Internal Revenue Bulletin 2005-43 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
5-43
October 24, 2005
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. 2005–67, page 771.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through De-
cember 2005.This ruling provides the monthly bond factor
amounts to be used by taxpayers who dispose of qualified
low-income buildings or interests therein during the period
January through December 2005.
T.D. 9226
, page 772.
Final regu
lations under section 864 of the Code relate to the
applicat
ion of the asset-use test to stock held by foreign in-
surance c
ompanies. The regulations provide that income from
stock may
, in some circumstances, be effectively connected
income.
REG–158080–04, page 786.
Proposed regulations under new section 409A of the Code,
added as part of the American Jobs Creation Act of 2004, pro-
vide certain rules relating to nonqualified deferred compensa-
tion plans, which generally are effective as of January 1, 2005.
These regulations provide general guidance with respect to
what arrangements are covered by section 409A, and the re-
quirements that must be met under section 409A with respect
to initial deferral elections, subsequent deferral elections and
payments. A public hearing is scheduled for January 25, 2006.
ADMINI
STRATIVE
REG–15
0088–02, page 774.
Propos
ed regulations under section 6320 of the Code relate
to a tax
payer’s right to a hearing after the filing of a notice of
feder
al tax lien (NFTL). The regulations make certain clarifying
chang
es in the way collection due process hearings are con-
ducted and specify the period during which a taxpayer may re-
questanequivalenthearing.Theregulationsaffecttaxpayers
against whose property or rights to property the Service files
an NFTL. A public hearing is scheduled for January 19, 2006.
REG–150091–02, page 780.
Proposed regulations under section 6330 of the Code relate to
a taxpayer’s right to a hearing before or after levy. The regula-
tions make certain clarifying changes in the way collection due
process hearings are conducted and specify the period dur-
ing which a taxpayer may request an equivalent hearing. The
regulations affect taxpayers against whose property or rights
to property the Service proposes to levy. A public hearing is
scheduled for January 19, 2006.
Announcements of Disbarments and Suspensions begin on page 846.
Fi
nding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and 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 Sec-
retary (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.
October 24, 20052005–43 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period January through December
2005.This ruling provides the monthly
bond factor amounts to be used by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the pe-
riod January through December 2005.
Rev. Rul. 2005–67
In Rev. Rul. 90–60, 1990–2 C.B.
3, the Internal Revenue Service provided
guidance to taxpayers concerning the gen-
eral methodology used by the Treasury
Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secre-
tary under § 42(j)(6) of the Internal Rev-
enue Code. It further announced that the
Secretary would publishintheInternal
Revenue Bulletin a table of bond factor
amounts for dispositions occurring during
each calendar month.
Rev. Proc. 99–11, 1999–1 C.B. 275,
established a collateral program as an al-
ternative to providing a surety bond for
taxpayers to avoid or defer recapture of
the low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculat-
ing the amount of bond considered satis-
factory under § 42(j)(6) or the amount of
United States Treasury securities to pledge
in a Treasury Direct Account under Rev.
Proc. 99–11 for dispositions of qualified
low-income buildings or interests therein
during the period January through Decem-
ber 2005.
Table 1
Rev. Rul. 2005–67
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19911992199319941995199619971998199920002001
Jan ’0514.9927.9239.0348.5556.7756.7156.8657.1557.5258.0058.83
Feb ’0514.9927.9239.0348.5556.7756.5956.7457.0457.4157.8958.72
Mar ’0514.9927.9239.0348.5556.7756.4756.6356.9357.3057.7958.61
Apr ’0515.8529.5241.2751.3360.0360.1860.9561.8962.9264.1065.66
May ’0515.8529.5241.2751.3360.0360.0560.8361.7762.8063.9865.54
Jun ’0515.8529.5241.2751.3360.0359.9360.7161.6562.6963.8765.42
Jul ’0515.8529.5241.2751.3360.0359.8160.5961.5462.5763.7665.32
Aug ’0515.8529.5241.2751.3360.0359.7060.4861.4262.4663.6565.21
Sep ’0515.8529.5241.2751.3360.0359.5860.3661.3162.3663.5565.11
Oct ’0516.6831.0643.4254.0163.1663.1864.6566.3368.1470.1472.58
Nov ’0516.6831.0643.4254.0163.1663.0664.5466.2168.0270.0272.47
Dec ’0516.6831.0643.4254.0163.1662.9464.4266.1067.9169.9272.36
2005–43 I.R.B.771October 24, 2005

Table 1 (cont’d)
Rev. Rul. 2005–67
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
2002200320042005
Jan ’0559.9261.2262.4962.68
Feb ’0559.8061.0962.3362.68
Mar ’0559.6960.9762.1962.68
Apr ’0567.5269.6271.6472.55
May ’0567.4069.4871.4972.55
Jun ’0567.2869.3671.3572.55
Jul ’0567.1769.2471.2372.55
Aug ’0567.0669.1271.1272.55
Sep ’0566.9669.0271.0272.55
Oct ’0575.3878.4581.4983.98
Nov ’0575.2778.3481.3883.98
Dec ’0575.1678.2381.2983.98
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul.
98–3, 1998–1 C.B. 248; Rev. Rul.
2001–2, 2001–1 C.B. 255; Rev. Rul.
2001–53, 2001–2 C.B. 488; Rev. Rul.
2002–72, 2002–2 C.B. 759; Rev. Rul.
2003–117, 2003–2 C.B. 1051; and Rev.
Rul. 2004–100, 2004–2 C.B. 718.
DRAFTING INFORMATION
The principal author of this revenue
ruling is David McDonnell of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. McDonnell at (202) 622–3040
(not a toll-free call).
Section 864.—Definitions
and Special Rules
26 CFR 1.864–4: U.S. source income effectively con-
nected with U.S. business.
T.D. 9226
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Stock Held by Foreign
Insurance Companies
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the determi-
nation of income of foreign insurance
companies that is effectively connected
with the conduct of a trade or business
within the United States. The regulations
provide that the exception to the asset-use
test for stock shall not apply in determin-
ing whether the income, gain, or loss from
portfolio stock held by foreign insurance
companies constitutes effectively con-
nected income.
DATES:Effective Date: These regulations
are effective on October 3, 2005.
FOR FURTHER INFORMATION
CONTACT: Sheila Ramaswamy, (202)
622–3870 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On June 25, 2004, a notice of proposed
rulemaking (REG–117307–04, 2004–2
C.B. 39) was published in theFederal
Register(69 FR 35543). No requests
for a public hearing were received, and no
public hearing was held. The IRS received
one written comment in response to the
notice of proposed rulemaking. After con-
sideration of the comment, the proposed
regulation is adopted without change.
Explanation of Provisions and
Summary of Comments
This Treasury decision adopts the lan-
guage of the proposed regulation without
change.
The IRS received one comment in re-
sponse to the proposed regulation. The
commentator requested further clarifica-
tion regarding what constitutes an insur-
ance company for federal income tax pur-
poses.TheIRSbelievestheissueofwhat
October 24, 20057722005–43 I.R.B.

constitutes an insurance company is out-
side the scope of this regulation, which
solely relates to the application of the as-
set-use test to stock held by foreign insur-
ance companies.
The commentator also expressed con-
cern about the interaction of the proposed
regulation with §1.864–5(a), which pro-
vides, generally, that foreign source in-
come, such as a foreign-source dividend
or gain, cannot constitute U.S. effectively
connected income in circumstances in
which a U.S.-source dividend or gain
would not constitute U.S. effectively
connected income. Accordingly, the com-
mentator is concerned that the rule in
the regulations will also expand the cate-
gory of foreign-source dividends or gains
that may constitute effectively connected
income. That is true and the Treasury
Department and the IRS believe this is the
appropriate result.
The IRS invited comments whether the
10 percent threshold provided in the pro-
posed regulation was an appropriate stan-
dard for determining whether stock is a
portfolio investment. The commentator
stated that it was possible for insurance
companies to make a strategic investment
in a corporation at a level below 10 percent
of the vote or value of the corporation, such
as by purchasing a special class of shares
that conveyed the power to elect directors.
The commentator recommended creating a
rebuttable presumption of portfolio status.
We do not believe that treating the 10
percent threshold as a rebuttable presump-
tion is appropriate. The 10 percent thresh-
old provides a reasonable method for iden-
tifying portfolio stock held by a branch of
a foreign life insurance company.
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 has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because these regulations do not impose a
collection of information on small entities,
the provisions of the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) do not apply.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding this regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of this regulation
is Sheila Ramaswamy, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.864–4, paragraph
(c)(2)(iii)(b) is revised to read as follows:
§1.864–4 U.S. source income effectively
connected with U.S. business.
*****
(c) * * *
(2) * * *
(iii) * * *
(b)Stock held by foreign insurance
companies. This paragraph (c)(2)(iii)
shall not apply to stock of a corporation
(whether domestic or foreign) held by a
foreign insurance company unless the for-
eign insurance company owns 10 percent
or more of the total voting power or value
of all classes of stock of such corpora-
tion. For purposes of this section, section
318(a) shall be applied in determining
ownership, except that in applying section
318(a)(2)(C), the phrase “10 percent” is
used instead of the phrase “50 percent.”
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved August 9, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
for Tax Policy.
(Filed by the Office of the Federal Register on September
30, 2005, 8:45 a.m., and published in the issue of the Federal
Register for October 3, 2005, 70 F.R. 57509)
2005–43 I.R.B.773October 24, 2005

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Miscellaneous Changes
to Collection Due Process
Procedures Relating to Notice
and Opportunity for Hearing
Upon Filing of Notice of
Federal Tax Lien
REG–150088–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed amendments to the regulations relat-
ing to a taxpayer’s right to a hearing under
section 6320 of the Internal Revenue Code
of 1986 after the filing of a notice of Fed-
eral tax lien (NFTL). The proposed reg-
ulations make certain clarifying changes
in the way collection due process (CDP)
hearings are held and specify the period
during which a taxpayer may request an
equivalent hearing. The proposed regula-
tions affect taxpayers against whose prop-
erty or rights to property the Internal Rev-
enue Service (IRS) files a NFTL on or af-
ter January 19, 1999. This document also
contains a notice of public hearing on these
proposed regulations.
DATES: Written and electronic comments
must be received by December 15, 2005.
Outlines of topics to be discussed at the
public hearing scheduled for 10 a.m. on
January 19, 2006 must be received by De-
cember 29, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–150088–02), 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–150088–02),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via the
IRS Internet site atwww.irs.gov/regsor
via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–150088–02). The public hearing
will be held in the IRS Auditorium, In-
ternal Revenue Building (7th Floor), 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
call Laurence K. Williams, 202–622–3600
(not a toll-free number); concerning
submissions and/or to be placed on the
building access list to attend the hearing,
call Robin Jones, 202–622–7180 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Regulations on Pro-
cedure and Administration (26 CFR part
301) relating to the provision of notice
under section 6320 of the Internal Rev-
enue Code to taxpayers of a right to a CDP
hearing (CDP Notice) after the IRS files
a NFTL. Final regulations (T.D. 8979,
2002–1 C.B. 466) were published on Jan-
uary 18, 2002 in theFederal Register(67
FR 2558). The final regulations imple-
mented certain changes made by section
3401 of the Internal Revenue Service Re-
structuring and Reform Act of 1998 (Pub-
lic Law 105–206, 112 Stat. 685) (RRA
1998), including the addition of section
6320 to the Internal Revenue Code. The
final regulations affected taxpayers against
whose property or rights to property the
IRS files a NFTL.
Section 3401 of RRA 1998 also added
section 6330 to the Internal Revenue Code.
That statute provides for notice to taxpay-
ers of a right to a hearing before or, in lim-
ited cases, after levy. A number of the
provisions in section 6330 concerning the
conduct and judicial review of a CDP hear-
ing are incorporated by reference in sec-
tion 6320. On January 18, 2002, final
regulations (T.D. 8980, 2002–1 C.B. 477)
under section 6330 were published in the
Federal Register(67 FR 2549) along with
the final regulations under section 6320.
Explanation of Provisions
A taxpayer is entitled to one CDP hear-
ing with respect to the tax and tax period
covered by a CDP Notice concerning a
levy or a CDP Notice concerning the fil-
ing of a NFTL. The IRS Office of Appeals
(Appeals) has conducted over 92,000 CDP
hearings and more than 30,000 equivalent
hearings since sections 6320 and 6330 be-
came effective for collection actions initi-
ated on and after January 19, 1999.
In general, the experience of the past six
years with CDP hearings has demonstrated
that there is a need for changes to allow
Appeals to effectively and fairly handle the
cases of taxpayers who raise issues of sub-
stance. Appeals has instituted many im-
provements in its processing of CDP cases
and has conducted extensive training in an
effort to provide careful, but timely, review
of CDP cases, which currently are filed at
a rate of approximately 2,450 per month.
The proposed regulations, if adopted as
final regulations, will increase efficiency
without compromising the quality and fair-
ness of review.
In many CDP cases, significant time is
spent merely identifying the issues. Al-
though the Form 12153 used to request a
CDP hearing requires a taxpayer to state
a reason or reasons for disagreeing with
the NFTL filing, many taxpayers either do
not supply that information, or raise new
issues during the CDP hearing process
not identified on the hearing request. De-
lays result while taxpayers provide new
supporting documentation and Appeals
personnel reconsider prior conclusions in
light of the new information. Cases of
other taxpayers pending in Appeals are
delayed because other work must be con-
stantly rescheduled.
Cases are also delayed when taxpayers
propose collection alternatives for which
they are not eligible. The IRS does not
consider offers in compromise or install-
ment agreements from taxpayers who have
failed to file required returns as of the date
the offer or the proposed installment agree-
ment is submitted. See Publication 594,
“What You Should Know About the IRS
Collection Process(Rev. 2–2004).” Sim-
ilarly, the IRS will not consider an offer in
compromise from an in-business taxpayer
unless the taxpayer has timely filed all re-
October 24, 20057742005–43 I.R.B.

turns and timely made all Federal tax de-
posits for two consecutive quarters. See
Form 656, “Offer in Compromise(Rev.
7–2004).” The resources of Appeals are in-
effectively utilizedarranging and conduct-
ing face-to-face conferences requested by
non-compliant taxpayers whose only com-
plaint is the rejection of an offer to compro-
mise or installment agreement for which
they are not eligible.
Frivolous cases also cause unneces-
sary delays. During fiscal year 2004, 5.4
percent of the 32,226 CDP and equiva-
lent-hearing cases Appeals handled in-
volved taxpayers who were non-filers or
raised only frivolous issues. Cases raising
frivolous issues, in particular, consume a
disproportionately large amount of time,
because Appeals personnel must often
read lengthy, frivolous submissions in
search of any substantive issue buried
within. Delays also result when taxpayers
use face-to-face conferences as a venue
for frivolous oration and harassment of
Appeals personnel.
The proposed regulations attempt to ad-
dress these and other problems that have
become apparent during the first six years
of CDP practice. The proposed changes
are aimed at creating a more focused pro-
cedure that will allow Appeals to continue
to provide careful review of NFTL filings
as the volume of cases increases.
A taxpayer must request a CDP hearing
in writing. The current regulations require
that a request for a CDP hearing include
the taxpayer’s name, address, and daytime
telephone number, and that the request be
dated and signed by either the taxpayer
or the taxpayer’s authorized representa-
tive. Section 301.6320–1(c)(2), Q&A-C1.
A Form 12153, “Request for a Collection
Due Process Hearing,” is included with
the CDP Notice sent to the taxpayer pur-
suant to section 6320. The Form 12153
requests (1) the taxpayer’s name, address,
daytime telephone number, and taxpayer
identification number (SSN or EIN), (2)
the type of tax involved, (3) the tax period
at issue, (4) a statement that the taxpayer
requests a hearing with Appeals concern-
ing the filing of the NFTL, and (5) the rea-
son or reasons why the taxpayer disagrees
with the NFTL filing. Although taxpay-
ers are encouraged to use a Form 12153
in requesting a CDP hearing, the current
regulations do not require the use of Form
12153.
Section 301.6320–1(c)(2), A-C1, of the
proposed regulations requires taxpayers to
state their reasons for disagreement with
the NFTL filing whether or not a Form
12153 is used to request a CDP hearing.
In addition, a taxpayer who fails to sign
a timely CDP hearing request because the
request is made by a spouse or other unau-
thorized representative must affirm in writ-
ing that the request was originally submit-
ted on the taxpayer’s behalf. Failure to
provide the written affirmation within a
reasonable time after a request from Ap-
peals will result in the denial of a CDP
hearing for that taxpayer.
ACDPhearingistobeconductedbyan
Appeals officer or employee who has had
no “prior involvement” with respect to the
taxforthetaxperiodstobecoveredbythe
hearing, unless the taxpayer waives this
requirement. Section 301.6320–1(d)(2),
A-D4 of the current regulations provides
that “prior involvement” by an Appeals
officer or employee includes participation
or involvement in an Appeals hearing that
the taxpayer may have had with respect to
the tax and tax period shown on the CDP
Notice, other than a CDP hearing held
under either section 6320 or section 6330.
It is important that “prior involvement”
be construed in a manner that reasonably
protects against predisposition but at the
same time does not disqualify too broad
a range of Appeals personnel. A broad
standard of “prior involvement” would
lead to uncertain application, could result
in the disqualification of an entire Appeals
office, many of which have small staffs,
and could make it difficult to conduct the
CDP hearing. Section 301.6320–1(d)(2),
A-D4 of the proposed regulations pro-
vides that prior involvement exists only
when the taxpayer, the tax liability and
the tax period shown on the CDP Notice
also were at issue in the prior non-CDP
hearing or proceeding, and the Appeals
officer or employee actually participated
in the prior hearing or proceeding. Exam-
ples are provided in §301.6320–1(d)(3)
of the proposed regulations. Section
301.6320–1(d)(2), A-D7, of the proposed
regulations clarifies that a face-to-face
conference is merely one aspect of a CDP
hearing under section 6320 and is not by
itself the entire CDP hearing.
A-D7 of the proposed regulations also
provides that, in all cases, the Appeals
officer or employee will review the tax-
payer’s request for a CDP hearing, the case
file, other written communications from
the taxpayer, and any notes of oral com-
munications with the taxpayer or the tax-
payer’s representative. If no face-to-face
or telephonic conference is held, review of
those documents will constitute the CDP
hearing for purposes of section 6320(b).
A-D7 of the proposed regulations fur-
ther clarifies that when a business taxpayer
is offered an opportunity for a face-to-face
conference it will be held at the Appeals
office closest to the taxpayer’s principal
place of business. The current regulations
have been misinterpreted by some taxpay-
ers as requiring the IRS to hold a face-to-
face conference at the taxpayer’s principal
place of business. Q&A-D8 of the pro-
posed regulations is new. It describes spe-
cific circumstances in which Appeals will
not hold a face-to-faceconference with the
taxpayer or the taxpayer’s representative
because a conference will serve no use-
ful purpose. The experience of Appeals
is that although most taxpayers request
face-to-face conferences, they are some-
times difficult to schedule on a date and at a
time that is convenient for the taxpayer. In
some of these cases, taxpayers or their rep-
resentatives have used the scheduling of a
face-to-face conference as a tactic to de-
lay the IRS’s collection efforts. In other
cases, taxpayers have requested a face-to-
face conference merely to raise frivolous
arguments concerning the Federal tax sys-
tem or to request collection alternatives
for which they do not qualify. Q&A-D8
of the proposed regulations provides that
a face-to-face conference need not be of-
fered if the taxpayer or the taxpayer’s rep-
resentative raises only frivolous arguments
concerning the Federal tax system. See
the IRS Internet site,www.irs.gov/pub/irs-
utl/friv_tax.pdf, for examples of frivolous
arguments. A face-to-face conference also
will not be granted if the taxpayer proposes
collection alternatives that would not be
available to other taxpayers in similar cir-
cumstances. A face-to-face conference
need not be granted if the taxpayer does not
provide in the written request for a CDP
hearing, as perfected, the required infor-
mation set forth in A-C1(ii)(E) of para-
graph (c)(2) of the proposed regulations.
In addition, a face-to-face conference
will not be held at the location closest
to the taxpayer’s residence or principal
place of business if all Appeals officers or
2005–43 I.R.B.775October 24, 2005

employees at that location are considered
to have prior involvement as provided in
A-D4. In this case, the taxpayer will be of-
fered a hearing by telephone or correspon-
dence, or some combination thereof. The
taxpayer may be able to obtain a face-to-
face conference at the Appeals office clos-
est to the taxpayer’s residence or princi-
pal place of business under these circum-
stances if the taxpayer waives the require-
ment of section 6320(b)(3) concerning im-
partiality of the Appeals officer or em-
ployee. Appeals will offer the taxpayer a
face-to-face conference at another Appeals
office if in the exercise of its discretion Ap-
peals would have offered the taxpayer a
face-to-face conference at the original lo-
cation.
With the foregoing exceptions, it is
anticipated that a face-to-face conference
will ordinarily be offered with respect to
any relevant issues or collection alterna-
tives for which the taxpayer qualifies.
Sections 301.6320–1(e)(1) and
301.6320–1(e)(3), A-E2 and A-E7 have
been changed to more closely follow the
language of section 6330(c)(2)(B), made
applicable to section 6320 by section
6320(c). These changes are necessary
because these regulations have been mis-
interpreted as defining the underlying tax
liability that may be considered at the
CDP hearing under section 6330(c)(2)(B)
to be the tax liability listed on the CDP
Notice. The intent of the existing regu-
lations, which refer to tax liability on the
CDP Notice, is thattaxpayers may only
challenge taxes or tax periods listed on
the CDP Notice, not to supply a substan-
tive definition of underlying tax liability.
Section 301.6320–1(e)(3), A-E6 has been
amended to clarify that taxpayers who
receive CDP hearings can only qualify for
collection alternatives available generally
to taxpayers in similar circumstances.
The experience of the past six years has
revealed that many taxpayers raise an is-
sue with Appeals but fail to furnish any
documentation or evidence with respect
to the issue despite being given a reason-
able period to do so. For example, a tax-
payer may request an installment agree-
ment, but when an Appeals officer or em-
ployee requests financial data necessary
to determine eligibility for the installment
agreement, the taxpayer may not comply
with the request. Or a taxpayer may dis-
pute liability for a tax period by claim-
ing entitlement to deductions, but provide
no substantiation for the deductions in re-
sponse to requests from Appeals. Current
§301.6320–1(f)(2), A-F5 provides that a
taxpayer may not seek judicial review of
an issue that he has not raised during the
CDP hearing. A-F5 is revised to clarify
that in order to obtain judicial review, a
taxpayer must not only bring the issue to
the attention of Appeals but must also sub-
mit, if requested, evidence with respect to
that issue. Under revised A-F5, if the tax-
payer does not provide Appeals any evi-
dence with respect to the issue after being
given a reasonable opportunity to submit
such evidence, then he may not ask a court
to consider the issue.
There has been some confusion about
what documents Appeals should retain,
and what notations the Appeals officer or
employee conducting the hearing should
make, in order to provide a judicially re-
viewable administrative record. A new
Q&A-F6 has been added to specify the
contents of the administrative record re-
quired for court review.
The IRS receives a number of tardy
requests for CDP hearings. The changes
to §301.6320–1(i)(2) explain how these
requests will be treated. The proposed
amendments to the regulations add a new
Q&A-I1 to §301.6320–1(i)(2) to explain
that a taxpayer must request an equiva-
lent hearing in writing. A taxpayer may
obtain an equivalent hearing if the 30-day
period described in section 6320(a)(3) for
requesting a CDP hearing has expired.
Unlike an Appeals determination in a
CDP hearing, the Appeals decision in an
equivalent hearing is not reviewable in
court. Under new Q&A-I1, the IRS is not
required to treat a late-filed CDP request
as a request for an equivalent hearing.
Section 301.6320–1(c)(2), A-C7 has been
amended to require that the taxpayer be
notified of the right to an equivalent hear-
ing in all cases in which a tardy request for
a CDP hearing is received. It is expected
that the IRS will either send the taxpayer a
letter or orally inform the taxpayer that the
CDP hearing request is untimely and ask if
the taxpayer wishes to have an equivalent
hearing. If the taxpayer elects to have an
equivalent hearing, the IRS will treat the
CDP hearing request as a request for an
equivalent hearing without requiring the
taxpayer to make an additional written
request.
Current Q&A-I1 through I5 are
renumbered Q&A-I2 through I6. The
proposed regulations add Q&A-I7 to
§301.6320–1(i)(2) to clarify that the pe-
riod during which a taxpayer may obtain
an equivalent hearing is not indefinite.
The equivalent hearing procedure is not
provided by statute but, consistent with
the legislative history of RRA 1998, was
adopted in order to accommodate tax-
payerswhofailedtimelytoexercisetheir
right to a CDP hearing. The equivalent
hearing was meant to occur near the time
a CDP hearing held pursuant to a timely
request would have occurred, because it
was meant to address the same matters
that would have been addressed at a CDP
hearing. The procedure was not meant
to provide a hearing right that could be
exercised months or years after the cir-
cumstances that precipitated the filing of
the NFTL have passed. A hearing before
Appeals at a later time may be obtained
under the Collection Appeals Program.
Therefore, proposed Q&A-I7 limits to one
year the period during which a taxpayer
may request an equivalent hearing. The
period commences the day after the end of
the five business day period following the
filing of the NFTL, described in section
6320(a)(2).
Because the time for requesting an
equivalent hearing will be limited, the
proposed regulations add new Q&A-I8,
Q&A-I9, Q&A-I10 and Q&A-I11 to
§301.6320–1(i)(2) to provide the same
rules governing mailing, delivery and de-
termination of timeliness that apply to
requests for CDP hearings. Unlike exist-
ing §301.6320–1(c)(2), A-C6, new A-I10
does not identify the officials to whom
to send an equivalent hearing request if
the CDP Notice does not specify where
to send the request. Because the identity
and the address of the person to whom
the request should be sent may change in
the future, taxpayers will be able to obtain
more current information by calling the
1–800 number listed in A-I10. Section
301.6320–1(c)(2), A-C6 also has been
revised in the proposed regulations to pro-
vide that taxpayers should call the 1–800
number to obtain the address to which the
CDP hearing request should be sent.
The proposed regulations are effective
the date 30 days after final regulations are
published in theFederal Registerwith
respect to requests for CDP hearings or
October 24, 20057762005–43 I.R.B.

equivalent hearings made on or after the
date 30 days after final regulations are pub-
lished in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these 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 Inter-
nal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and writ-
ten comments that are submitted timely to
the IRS. The IRS and Treasury Department
specifically 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 scheduled
for January 19, 2006, at 10 a.m. in the IRS
Auditorium, Internal Revenue Building
(7th Floor), 1111 Constitution Avenue,
NW, Washington, DC. All visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediateentranceareamorethan30
minutes before the hearing starts. For in-
formation about having a visitor’s name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT caption.
An outline of the topics to be discussed
and the time to be devoted to each topic
must be submitted by any person who
wishes to present oral comments at the
hearing. Outlines must be received by
December 29, 2005.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. A period of 10 minutes
will be allotted to each person for making
comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving requests to speak
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 Laurence K. Williams, Office of
Associate Chief Counsel, Procedure and
Administration (Collection, Bankruptcy
and Summonses Division).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6320–1 is proposed
to be amended as follows:
1. Paragraph (c)(2) A-C1, Q&A-C6
and A-C7 are revised.
2. Paragraph (d)(2) A-D4 and A-D7 are
revised.
3. Paragraph (d)(2) Q&A-D8 is added.
4. Paragraph (d)(3) is added.
5. Paragraph (e)(1) is revised.
6. Paragraph (e)(3) A-E2, A-E6 and
A-E7 are revised.
7. Paragraph (f)(2) A-F5 is revised
8. Paragraph (f)(2) Q&A-F6 is added.
9. Paragraph (i)(2) Q&A-I1 through
Q&A-I5 are renumbered Q&A-I2 through
Q&A-I6, a new paragraph (i)(2) Q&A-I1
and new paragraphs Q&A-I7 through
Q&A-I11 are added.
10. Paragraph (j) is revised.
§301.6320–1 Notice and opportunity for
hearing upon filing of notice of Federal
tax lien.
*****
(c) * * *
(2) * * *
A-C1. (i) The taxpayer must make a
request in writing for a CDP hearing. The
request for a CDP hearing shall include the
information specified in A-C1(ii) of this
paragraph (c)(2). See A-D7 and A-D8 of
paragraph (d)(2).
(ii) The written request for a CDP hear-
ing must be dated and must include the fol-
lowing information:
(A) The taxpayer’s name, address, day-
time telephone number (if any), and tax-
payer identification number (SSN or EIN).
(B) The type of tax involved.
(C) The tax period at issue.
(D) A statement that the taxpayer re-
quests a hearing with Appeals concerning
the filing of the NFTL.
(E) The reason or reasons why the
taxpayer disagrees with the filing of the
NFTL.
(F) The signature of the taxpayer or the
taxpayer’s authorized representative.
(iii) The taxpayer must perfect any
timely written request for a CDP hearing
that does not provide the required informa-
tion set forth in A-C1(ii) of this paragraph
within a reasonable period of time after a
request from the IRS.
(iv) Taxpayers are encouraged to use
a Form 12153, “Request for a Collection
Due Process Hearing,” in requesting a
CDP hearing so that the request can be
readily identified and forwarded to Ap-
peals. Taxpayers may obtain a copy of
Form 12153 by contacting the IRS office
that issued the CDP Notice, by down-
loading a copy from the IRS Internet site,
www.irs.gov/pub/irs-pdf/f12153.pdf,orby
calling, toll-free, 1–800–829–3676.
(v) The taxpayer must affirm any timely
written request for a CDP hearing which
is signed or alleged to have been signed
on the taxpayer’s behalf by the taxpayer’s
spouse or other unauthorized representa-
tive by filing, within a reasonable period
of time after a request from the IRS, a
signed, written affirmation that the request
was originally submitted on the taxpayer’s
behalf. If the affirmation is not filed within
a reasonable period of time after a request,
the CDP hearing request will be denied
with respect to the non-signing taxpayer.
*****
Q-C6. Where must the written request
for a CDP hearing be sent?
A-C6. The written request for a CDP
hearing must be sent, or hand delivered (if
permitted), to the IRS office and address
as directed on the CDP Notice. If the ad-
2005–43 I.R.B.777October 24, 2005

dress of that office does not appear on the
CDP Notice, the taxpayer should obtain
the address of the office to which the writ-
ten request should be sent or hand deliv-
ered by calling, toll-free, 1–800–829–1040
and providing the taxpayer’s identification
number (SSN or TIN).
*****
A-C7. If the taxpayer does not request a
CDP hearing in writing within the 30-day
period that commences on the day after
the end of the five business day notifi-
cation period, the taxpayer foregoes the
right to a CDP hearing under section 6320
with respect to the unpaid tax and tax pe-
riods shown on the CDP Notice. If the re-
quest for CDP hearing is received after the
30-day period, the taxpayer will be notified
of the untimely request and of the right to
an equivalent hearing. See paragraph (i) of
this section.
*****
(d) * * *
(2) * * *
A-D4. Prior involvement by an Ap-
peals officer or employee includes partici-
pation or involvement in an Appeals hear-
ing(otherthanaCDPhearingheldun-
der either section 6320 or section 6330)
that the taxpayer may have had with re-
spect to the tax and tax period shown on
the CDP Notice. Prior involvement exists
only when the taxpayer, the tax liability
and the tax period at issue in the CDP hear-
ing also were at issue in the prior non-CDP
hearing or proceeding, and the Appeals of-
ficer or employee actually participated in
the prior hearing or proceeding.
*****
A-D7. Except as provided in A-D8
of this paragraph (d)(2), a taxpayer who
presents in the CDP hearing request rel-
evant, non-frivolous reasons for disagree-
ment with the NFTL filing will ordinarily
be offered an opportunity for a face-to-face
conference at the Appeals office closest
to the taxpayer’s residence. A business
taxpayer will ordinarily be offered an op-
portunity for a face-to-face conference at
the Appeals office closest to the taxpayer’s
principal place of business. If that is not
satisfactory to the taxpayer, the taxpayer
will be given an opportunity for a hear-
ing by telephone or by correspondence. In
all cases, the Appeals officer or employee
will review the case file, which includes
the taxpayer’s request for a CDP hearing,
any other written communications from
the taxpayer or the taxpayer’s authorized
representative, and any notes made by Ap-
peals officers or employees of any oral
communications with the taxpayer or the
taxpayer’s authorized representative. If
no face-to-face or telephonic conference or
correspondence hearing is held, review of
those documents will constitute the CDP
hearing for purposes of section 6320(b).
Q-D8. In what circumstances will
a face-to-face CDP conference not be
granted?
A-D8. A taxpayer is not entitled to
a face-to-face CDP conference at a loca-
tion other than as provided in A-D7 of this
paragraph (d)(2) and this A-D8. If all Ap-
peals officers or employees at the loca-
tion provided for in A-D7 of this paragraph
have had prior involvement with the tax-
payerasprovidedinA-D4ofthispara-
graph, the taxpayer will not be offered a
face-to-face meeting at that location, un-
less the taxpayer elects to waive the re-
quirement of section 6320(b)(3). The tax-
payer will be offered a face-to-face confer-
ence at another Appeals office if Appeals
in the exercise of its discretion would have
offered the taxpayer a face-to-face confer-
ence at the location provided in A-D7. A
face-to-face CDP conference concerning a
taxpayer’s underlying liability will not be
granted if the request for a hearing or other
taxpayer communication indicates that the
taxpayer wishes only to raise irrelevant or
frivolous issues concerning that liability.
A face-to-face CDP conference concern-
ing a collection alternative, such as an in-
stallment agreement or an offer to compro-
mise liability, will not be granted unless
the alternative would be available to other
taxpayers in similar circumstances. For
example, because the IRS does not con-
sider offers to compromise from taxpay-
ers who have not filed required returns or
have not made certain required deposits of
tax, as set forth in Form 656, “Offer in
Compromise,” no face-to-face conference
will be offered to a taxpayer who wishes
to make an offer to compromise but has not
fulfilled those obligations. A face-to-face
conference need not be granted if the tax-
payer does not provide the required infor-
mation set forth in A-C1(ii)(E) of para-
graph (c)(2). See also A-C1(iii) of para-
graph (c)(2).
(3)Examples. The following examples
illustrate the principles of this paragraph
(d):
Example 1. Individual A timely requests a CDP
hearing concerning a NFTL filed with respect to A’s
1998 income tax liability. Appeals employee B previ-
ously conducted a CDP hearing regarding a proposed
levy for the 1998 income tax liability assessed against
individual A. Because employee B’s only prior in-
volvement with individual A’s 1998 income tax li-
ability was in connection with a section 6330 CDP
hearing, employee B may conduct the CDP hearing
under section 6320 involving the NFTL filed for the
1998 income tax liability.
Example 2. Individual C timely requests a CDP
hearing concerning a NFTL filed with respect to C’s
1998 income tax liability assessed against individ-
ual C. Appeals employeeD previously conducted a
Collection Appeals Program(CAP) hearing regard-
ing a NFTL filed with respect to C’s 1998 income
tax liability. Because employee D’s prior involve-
ment with individual C’s 1998 income tax liability
was in connection with a non-CDP hearing, employee
D may not conduct the CDP hearing under section
6320 unless individual C waives the requirement that
the hearing will be conducted by an Appeals officer
or employee who has had no prior involvement with
respect to C’s 1998 income tax liability.
Example 3. Same facts as inExample 2, except
that the prior CAP hearing only involved individual
C’s 1997 income tax liability and employment tax li-
abilities for 1998 reported on Form 941. Employee
D would not be considered to have prior involvement
because the prior CAP hearing in which she partici-
pated did not involve individual C’s 1998 income tax
liability.
Example 4. Appeals employee F is assigned to a
CDP hearing concerning a NFTL filed with respect
to a trust fund recovery penalty (TFRP) assessed pur-
suant to section 6672 against individual E. Appeals
employee F participated in a prior CAP hearing in-
volving individual E’s 1999 income tax liability, and
participated in a CAP hearing involving the employ-
ment taxes of business entity X, which incurred the
employment tax liability to which the TFRP assessed
against individual E relates. Appeals employee F
would not be considered to have prior involvement
because the prior CAP hearings in which he partici-
pated did not involve the TFRP assessed against in-
dividual E.
Example 5. Appeals employee G is assigned to a
CDP hearing concerning a NFTL filed with respect
to a TFRP assessed pursuant to section 6672 against
individual H. In preparing for the CDP hearing, Ap-
peals employee G reviews the Appeals case file con-
cerning the prior CAP hearing involving the TFRP
assessed pursuant to section 6672 against individual
H. Appeals employee G is not deemed to have par-
ticipated in the previous CAP hearing involving the
TFRP assessed against individual H by such review.
(e)Matters considered at CDP hear-
ing—(1)In general. Appeals has the
authority to determine the validity, suffi-
ciency, and timeliness of any CDP Notice
given by the IRS and of any request for a
CDP hearing that is made by a taxpayer.
Prior to issuance of a determination, Ap-
October 24, 20057782005–43 I.R.B.

peals is required to obtain verification
from the IRS office collecting the tax that
the requirements of any applicable law or
administrative procedure have been met.
The taxpayer may raise any relevant issue
relating to the unpaid tax at the hearing,
including appropriate spousal defenses,
challenges to the appropriateness of the
NFTL filing, and offers of collection al-
ternatives. The taxpayer also may raise
challenges to the existence or amount of
the underlying liability for any tax period
specified on the CDPNotice if the tax-
payer did not receive a statutory notice
of deficiency for that tax liability or did
not otherwise have an opportunity to dis-
pute the tax liability. Finally, the taxpayer
maynotraiseanissuethatwasraisedand
considered at a previous CDP hearing un-
der section 6330 or in any other previous
administrative or judicial proceeding if
the taxpayer participated meaningfully in
such hearing or proceeding. Taxpayers
will be expected to provide all relevant in-
formation requested by Appeals, including
financial statements, for its consideration
of the facts and issues involved in the
hearing.
*****
(3) * * *
A-E2. A taxpayer is entitled to chal-
lenge the existence or amount of the under-
lying liability for any tax period specified
on the CDP Notice if the taxpayer did not
receive a statutory notice of deficiency for
such liability or didnot otherwise have an
opportunity to dispute such liability. Re-
ceipt of a statutory notice of deficiency for
this purpose means receipt in time to peti-
tion the Tax Court for a redetermination of
the deficiency determined in the notice of
deficiency. An opportunity to dispute the
underlying liability includes a prior oppor-
tunity for a conference with Appeals that
was offered either before or after the as-
sessment of the liability.
*****
A-E6. Collection alternatives include,
for example, a proposal to withdraw the
NFTL in circumstances that will facilitate
the collection of the tax liability, an in-
stallment agreement, an offer to compro-
mise, the posting of a bond, or the sub-
stitution of other assets. A collection al-
ternative is not available unless the alter-
native would be available to other taxpay-
ers in similar circumstances. For example,
the IRS does not consider an offer to com-
promise made by a taxpayer who, at the
time of the CDP hearing, has not filed re-
quired returns or has not made certain re-
quired deposits of tax, as set forth in Form
656, “Offer in Compromise.” The collec-
tion alternative of an offer to compromise
would not be available to such a taxpayer
in a CDP hearing.
*****
A-E7. The taxpayer may raise appro-
priate spousal defenses, challenges to the
appropriateness of the NFTL filing, and of-
fers of collection alternatives. The exis-
tence or amount of the underlying liability
for any tax period specified in the CDP No-
tice may be challenged only if the taxpayer
did not already have an opportunity to dis-
pute the tax liability. If the taxpayer previ-
ously received a CDP Notice under section
6330 with respect to the same tax and tax
period and did not request a CDP hearing
with respect to that earlier CDP Notice, the
taxpayer has already had an opportunity to
dispute the existence or amount of the un-
derlying tax liability.
*****
(f) * * *
(2) * * *
A-F5. In seeking Tax Court or district
court review of a Notice of Determination,
the taxpayer can only ask the court to con-
sider an issue, including a challenge to the
underlying tax liability, that was properly
raised in the taxpayer’s CDP hearing. An
issue is not properly raised if the taxpayer
fails to request consideration of the issue
by Appeals, or if consideration is requested
but the taxpayer fails to present to Appeals
any evidence with respect to that issue af-
ter being given a reasonable opportunity to
present such evidence.
Q-F6. What is the administrative record
for purposes of court review?
A-F6. The case file, including written
communications and information from
the taxpayer or the taxpayer’s authorized
representative submitted in connection
with the CDP hearing, notes made by an
Appeals officer or employee of any oral
communications with the taxpayer or the
taxpayer’s authorized representative and
memoranda created by the Appeals officer
or employee in connection with the CDP
hearing, and any other documents or ma-
terials relied upon by the Appeals officer
or employee in making the determination
under section 6330(c)(3), will constitute
the record in any court review of the No-
tice of Determination issued by Appeals.
*****
(i) * * *
(2) * * *
Q-I1. What must a taxpayer do to ob-
tain an equivalent hearing?
A-I1. (i) A request for an equivalent
hearing must be made in writing. A writ-
ten request in any form that requests an
equivalent hearing will be acceptable if it
includes the information required in para-
graph (ii) of this A-I1.
(ii) The request must be dated and must
include the following information:
(A) The taxpayer’s name, address, day-
time telephone number (if any), and tax-
payer identification number (SSN or EIN).
(B) The type of tax involved.
(C) The tax period at issue.
(D) A statement that the taxpayer is re-
questing an equivalent hearing with Ap-
peals concerning the filing of the NFTL.
(E) The reason or reasons why the
taxpayer disagrees with the filing of the
NFTL.
(F) The signature of the taxpayer or the
taxpayer’s authorized representative.
(iii) The taxpayer must perfect any
timely written request for an equivalent
hearing that does not provide the required
information set forth in paragraph (ii) of
this A-I1 within a reasonable period of
time after a request from the IRS. If the re-
quested information is not provided within
a reasonable period of time, the taxpayer’s
equivalent hearing request will be denied.
(iv) The taxpayer must affirm any
timely written request for an equivalent
hearing that is signed or alleged to have
been signed on the taxpayer’s behalf by the
taxpayer’s spouse or other unauthorized
representative, and that otherwise meets
the requirements set forth in paragraph (ii)
of this A-I1, by the taxpayer’s spouse or
any other representative, by filing, within
a reasonable time after a request from the
IRS, a signed written affirmation that the
request was originally submitted on the
taxpayer’s behalf. If the affirmation is
not filed within a reasonable period of
time, the equivalent hearing request will
be denied with respect to the non-signing
taxpayer.
*****
2005–43 I.R.B.779October 24, 2005

Q-I7. When must a taxpayer request an
equivalent hearing with respect to a CDP
Notice issued under section 6320?
A-I7. A taxpayer must submit a written
request for an equivalent hearing within
the one-year period commencing the day
after the end of the five-business-day pe-
riod following the filing of the NFTL. This
period is slightly different from the pe-
riod for submitting a written request for an
equivalent hearing with respect to a CDP
Notice issued under section 6330. For a
CDP Notice issued under section 6330, a
taxpayer must submit a written request for
an equivalent hearing within the one-year
period commencing the day after the date
of the CDP Notice issued under section
6330.
Q-I8. How will the timeliness of a tax-
payer’s written request for an equivalent
hearing be determined?
A-I8. The rules and regulations under
section 7502 and section 7503 will apply to
determine the timeliness of the taxpayer’s
request for an equivalent hearing, if prop-
erly transmitted and addressed as provided
in A-I10 of this paragraph (i)(2).
Q-I9. Is the one-year period within
which a taxpayer must make a request for
an equivalent hearing extended because
the taxpayer resides outside the United
States?
A-I9. No. All taxpayers who want an
equivalent hearing concerning the filing of
the NFTL must request the hearing within
the one-year period commencing the day
after the end of the five-business-day pe-
riod following the filing of the NFTL.
Q-I10. Where must the written request
for an equivalent hearing be sent?
A-I10. The written request for an
equivalent hearing must be sent, or hand
delivered (if permitted), to the IRS office
and address as directed on the CDP Notice.
If the address of the issuing office does not
appear on the CDP Notice, the taxpayer
should obtain the address of the office to
which the written request should be sent
or hand delivered by calling, toll-free,
1–800–829–1040 and providing the tax-
payer’s identification number (SSN or
EIN).
Q-I11. What will happen if the tax-
payer does not request an equivalent hear-
ing in writing within the one-year period
commencing the day after the end of the
five-business-day period following the fil-
ing of the NFTL?
A-I11. If the taxpayer does not request
an equivalent hearing with Appeals within
the one-year period commencing the day
after the end of the five-business-day pe-
riod following the filing of the NFTL, the
taxpayer foregoes the right to an equiva-
lent hearing with respect to the unpaid tax
and tax periods shown on the CDP Notice.
The taxpayer, however, may seek recon-
sideration by the IRS office collecting the
tax, assistance from the National Taxpayer
Advocate, or an administrative hearing be-
fore Appeals under its Collection Appeals
Program or any successor program.
*****
(j)Effective date.Thissectionisappli-
cable the date 30 days after final regula-
tions are published in theFederal Regis-
terwith respect to requests made for CDP
hearings or equivalent hearings on or after
the date 30 days after final regulations are
published in theFederal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September
15, 2005, 8:45 a.m., and published in the issue of the Federal
Register for September 16, 2005, 70 F.R. 54681)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Miscellaneous Changes
to Collection Due Process
Procedures Relating to Notice
and Opportunity for Hearing
Prior to Levy
REG–150091–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed amendments to the regulations relat-
ingtoataxpayer’srighttoahearingbe-
fore or after levy under section 6330 of the
Internal Revenue Code of 1986. The pro-
posed regulations make certain clarifying
changes in the way collection due process
(CDP) hearings are held and specify the
period during which a taxpayer may re-
quest an equivalent hearing. The proposed
regulations affect taxpayers against whose
property or rights to property the Internal
Revenue Service (IRS) intends to levy on
or after January 19, 1999. This document
also contains a notice of public hearing on
these proposed regulations.
DATES: Written and electronic comments
must be received by December 15, 2005.
Outlines of topics to be discussed at the
public hearing scheduled for 10 a.m. on
January 19, 2006, must be received by De-
cember 29, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–150091–02), 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–150091–02),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via the
IRS Internet site atwww.irs.gov/regsor
via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–150091–02). The public hearing
will be held in the IRS Auditorium, In-
ternal Revenue Building (7th Floor), 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
call Laurence K. Williams, 202–622–3600
(not a toll-free number). Concerning
submissions and/or to be placed on the
building access list to attend the hearing,
call Robin Jones, 202–622–7180 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Regulations on Pro-
cedure and Administration (26 CFR part
301) relating to the provision of notice
under section 6330 of the Internal Rev-
enue Code to taxpayers of a right to a CDP
hearing (CDP Notice) before levy. Final
regulations (T.D. 8980, 2002–1 C.B. 477)
were published on January 18, 2002 in the
Federal Register(67 FR 2549). The final
October 24, 20057802005–43 I.R.B.

regulations implemented certain changes
made by section 3401 of the Internal Rev-
enue Service Restructuring and Reform
Act of 1998 (Public Law 105–206, 112
Stat. 685) (RRA 1998), including the
addition of section 6330 to the Internal
Revenue Code. The final regulations af-
fected taxpayers against whose property or
rights to property the IRS intends to levy.
Section 3401 of RRA 1998 also added
section 6320 to the Internal Revenue Code.
That statute provides for notice to taxpay-
ers of a right to a hearing after the filing
of a notice of Federal tax lien (NFTL). A
number of the provisions in section 6330
concerning the conduct and judicial review
of a CDP hearing are incorporated by refer-
ence in section 6320. On January 18, 2002,
final regulations (T.D. 8979, 2002–1 C.B.
466) under section 6320 were published in
theFederal Register(67 FR 2558) along
with the final regulations under section
6330.
Explanation of Provisions
A taxpayer is entitled to one CDP hear-
ing with respect to the tax and tax period
covered by a CDP Notice concerning a
levy or a CDP Notice concerning the fil-
ing of a NFTL. The IRS Office of Appeals
(Appeals) has conducted over 92,000 CDP
hearings and more than 30,000 equivalent
hearings since sections 6320 and 6330 be-
came effective for collection actions initi-
ated on and after January 19, 1999.
In general, the experience of the past six
years with CDP hearings has demonstrated
that there is a need for changes to allow
Appeals to effectively and fairly handle the
cases of taxpayers who raise issues of sub-
stance. Appeals has instituted many im-
provements in its processing of CDP cases
and has conducted extensive training in an
effort to provide careful, but timely, review
of CDP cases, which currently are filed at
a rate of approximately 2,450 per month.
The proposed regulations, if adopted as
final regulations, will increase efficiency
without compromising the quality and fair-
ness of review.
In many CDP cases, significant time is
spent merely identifying the issues. Al-
though the Form 12153 used to request a
CDP hearing requires a taxpayer to state a
reason or reasons for disagreeing with the
proposed levy, many taxpayers either do
not supply that information, or raise new
issues during the CDP hearing process
not identified on the hearing request. De-
lays result while taxpayers provide new
supporting documentation and Appeals
personnel reconsider prior conclusions in
light of the new information. Cases of
other taxpayers pending in Appeals are
delayed because other work must be con-
stantly rescheduled.
Cases are also delayed when taxpayers
propose collection alternatives for which
they are not eligible. The IRS does not
consider offers in compromise or install-
ment agreements from taxpayers who have
failed to file required returns as of the date
the offer or the proposed installment agree-
ment is submitted. See Publication 594,
“What You Should Know About the IRS
Collection Process(Rev. 2–2004).” Sim-
ilarly, the IRS will not consider an offer in
compromise from an in-business taxpayer
unless the taxpayer has timely filed all re-
turns and timely made all Federal tax de-
posits for two consecutive quarters. See
Form 656, “Offer in Compromise(Rev.
7–2004).” The resources of Appeals are in-
effectively utilized arranging and conduct-
ing face-to-face conferences requested by
non-compliant taxpayers whose only com-
plaint is the rejection of an offer to compro-
mise or installment agreement for which
they are not eligible.
Frivolous cases also cause unneces-
sary delays. During fiscal year 2004, 5.4
percent of the 32,226 CDP and equiva-
lent-hearing cases Appeals handled in-
volved taxpayers who were non-filers or
raised only frivolous issues. Cases raising
frivolous issues, in particular, consume a
disproportionately large amount of time,
because Appeals personnel must often
read lengthy, frivolous submissions in
search of any substantive issue buried
within. Delays also result when taxpayers
use face-to-face conferences as a venue
for frivolous oration and harassment of
Appeals personnel.
The proposed regulations attempt to ad-
dress these and other problems that have
become apparent during the first six years
of CDP practice. The proposed changes
are aimed at creating a more focused pro-
cedure that will allow Appeals to continue
to provide careful review of proposed
levies as the volume of cases increases.
A taxpayer must request a CDP hearing
in writing. The current regulations require
that a request for a CDP hearing include
the taxpayer’s name, address, and daytime
telephone number, and that the request be
dated and signed by either the taxpayer
or the taxpayer’s authorized representa-
tive. Section 301.6330–1(c)(2), Q&A-C1.
A Form 12153, “Request for a Collection
Due Process Hearing,” is included with
the CDP Notice sent to the taxpayer pur-
suant to section 6330. The Form 12153
requests (1) the taxpayer’s name, address,
daytime telephone number, and taxpayer
identification number (SSN or EIN), (2)
the type of tax involved, (3) the tax pe-
riod at issue, (4) a statement that the tax-
payer requests a hearing with Appeals con-
cerning the proposed levy, and (5) the rea-
son or reasons why the taxpayer disagrees
with the proposed levy. Although taxpay-
ers are encouraged to use a Form 12153
in requesting a CDP hearing, the current
regulations do not require the use of Form
12153.
Section 301.6330–1(c)(2), A-C1, of the
proposed regulations requires taxpayers to
state their reasons for disagreement with
the proposed levy whether or not a Form
12153 is used to request a CDP hearing.
In addition, a taxpayer who fails to sign
a timely CDP hearing request because the
request is made by a spouse or other unau-
thorized representative must affirm in writ-
ing that the request was originally submit-
ted on the taxpayer’s behalf. Failure to
provide the written affirmation within a
reasonable time after a request from Ap-
peals will result in the denial of a CDP
hearing for that taxpayer.
ACDPhearingistobeconductedbyan
Appeals officer or employee who has had
no “prior involvement” with respect to the
tax for the tax periods to be covered by the
hearing, unless the taxpayer waives this
requirement. Section 301.6330–1(d)(2),
A-D4 of the current regulations provides
that “prior involvement” by an Appeals
officer or employee includes participation
or involvement in an Appeals hearing that
the taxpayer may have had with respect to
the tax and tax period shown on the CDP
Notice, other than a CDP hearing held
under either section 6320 or section 6330.
It is important that “prior involvement”
be construed in a manner that reasonably
protects against predisposition but at the
same time does not disqualify too broad
a range of Appeals personnel. A broad
standard of “prior involvement” would
lead to uncertain application, could result
2005–43 I.R.B.781October 24, 2005

in the disqualification of an entire Appeals
office, many of which have small staffs,
and could make it difficult to conduct the
CDP hearing. Section 301.6330–1(d)(2),
A-D4 of the proposed regulations pro-
vides that prior involvement exists only
when the taxpayer, the tax liability and the
tax period shown on the CDP Notice also
were at issue in the prior non-CDP hearing
or proceeding, and the Appeals officer
or employee actually participated in the
prior hearing or proceeding. Examples
are provided in §301.6330–1(d)(3) of the
proposed regulations.
Section 301.6330–1(d)(2), A-D7, of the
proposed regulations clarifies that a face-
to-face conference is merely one aspect of
aCDPhearingundersection6330andis
not by itself the entire CDP hearing.
A-D7 of the proposed regulations also
provides that, in all cases, the Appeals
officer or employee will review the tax-
payer’s request for a CDP hearing, the case
file, other written communications from
the taxpayer, and any notes of oral com-
munications with the taxpayer or the tax-
payer’s representative. If no face-to-face
or telephonic conference is held, review of
those documents will constitute the CDP
hearing for purposes of section 6330(b).
A-D7 of the proposed regulations fur-
ther clarifies that when a business taxpayer
is offered an opportunity for a face-to-face
conference it will be held at the Appeals
office closest to the taxpayer’s principal
place of business. The current regula-
tions have been misinterpreted by some
taxpayers as requiring the IRS to hold a
face-to-face conference at the taxpayer’s
principal place of business.
Q&A-D8 of the proposed regulations
is new. It describes specific circum-
stances in which Appeals will not hold
a face-to-face conference with the tax-
payer or the taxpayer’s representative
because a conference will serve no use-
ful purpose. The experience of Appeals
is that although most taxpayers request
face-to-face conferences, they are some-
times difficult to schedule on a date and at
a time that is convenient for the taxpayer.
In some of these cases, taxpayers or their
representatives have used the scheduling
of a face-to-face conference as a tactic
to delay the IRS’s collection efforts. In
other cases, taxpayers have requested a
face-to-face conference merely to raise
frivolous arguments concerning the Fed-
eral tax system or to request collection
alternatives for which they do not qual-
ify. Q&A-D8 of the proposed regulations
provides that a face-to-face conference
need not be offered if the taxpayer or
the taxpayer’s representative raises only
frivolous arguments concerning the Fed-
eral tax system. See the IRS Internet
site,www.irs.gov/pub/irs-utl/friv_tax.pdf,
for examples of frivolous arguments. A
face-to-face conference also will not be
granted if the taxpayer proposes collection
alternatives that would not be available to
other taxpayers in similar circumstances.
A face-to-face conference need not be
granted if the taxpayer does not provide
in the written request for a CDP hearing,
as perfected, the required information set
forth in A-C1(ii)(E) of paragraph (c)(2) of
the proposed regulations.
In addition, a face-to-face conference
will not be held at the location closest
to the taxpayer’s residence or principal
place of business if all Appeals officers or
employees at that location are considered
to have prior involvement as provided in
A-D4. In this case, the taxpayer will be of-
fered a hearing by telephone or correspon-
dence, or some combination thereof. The
taxpayer may be able to obtain a face-to-
face conference at the Appeals office clos-
est to the taxpayer’s residence or princi-
pal place of business under these circum-
stances if the taxpayer waives the require-
ment of section 6330(b)(3) concerning im-
partiality of the Appeals officer or em-
ployee. Appeals will offer the taxpayer a
face-to-face conference at another Appeals
office if in the exercise of its discretion Ap-
peals would have offered the taxpayer a
face-to-face conference at the original lo-
cation.
With the foregoing exceptions, it is
anticipated that a face-to-face conference
will ordinarily be offered with respect to
any relevant issues or collection alterna-
tives for which the taxpayer qualifies.
Sections 301.6330–1(e)(1) and
301.6330–1(e)(3), A-E2 and A-E7 have
been changed to more closely follow the
language of section 6330(c)(2)(B). These
changes are necessary because these regu-
lations have been misinterpreted as defin-
ing the underlying tax liability that may
be considered at the CDP hearing under
section 6330(c)(2)(B) to be the tax liabil-
ity listed on the CDP Notice. The existing
regulations, which refer to tax liability on
the CDP Notice, were intended merely
to make clear that taxpayers may only
challenge taxes or tax periods listed on
the CDP Notice, not to supply a substan-
tive definition of underlying tax liability.
Section 301.6330–1(e)(3), A-E6 has been
amended to clarify that taxpayers who
receive CDP hearings can only qualify for
collection alternatives available generally
to taxpayers in similar circumstances.
The experience of the past six years has
revealed that many taxpayers raise an is-
sue with Appeals but fail to furnish any
documentation or evidence with respect
to the issue despite being given a reason-
able period to do so. For example, a tax-
payer may request an installment agree-
ment, but when an Appeals officer or em-
ployee requests financial data necessary
to determine eligibility for the installment
agreement, the taxpayer may not comply
with the request. Or a taxpayer may dis-
pute liability for a tax period by claim-
ing entitlement to deductions, but provide
no substantiation for the deductions in re-
sponse to requests from Appeals. Current
§301.6330–1(f)(2), A-F5 provides that a
taxpayer may not seek judicial review of
an issue that he has not raised during the
CDP hearing. A-F5 is revised to clarify
that in order to obtain judicial review, a
taxpayer must not only bring the issue to
the attention of Appeals but must also sub-
mit, if requested, evidence with respect to
that issue. Under revised A-F5, if the tax-
payer does not provide Appeals any evi-
dence with respect to the issue after being
given a reasonable opportunity to submit
such evidence, then he may not ask a court
to consider the issue.
There has been some confusion about
what documents Appeals should retain,
and what notations the Appeals officer or
employee conducting the hearing should
make, in order to provide a judicially re-
viewable administrative record. A new
Q&A-F6 has been added to specify the
contents of the administrative record re-
quired for court review.
The IRS receives a number of tardy
requests for CDP hearings. The changes
to §301.6330–1(i)(2) explain how these
requests will be treated. The proposed
amendments to the regulations add a new
Q&A-I1 to §301.6330–1(i)(2) to explain
that a taxpayer must request an equiva-
lent hearing in writing. A taxpayer may
obtain an equivalent hearing if the 30-day
October 24, 20057822005–43 I.R.B.

period described in section 6330(a)(3) for
requesting a CDP hearing has expired.
Unlike an Appeals determination in a
CDP hearing, the Appeals decision in an
equivalent hearing is not reviewable in
court. Under new Q&A-I1, the IRS is not
required to treat a late-filed CDP request
as a request for an equivalent hearing.
Section 301.6330–1(c)(2), A-C7 has been
amended to require that the taxpayer be
notified of the right to an equivalent hear-
ing in all cases in which a tardy request for
a CDP hearing is received. It is expected
that the IRS will either send the taxpayer a
letter or orally inform the taxpayer that the
CDP hearing request is untimely and ask if
the taxpayer wishes to have an equivalent
hearing. If the taxpayer elects to have an
equivalent hearing, the IRS will treat the
CDP hearing request as a request for an
equivalent hearing without requiring the
taxpayer to make an additional written
request.
Current Q&A-I1 through I5 are
renumbered Q&A-I2 through I6. The
proposed regulations add Q&A-I7 to
§301.6330–1(i)(2) to clarify that the pe-
riod during which a taxpayer may obtain
an equivalent hearing is not indefinite.
The equivalent hearing procedure is not
provided by statute but, consistent with
the legislative history of RRA 1998, was
adopted in order to accommodate tax-
payerswhofailedtimelytoexercisetheir
right to a CDP hearing. The equivalent
hearing was meant to occur near the time
a CDP hearing held pursuant to a timely
request would have occurred, because it
was meant to address the same matters
that would have been addressed at a CDP
hearing. The procedure was not meant
to provide a hearing right that could be
exercised months or years after the cir-
cumstances that precipitated the proposed
levy have passed. A hearing before Ap-
peals at a later time may be obtained under
the Collection Appeals Program. There-
fore, proposed Q&A-I7 limits to one year
the period during which a taxpayer may
request an equivalent hearing. The period
commences the day after the date of the
CDP Notice issued under section 6330.
Because the time for requesting an
equivalent hearing will be limited, the
proposed regulations add new Q&A-I8,
Q&A-I9, Q&A-I10 and Q&A-I11 to
§301.6330–1(i)(2) to provide the same
rules governing mailing, delivery and de-
termination of timeliness that apply to
requests for CDP hearings. Unlike exist-
ing §301.6330–1(c)(2), A-C6, new A-I10
does not identify the officials to whom
to send an equivalent hearing request if
the CDP Notice does not specify where
to send the request. Because the identity
and the address of the person to whom
the request should be sent may change in
the future, taxpayers will be able to obtain
more current information by calling the
1–800 number listed in A-I10. Section
301.6330–1(c)(2), A-C6 also has been
revised in the proposed regulations to pro-
vide that taxpayers should call the 1–800
number to obtain the address to which the
CDP hearing request should be sent.
The proposed regulations are effective
the date 30 days after final regulations are
published in theFederal Registerwith
respect to requests for CDP hearings or
equivalent hearings made on or after the
date 30 days after final regulations are pub-
lished in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined 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 Inter-
nal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and writ-
ten comments that are submitted timely to
the IRS. The IRS and Treasury Department
specifically 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 scheduled
for January 19, 2006, at 10 a.m. in the IRS
Auditorium, Internal Revenue Building
(7th Floor), 1111 Constitution Avenue,
NW, Washington, DC. All visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediateentranceareamorethan30
minutes before the hearing starts. For in-
formation about having a visitor’s name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT caption.
An outline of the topics to be discussed
and the time to be devoted to each topic
must be submitted by any person who
wishes to present oral comments at the
hearing. Outlines must be received by
December 29, 2005.
The rules of 26 CFR 601.601(a)(3) ap-
plytothehearing.Aperiodof10minutes
will be allotted to each person for making
comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving requests to speak
has passed. Copies of the agenda will be
available free of charge at the hearing.
Draftin
g Information
The principal author of these regula-
tions is Laurence K. Williams, Office of
Associate Chief Counsel, Procedure and
Administration (Collection, Bankruptcy
and Summonses Division).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6330–1 is proposed
to be amended as follows:
1. Paragraph (c)(2) A-C1, Q&A-C6
andA-C7arerevised.
2. Paragraph (d)(2) A-D4 and A-D7 are
revised.
3. Paragraph (d)(2) Q&A-D8 is added.
2005–43 I.R.B.783October 24, 2005

4. Paragraph (d)(3) is added.
5. Paragraph (e)(1) is revised
6. Paragraph (e)(3)A-E2,A-E6and
A-E7 are revised.
7. Paragraph (f)(2) A-F5 is revised.
8. Paragraph (f)(2) Q&A-F6 is added.
9. Paragraph (i)(2) Q&A-I1 through
Q&A-I5 are renumbered Q&A-I2 through
Q&A-I6, a new paragraph (i)(2) Q&A-I1
and new paragraphs Q&A-I7 through
Q&A-I11 are added.
10. Paragraph (j) is revised.
§301.6330–1 Notice and opportunity for
hearing prior to levy.
*****
(c) * * *
(2) * * *
A-C1. (i) The taxpayer must make a
request in writing for a CDP hearing. The
request for a CDP hearing shall include the
information specified in A-C1(ii) of this
paragraph (c)(2). See A-D7 and A-D8 of
paragraph (d)(2).
(ii) The written request for a CDP hear-
ing must be dated and must include the fol-
lowing information:
(A) The taxpayer’s name, address, day-
time telephone number (if any), and tax-
payer identification number (SSN or EIN).
(B) The type of tax involved.
(C) The tax period at issue.
(D) A statement that the taxpayer re-
quests a hearing with Appeals concerning
the proposed levy.
(E) The reason or reasons why the tax-
payer disagrees with the proposed levy.
(F) The signature of the taxpayer or the
taxpayer’s authorized representative.
(iii) The taxpayer must perfect any
timely written request for a CDP hearing
that does not provide the required informa-
tion set forth in A-C1(ii) of this paragraph
within a reasonable period of time after a
request from the IRS.
(iv) Taxpayers are encouraged to use
a Form 12153, “Request for a Collection
Due Process Hearing,” in requesting a
CDP hearing so that the request can be
readilyidentifiedandforwardedtoAp-
peals. Taxpayers may obtain a copy of
Form 12153 by contacting the IRS office
that issued the CDP Notice, by down-
loading a copy from the IRS Internet site,
www.irs.gov/pub/irs-pdf/f12153.pdf,orby
calling, toll-free, 1–800–829–3676.
(v) The taxpayer must affirm any timely
written request for a CDP hearing which
is signed or alleged to have been signed
on the taxpayer’s behalf by the taxpayer’s
spouse or other unauthorized representa-
tive by filing, within a reasonable time af-
ter a request from the IRS, a signed, writ-
ten affirmation that the request was orig-
inally submitted on the taxpayer’s behalf.
If the affirmation is not filed within a rea-
sonable period of time after a request, the
CDP hearing request will be denied with
respect to the non-signing taxpayer.
*****
Q-C6. Where must the written request
for a CDP hearing be sent?
A-C6. The written request for a CDP
hearing must be sent, or hand delivered (if
permitted), to the IRS office and address
as directed on the CDP Notice. If the ad-
dress of that office does not appear on the
CDP Notice, the taxpayer should obtain
the address of the office to which the writ-
ten request should be sent or hand deliv-
ered by calling, toll-free, 1–800–829–1040
and providing the taxpayer’s identification
number (SSN or TIN).
*****
A-C7. If the taxpayer does not request a
CDP hearing in writing within the 30-day
period that commences on the day after
the date of the CDP Notice, the taxpayer
foregoes the right to a CDP hearing under
section 6330 with respect to the unpaid tax
and tax periods shown on the CDP Notice.
If the request for CDP hearing is received
after the 30-day period, the taxpayer will
be notified of the untimely request and of
the right to an equivalent hearing. See
paragraph (i) of this section.
*****
(d) * * *
(2) * * *
A-D4. Prior involvement by an Ap-
peals officer or employee includes partici-
pation or involvement in an Appeals hear-
ing(otherthanaCDPhearingheldun-
der either section 6320 or section 6330)
that the taxpayer may have had with re-
spect to the tax and tax period shown on
the CDP Notice. Prior involvement exists
only when the taxpayer, the tax liability
and the tax period at issue in the CDP hear-
ing also were at issue in the prior non-CDP
hearing or proceeding,and the Appeals of-
ficer or employee actually participated in
the prior hearing or proceeding.
*****
A-D7. Except as provided in A-D8
of this paragraph (d)(2), a taxpayer who
presents in the CDP hearing request rel-
evant, non-frivolous reasons for disagree-
ment with the proposed levy will ordinar-
ily be offered an opportunity for a face-to-
face conference at the Appeals office clos-
est to the taxpayer’s residence. A busi-
ness taxpayer will ordinarily be offered
an opportunity for a face-to-face confer-
ence at the Appeals office closest to the
taxpayer’s principal place of business. If
that is not satisfactory to the taxpayer, the
taxpayer will be given an opportunity for
a hearing by telephone or by correspon-
dence. In all cases, the Appeals officer or
employee will review the case file, which
includes the taxpayer’s request for a CDP
hearing, any other written communications
from the taxpayer or the taxpayer’s autho-
rized representative, and any notes made
by Appeals officers or employees of any
oral communications with the taxpayer or
the taxpayer’s authorized representative.
If no face-to-face or telephonic conference
is held, review of those documents will
constitute the CDP hearing for purposes of
section 6330(b).
Q-D8. In what circumstances will
a face-to-face CDP conference not be
granted?
A-D8. A taxpayer is not entitled to
a face-to-face CDP conference at a loca-
tion other than as provided in A-D7 of this
paragraph (d)(2) and this A-D8. If all Ap-
peals officers or employees at the loca-
tion provided for in A-D7 of this paragraph
have had prior involvement with the tax-
payer as provided in A-D4 of this para-
graph, the taxpayer will not be offered a
face-to-face meeting at that location, un-
less the taxpayer elects to waive the re-
quirement of section 6330(b)(3). The tax-
payer will be offered a face-to-face confer-
ence at another Appeals office if Appeals
in the exercise of its discretion would have
offered the taxpayer a face-to-face confer-
ence at the location provided in A-D7. A
face-to-face CDP conference concerning a
taxpayer’s underlying liability will not be
granted if the request for a hearing or other
taxpayer communication indicates that the
taxpayer wishes only to raise irrelevant or
frivolous issues concerning that liability.
A face-to-face CDP conference concern-
ing a collection alternative, such as an in-
stallment agreement or an offer to compro-
October 24, 20057842005–43 I.R.B.

mise liability, will not be granted unless
the alternative would be available to other
taxpayers in similar circumstances. For
example, because the IRS does not con-
sider offers to compromise from taxpay-
ers who have not filed required returns or
have not made certain required deposits of
tax, as set forth in Form 656, “Offer in
Compromise,” no face-to-face conference
will be offered to a taxpayer who wishes
to make an offer to compromise but has not
fulfilled those obligations. A face-to-face
conference need not be granted if the tax-
payer does not provide the required infor-
mation set forth in A-C1(ii)(E) of para-
graph (c)(2). See also A-C1(iii) of para-
graph C–2.
(3)Examples. The following examples
illustrate the principles of this paragraph
(d):
Example 1. Individual A timely requests a CDP
hearing concerning a proposed levy for the 1998
income tax liability assessed against individual A.
Appeals employee B previously conducted a CDP
hearing regarding a NFTL filed with respect to A’s
1998 income tax liability. Because employee B’s
only prior involvement with individual A’s 1998
income tax liability was in connection with a sec-
tion 6320 CDP hearing, employee B may conduct
the CDP hearing under section 6330 involving the
proposed levy for the 1998 income tax liability.
Example 2. Individual C timely requests a CDP
hearing concerning a proposed levy for the 1998 in-
come tax liability assessed against individual C. Ap-
peals employee D previously conducted a Collection
Appeals Program (CAP) hearing regarding a NFTL
filed with respect to C’s 1998 income tax liability.
Because employee D’s prior involvement with indi-
vidual C’s 1998 income tax liability was in connec-
tion with a non-CDP hearing, employee D may not
conduct the CDP hearing under section 6330 unless
individual C waives the requirement that the hearing
will be conducted by an Appeals officer or employee
who has had no prior involvement with respect to C’s
1998 income tax liability.
Example 3. Same facts as inExample 2, except
that the prior CAP hearing only involved individual
C’s 1997 income tax liability and employment tax li-
abilities for 1998 reported on Form 941. Employee
D would not be considered to have prior involvement
because the prior CAP hearing in which she partici-
pated did not involve individual C’s 1998 income tax
liability.
Example 4. Appeals employee F is assigned to a
CDP hearing concerning a proposed levy for a trust
fund recovery penalty (TFRP) assessed pursuant to
section 6672 against individual E. Appeals employee
F participated in a prior CAP hearing involving indi-
vidual E’s 1999 income tax liability, and participated
in a CAP hearing involving the employment taxes of
business entity X, which incurred the employment tax
liability to which the TFRP assessed against individ-
ual E relates. Appeals employee F would not be con-
sidered to have prior involvement because the prior
CAP hearings in which he participated did not di-
rectly involve the TFRP assessed against individual
E.
Example 5. Appeals employee G is assigned to a
CDP hearing concerning a proposed levy for a TFRP
assessed pursuant to section 6672 against individual
H. In preparing for the CDP hearing, Appeals em-
ployee G reviews the Appeals case file concerning the
prior CAP hearing involving the TFRP assessed pur-
suant to section 6672 against individual H. Appeals
employee G is not deemed to have participated in the
previous CAP hearing involving the TFRP assessed
against individual H by such review.
(e)Matters considered at CDP hear-
ing—(1)In general. Appeals has the
authority to determine the validity, suffi-
ciency, and timeliness of any CDP Notice
given by the IRS and of any request for a
CDP hearing that is made by a taxpayer.
Prior to issuance of a determination, Ap-
peals is required to obtain verification
from the IRS office collecting the tax that
the requirements of any applicable law or
administrative procedure have been met.
The taxpayer may raise any relevant issue
relating to the unpaid tax at the hearing,
including appropriate spousal defenses,
challenges to the appropriateness of the
proposed levy, and offers of collection
alternatives. The taxpayer also may raise
challenges to the existence or amount of
the underlying liability for any tax period
specified on the CDP Notice if the tax-
payer did not receive a statutory notice
of deficiency for that tax liability or did
not otherwise have an opportunity to dis-
pute the tax liability. Finally, the taxpayer
may not raise an issue that was raised and
considered at a previous CDP hearing un-
der section 6320 or in any other previous
administrative or judicial proceeding if
the taxpayer participated meaningfully in
such hearing or proceeding. Taxpayers
will be expected to provide all relevant in-
formation requested by Appeals, including
financial statements, for its consideration
of the facts and issues involved in the
hearing.
*****
(3) * * *
A-E2. A taxpayer is entitled to chal-
lenge the existence or amount of the under-
lying liability for any tax period specified
on the CDP Notice if the taxpayer did not
receive a statutory notice of deficiency for
such liability or did not otherwise have an
opportunity to dispute such liability. Re-
ceipt of a statutory notice of deficiency for
this purpose means receipt in time to peti-
tion the Tax Court for a redetermination of
the deficiency determined in the notice of
deficiency. An opportunity to dispute the
underlying liability includes a prior oppor-
tunity for a conference with Appeals that
was offered either before or after the as-
sessment of the liability.
*****
A-E6. Collection alternatives include,
for example, a proposal to withhold the
proposed levy or future collection action
in circumstances that will facilitate the col-
lection of the tax liability, an installment
agreement, an offer to compromise, the
posting of a bond, or the substitution of
other assets. A collection alternative is not
available unless thealternative would be
available to other taxpayers in similar cir-
cumstances. For example, the IRS does
not consider an offer to compromise made
by a taxpayer who, at the time of the CDP
hearing, has not filed required returns or
has not made certain required deposits of
tax, as set forth in Form 656, “Offer in
Compromise.” The collection alternative
of an offer to compromise would not be
available to such a taxpayer in a CDP hear-
ing.
*****
A-E7. The taxpayer may raise appro-
priate spousal defenses, challenges to the
appropriateness of the proposed collection
action, and offers of collection alterna-
tives. The existence or amount of the un-
derlying liability for any tax period speci-
fied in the CDP Notice may be challenged
only if the taxpayer did not already have
an opportunity to dispute the tax liability.
If the taxpayer previously received a CDP
Notice under section 6320 with respect to
the same tax and tax period and did not re-
quest a CDP hearing with respect to that
earlier CDP Notice, the taxpayer has al-
ready had an opportunity to dispute the ex-
istence or amount of the underlying tax li-
ability.
*****
(f) * * *
(2) * * *
A-F5. In seeking Tax Court or district
court review of a Notice of Determination,
the taxpayer can only ask the court to con-
sider an issue, including a challenge to the
underlying tax liability, that was properly
raised in the taxpayer’s CDP hearing. An
issue is not properly raised if the taxpayer
fails to request consideration of the issue
2005–43 I.R.B.785October 24, 2005

by Appeals, or if consideration is requested
but the taxpayer fails to present to Appeals
any evidence with respect to that issue af-
ter being given a reasonable opportunity to
present such evidence.
Q-F6. What is the administrative record
for purposes of court review?
A-F6. The case file, including written
communications and information from
the taxpayer or the taxpayer’s authorized
representative submitted in connection
with the CDP hearing, notes made by an
Appeals officer or employee of any oral
communications with the taxpayer or the
taxpayer’s authorized representative and
memoranda created by the Appeals officer
or employee in connection with the CDP
hearing, and any other documents or ma-
terials relied upon by the Appeals officer
or employee in making the determination
under section 6330(c)(3), will constitute
the record in any court review of the No-
tice of Determination issued by Appeals.
(i) * * *
(2) * * *
Q-I1. What must a taxpayer do to ob-
tain an equivalent hearing?
A-I1. (i) A request for an equivalent
hearing must be made in writing. A writ-
ten request in any form that requests an
equivalent hearing will be acceptable if it
includes the information required in para-
graph(ii)ofthisA-I1.
(ii) The request must be dated and must
include the following information:
(A) The taxpayer’s name, address, day-
time telephone number (if any), and tax-
payer identification number (SSN or EIN).
(B) The type of tax involved.
(C) The tax period at issue.
(D) A statement that the taxpayer is re-
questing an equivalent hearing with Ap-
peals concerning the levy.
(E) The reason or reasons why the tax-
payer disagrees with the proposed levy.
(F) The signature of the taxpayer or the
taxpayer’s authorized representative.
(iii) The taxpayer must perfect any
timely written request for an equivalent
hearing that does not provide the required
information set forth in paragraph (ii) of
this A-I1 within a reasonable period of
time after a request from the IRS. If the re-
quested information is not provided within
a reasonable period of time, the taxpayer’s
equivalent hearing request will be denied.
(iv) The taxpayer must affirm any
timely written request for an equivalent
hearing that is signed or alleged to have
been signed on the taxpayer’s behalf by
the taxpayer’s spouse or other unautho-
rized representative, and that otherwise
meets the requirements set forth in para-
graph (ii) of this A-I1, by filing, within a
reasonable time after a request from the
IRS, a signed written affirmation that the
request was originally submitted on the
taxpayer’s behalf. If the affirmation is
not filed within a reasonable period of
time, the equivalent hearing request will
be denied with respect to the non-signing
taxpayer.
*****
Q-I7. When must a taxpayer request an
equivalent hearing with respect to a CDP
Notice issued under section 6330?
A-I7. A taxpayer must submit a written
request for an equivalent hearing within
the one-year period commencing the day
after the date of the CDP Notice issued un-
der section 6330. This period is slightly
different from the period for submitting a
written request for an equivalent hearing
with respect to a CDP Notice issued under
section 6320. For a CDP Notice issued un-
der section 6320, a taxpayer must submit
a written request for an equivalent hear-
ing within the one-year period commenc-
ing the day after the end of the five-busi-
ness-day period following the filing of the
NFTL.
Q-I8. How will the timeliness of a tax-
payer’s written request for an equivalent
hearing be determined?
A-I8. The rules and regulations under
section7502andsection7503willapplyto
determine the timeliness of the taxpayer’s
request for an equivalent hearing, if prop-
erly transmitted and addressed as provided
in A-I10 of this paragraph (i)(2).
Q-I9. Is the one-year period within
which a taxpayer must make a request for
an equivalent hearing extended because
the taxpayer resides outside the United
States?
A-I9. No. All taxpayers who want an
equivalent hearing must request the hear-
ing within the one-year period commenc-
ing the day after the date of the CDP Notice
issued under section 6330.
Q-I10. Where must the written request
for an equivalent hearing be sent?
A-I10. The written request for an
equivalent hearing must be sent, or hand
delivered (if permitted), to the IRS office
and address as directed on the CDP Notice.
If the address of the issuing office does not
appear on the CDP Notice, the taxpayer
should obtain the address of the office to
which the written request should be sent
or hand delivered by calling, toll-free,
1–800–829–1040 and providing the tax-
payer’s identification number (SSN or
EIN).
Q-I11. What will happen if the taxpayer
does not request an equivalent hearing in
writing within the one-year period com-
mencing the day after the date of the CDP
Notice issued under section 6330?
A-I11. If the taxpayer does not request
an equivalent hearing with Appeals within
the one-year period commencing the day
after the date of the CDP Notice issued un-
der section 6330, the taxpayer foregoes the
right to an equivalent hearing with respect
to the unpaid tax and tax periods shown
on the CDP Notice. The taxpayer, how-
ever, may seek reconsideration by the IRS
office collecting the tax, assistance from
the National Taxpayer Advocate, or an ad-
ministrative hearing before Appeals under
its Collection Appeals Program or any suc-
cessor program.
*****
(j)Effective date. This section is appli-
cable the date 30 days after final regula-
tions are published in theFederal Regis-
terwith respect to requests made for CDP
hearings or equivalent hearings on or after
the date 30 days after final regulations are
published in theFederal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September
15, 2005, 8:45 a.m., and published in the issue of the Federal
Register for September 16, 2005, 70 F.R. 54687)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Application of Section 409A
to Nonqualified Deferred
Compensation Plans
REG–158080–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
October 24, 20057862005–43 I.R.B.

ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations regarding the appli-
cation of section 409A to nonqualified
deferred compensation plans. The regu-
lations affect service providers receiving
amounts of deferred compensation, and
the service recipients for whom the service
providers provide services. This document
also provides a notice of public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by January 3, 2006. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for January 25, 2006,
must be received by January 4, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–158080–04),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–158080–04), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–158080–04). The public hear-
ing will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Stephen Tackney, at (202)
927–9639; concerning submissions of
comments, the hearing, and/or to be
placed on the building access list to at-
tend the hearing, Richard A. Hurst at
(202) 622–7116 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 409A was added to the Internal
Revenue Code (Code) by section 885 of
the American Jobs Creation Act of 2004,
Public Law 108–357 (118 Stat. 1418).
Section 409A generally provides that un-
less certain requirements are met, amounts
deferred under a nonqualified deferred
compensation plan forall taxable years
are currently includible in gross income
to the extent not subject to a substantial
risk of forfeiture and not previously in-
cluded in gross income. Section 409A
also includes rules applicable to certain
trusts or similar arrangements associated
with nonqualified deferred compensation,
where such arrangements are located out-
side of the United States or are restricted
to the provision of benefits in connection
with a decline in the financial health of the
sponsor.
On December 20, 2004, the IRS issued
Notice 2005–1, 2005–2 I.R.B. 274 (pub-
lished as modified on January 6, 2005),
setting forth initial guidance with respect
to the application of section 409A, and
supplying transition guidance in accor-
dance with the terms of the statute. Notice
2005–1 requested comments on all aspects
of the application of section 409A, includ-
ing certain specified topics. Numerous
comments were submitted and all were
considered by the Treasury Department
and the IRS in formulating these regula-
tions. In general, these regulations incor-
porate the guidance provided in Notice
2005–1 and provide substantial additional
guidance. For a discussion of the contin-
ued applicability of Notice 2005–1, see
theEffect on Other Documentssection
of this preamble.
Explanation of Provisions
I.Definition of Nonqualified Deferred
Compensation Plan
A.In general
Section 409A applies to amounts de-
ferred under a nonqualified deferred
compensation plan. For this purpose a
nonqualified deferred compensation plan
means any plan that provides for the de-
ferral of compensation, with specified
exceptions such as qualified retirement
plans, tax-deferred annuities, simplified
employee pensions, SIMPLEs and sec-
tion 501(c)(18) trusts. In addition, section
409A does not apply to certain welfare
benefit plans, includingbona fidevaca-
tion leave, sick leave,compensatory time,
disability pay, and death benefit plans.
In certain instances, these regulations
cross reference the regulations under sec-
tion 3121(v)(2), which provide a special
timing rule under the Federal Insurance
Contributions Act (FICA) for nonqualified
deferred compensation, as defined in sec-
tion 3121(v)(2) and the regulations there-
under. However, unless explicitly cross-
referenced in these regulations, the regula-
tions under section 3121(v)(2) do not ap-
ply for purposes of section 409A and under
no circumstances do these proposed reg-
ulations affect the application of section
3121(v)(2).
B.Section 457 plans
Section 409A does not apply to eligible
deferred compensation plans under sec-
tion 457(b). However, section 409A ap-
plies to nonqualified deferred compensa-
tion plans to which section 457(f) applies,
separately and in addition to the require-
ments applicable to such plans under sec-
tion 457(f). Section 409A(c) provides that
nothing in section 409A prevents the in-
clusion of amounts in gross income under
any other provision of the Code. Section
409A(c) further provides that any amount
included in gross income under section
409A will not be required to be included
in gross income under any other Code pro-
vision later than the time provided in sec-
tion 409A. Accordingly, if in a taxable year
an amount subject to section 409A (but not
required to be included in income under
section 409A) is required to be included
in gross income under section 457(f), that
amount must be included in gross income
under section 457(f) for that taxable year.
Correspondingly, if in a taxable year an
amount that would otherwise be required
to be included in gross income under sec-
tion 457(f) has been included previously
in gross income under section 409A, that
amount will not be required to be included
in gross income under section 457(f) for
that taxable year.
These proposed regulations are in-
tended solely as guidance with respect to
theapplicationofsection409Atosuchar-
rangements, and should not be relied upon
with respect to the application of section
457(f). Thus, state and local govern-
ment and tax exempt entities may not rely
upon the definition of a deferral of com-
pensation under §1.409A–1(b) of these
proposed regulations in applying section
457(f). For example, for purposes of sec-
tion 457(f), a deferral of compensation
includes a stock option and an arrange-
ment in which an employee or independent
2005–43 I.R.B.787October 24, 2005

contractor of a state or local government
or tax-exempt entity earns the right to fu-
ture payments for services, even if those
amounts are paid immediately upon vest-
ing and would qualify for the exclusion
from the definition of deferred compensa-
tion under §1.409A–1(b)(4) or (5) of these
proposed regulations. However, until fur-
ther guidance is issued, state and local
government and tax exempt entities may
rely on the definitions ofbona fidevaca-
tion leave, sick leave, compensatory time,
disability pay, and death benefit plans for
purposes of section 457(f) as applicable
for purposes of applying section 409A
and §1.409A–1(a)(5) of these proposed
regulations to nonqualified deferred com-
pensation plans under section 457(f).
C. Arrangements with independent
contractors
Consistent with Notice 2005–1,
Q&A–8, these regulations exclude from
coverage under section 409A certain ar-
rangements between service providers and
service recipients. Under these regula-
tions, amounts deferred in a taxable year
with respect to a service provider using
an accrual method of accounting for that
year are not subject to section 409A. In
addition, section 409A generally does not
apply to amounts deferred pursuant to an
arrangement between a service recipient
and an unrelated independent contractor
(other than a director of a corporation), if
during the independent contractor’s tax-
able year in which theamount is deferred,
the independent contractor is providing
significant services to each of two or more
service recipients that are unrelated, both
to each other and to the independent con-
tractor. In response to comments, these
regulations clarify that the determination
is made based upon the independent con-
tractor’s taxable year in which the amount
is deferred.
Commentators also requested clarifica-
tion of the circumstances in which services
to each service recipient will be deemed
to be significant, as required for the ex-
clusion. Determining whether services
provided to a service recipient are signifi-
cant generally will involve an examination
of all relevant facts and circumstances.
However, two clarifications have been
provided. First, the analysis applies sep-
arately to each trade or business in which
the service provider is engaged. For ex-
ample, a taxpayer providing computer
programming services for one service re-
cipient will not meetthe exception if, as
a separate trade or business, the taxpayer
paints houses for another unrelated service
recipient. To provide certainty to many
independent contractors engaged in an ac-
tive trade or business with multiple service
recipients, a safe harbor has been provided
under which an independent contractor
with multiple unrelated service recipients,
to whom the independent contractor also
is not related, will be treated as providing
significant services to more than one of
those service recipients, if not more than
70 percent of the total revenue generated
by the trade or business in the particular
taxable year is derived from any particu-
lar service recipient (or group of related
service recipients).
Commentators also requested clarifica-
tion with respect to the application of sec-
tion 409A to directors. As provided in
these regulations, an individual will not
be excluded from coverage under section
409A merely because the individual pro-
vides services as a director to two or more
unrelated service recipients. However, the
provisions of section 409A apply sepa-
rately to arrangements between the service
provider director and each service recipi-
ent. Accordingly, the inclusion of income
duetoafailuretomeettherequirements
of section 409A with respect to an arrange-
ment to serve as a director of one service
recipient will not cause an inclusion of in-
come with respect to arrangements to serve
as a director of an unrelated service recip-
ient. In addition, the continuation of ser-
vices as a director with one service recip-
ient will not cause the termination of ser-
vices as a director with an unrelated ser-
vice recipient to fail to constitute a sepa-
ration from service for purposes of section
409A, if the termination would otherwise
qualify as a separation from service.
Commentators also requested clarifica-
tion with respect to the application of the
rule to directors whoare also employees of
the service recipient. In general, the pro-
visions of section 409A will apply sepa-
rately to the arrangements between the ser-
vice recipient and the service provider for
services as a director and the arrangements
between the service recipient and the ser-
vice provider for services as an employee.
However, the distinction is not intended to
permit employee directors to limit the ag-
gregation of arrangements in which the in-
dividual participates as an employee by la-
beling such arrangements as arrangements
for services as a director. Accordingly,
an arrangement with an employee direc-
tor will be treated as an arrangement for
services as a director only to the extent
that another non-employee director defers
compensation under the same, or a sub-
stantially similar, arrangement on similar
terms. Moreover, the separate application
of section 409A to arrangements for ser-
vices as a director and arrangements for
services as an employee does not extend
to a service provider’s services for the ser-
vice recipient as an independent contrac-
tor in addition to the service provider’s ser-
vices as a director of the service recipient.
Under those circumstances, both arrange-
ments are treated as services provided as
an independent contractor.
Commentators also requested clarifica-
tion of the application of the exclusion to
independent contractors who provide ser-
vices to only one service recipient, when
that service recipient itself has multiple
clients. Specifically a commentator re-
quested that the rule be applied on a look
through basis, so that the independent
contractor will be deemed to be providing
services for multiple service recipients.
The Treasury Department and the IRS do
not believe that such a rule is appropri-
ate. Where multiple persons have come
together and formed an entity that is it-
self a service recipient of the independent
contractor, the independent contractor is
performing services for the single entity
service recipient.
The Treasury Department and the IRS
believe that where the service recipient
is purchasing an independent contractor’s
management services, amounts deferred
with respect to the independent contrac-
tor’s performance of services should not
be excluded from coverage under section
409A. Among the many objectives under-
lying the enactment of section 409A is to
limit the ability of a service provider to
retain the benefits of the deferral of com-
pensation while having excessive control
over the timing of the ultimate payment.
Where the independent contractor is man-
aging the service recipient, there is a sig-
nificant potential for the independent con-
tractor to have such influence or control
over compensation matters so that categor-
October 24, 20057882005–43 I.R.B.

ical exclusion from coverage under section
409A is not appropriate. Accordingly, the
regulations provide that compensation ar-
rangements between an independent con-
tractor and a service recipient that involve
the provision of management services are
not excluded from coverage under section
409A, and in such cases, the service recip-
ient is not treated as unrelated for purposes
of determining whether arrangements with
other service recipients are excluded from
coverage under section 409A under the
general rule addressing independent con-
tractors providing services to multiple un-
related service recipients. For this pur-
pose, management services include ser-
vices involving actual or de facto direction
or control of the financial or operational
aspects of the client’s trade or business, or
investment advisory services that are inte-
gral to the trade or business of a service re-
cipient whose primary trade or business in-
volves the management of investments in
entities other than the entities comprising
the service recipient, such as a hedge fund
or real estate investment trust.
II.Definition of Nonqualified Deferred
Compensation
A.In general
Consistent with Notice 2005–1,
Q&A–4, these regulations provide that
a plan provides for the deferral of com-
pensation only if, under the terms of the
plan and the relevant facts and circum-
stances, the service provider has a legally
binding right during a taxable year to
compensation that has not been actually
or constructively received and included
in gross income, and that, pursuant to the
terms of the plan, is payable to (or on be-
half of) the service provider in a later year.
A legally binding right to compensation
may exist even where the right is subject
to conditions, including conditions that
constitute a substantial risk of forfeiture.
For example, an employee that in Year 1
is promised a bonus equal to a set percent-
age of employer profits, to be paid out in
Year 3 if the employee has remained in
employment through Year 3, has a legally
binding right to the payment of the com-
pensation, subject to the conditions being
met. The right thus may be subject to a
substantial risk of forfeiture, and accord-
ingly be nonvested; however, the promise
constitutes a legally binding right subject
to a condition.
In contrast, a service provider does not
have a legally binding right to compen-
sation if that compensation may be uni-
laterally reduced or eliminated by the ser-
vice recipient or other person after the ser-
vices creating the right to the compensa-
tion have been performed. Notice 2005–1,
Q&A–4 provides that, if the facts and cir-
cumstances indicate that the discretion to
reduce or eliminate the compensation is
available or exercisable only upon a con-
dition that is unlikely to occur, or the dis-
cretion to reduce or eliminate the compen-
sation is unlikely to be exercised, a ser-
vice provider will be considered to have
a legally binding right to the compensa-
tion. Commentators criticized the provi-
sion as being difficult to apply, because
the standard is too vague, requiring a sub-
jective judgment as to whether the discre-
tion is likely to be exercised. The intent
of this provision was to eliminate the pos-
sibility of taxpayers avoiding the applica-
tion of section 409A through the use of
plan provisions providing negative discre-
tion, where such provisions are not mean-
ingful. In response to the comments, these
regulations adopt a standard under which
the negative discretion will be recognized
unless it lacks substantive significance, or
is available or exercisable only upon a con-
dition. Thus, where a promise of com-
pensation may be reduced or eliminated at
the unfettered discretion of the service re-
cipient, that promise generally will not re-
sult in a legally binding right to compen-
sation. However, where the negative dis-
cretion lacks substantive significance, or
the discretion is available or exercisable
only upon a condition, the discretion will
be ignored and the service provider will be
treated as having a legally binding right.
In addition, where the service provider has
control over, or is related to, the person
grantedthediscretiontoreduceorelimi-
nate the compensation, or has control over
all or any portion of such person’s com-
pensation or benefits, the discretion also
will be ignored and the service provider
will be treated as having a legally binding
right to the compensation.
B.Short-term deferrals
Notice 2005–1, Q&A–4(c), set forth
an exception from coverage under section
409A under which certain arrangements,
referred to as short-term deferrals, would
not be treated as resulting in the defer-
ral of compensation. Specifically, Notice
2005–1, Q&A–4 provided that until fur-
ther guidance a deferral of compensation
would not occur if, absent an election to
otherwise defer the payment to a later pe-
riod, at all times the terms of the plan re-
quire payment by, and an amount is actu-
ally or constructively received by the ser-
vice provider by, the later of (i) the date
that is 2
1
/2months from the end of the ser-
vice provider’s first taxable year in which
the amount is no longer subject to a sub-
stantial risk of forfeiture, or (ii) the date
that is 2
1
/2months from the end of the ser-
vice recipient’s year in which the amount
is no longer subject to a substantial risk of
forfeiture. For these purposes, an amount
that is never subject to a substantial risk
of forfeiture is considered to be no longer
subject to a substantial risk of forfeiture
on the date the service provider first has a
legally binding right to the amount. Under
this rule, many multi-year bonus arrange-
ments that require payments promptly af-
ter the amount vests would not be subject
to section 409A.
The exception from coverage under
section 409A for short-term deferrals set
forth in Notice 2005–1, Q&A–4, has been
incorporated into these proposed regula-
tions. Commentators questioned whether
a written provision in the arrangement
requiring the payment to be made by the
relevant deadline is necessary, or whether
the customary practice of the service re-
cipient is sufficient.These regulations do
not require that the arrangement provide in
writing that the payment must be made by
the relevant deadline. Accordingly, where
an arrangement does not otherwise defer
compensation, an amount will qualify as a
short-term deferral, and not be subject to
section 409A, if the amount is actually paid
out by the appropriate deadline. However,
where an arrangement does not provide
in writing that a payment must be paid by
a specified date on or before the relevant
deadline, and the payment is not made by
the appropriate deadline (except due to
unforeseeable administrative or solvency
issues, as discussed below), the payment
will result in automatic violation of sec-
tion 409A due to the failure to specify the
payment date or a permissible payment
event. In addition, the rules permitting
2005–43 I.R.B.789October 24, 2005

the service recipient limited discretion
to delay payments of amounts subject to
section 409A (for example, where the
service recipient reasonably anticipates
that payment of the amount would not be
deductible due to application of section
162(m), or where the service recipient
reasonably anticipates that payment of
the amount would violate a loan covenant
or similar contractual provision) would
not be available, because the arrangement
would not have specified a payment date
subject to the delay. In contrast, where
an arrangement provides in writing that
a payment must be made by a specified
date on or before the relevant deadline,
and the payment is not made by the ap-
propriate deadline so that section 409A
becomes applicable, the rules contained in
these regulations generally permitting the
payment to be made in the same calendar
year as the fixed payment date become
applicable. In addition, the rules permit-
tingaplantoprovideforadelayinthe
payment in certain circumstances and the
relief applicable to disputed payments and
refusals to pay would also be available.
Accordingly, it will often be appropriate
to include a date or year for payment even
when it is intended that the payment will
be made within the short-term deferral
period.
The short-term deferral rule does not
provide a method to avoid application of
section 409A if the legally binding right
creates a right to deferred compensation
from the outset. For example, if a legally
binding right to payment in Year 10 arises
in Year 1, but the right is subject to a sub-
stantial risk of forfeiture through Year 3,
paying the amount at the end of Year 3
would not result in the payment failing to
be subject to section 409A, but rather gen-
erally would be an impermissible accelera-
tion of the payment from the originally es-
tablished right to payment in Year 10.
Commentators also questioned whether
the 2
1
/2month deadline for payment could
be extended where the payment was not
administratively practicable, or where the
payment was made late due to error. These
regulations provide that a payment made
after the 2
1
/2month deadline may continue
to be treated as meeting the requirements
of the exception from the definition of a
deferral of compensation if the taxpayer
establishes that it was impracticable, either
administratively or economically, to avoid
the deferral of the receipt by a service
provider of the payment beyond the appli-
cable 2
1
/2monthperiodandthat,asofthe
time the legally binding right to the amount
arose, such impracticability was unfore-
seeable, and the payment is made as soon
as practicable. Some commentators had
asked for a rule permitting delays due to
unintentional error to satisfy the standard
for the exclusion. However, the excep-
tion is based upon the longstanding posi-
tion set forth in §1.404(b)–1T, Q&A–2(b)
regarding the timing of the deduction with
respect to a payment under a nonqualified
deferred compensation plan. Similar to the
deduction rule, the exclusion from cover-
age under section 409A treats a payment
made within the appropriate 2
1
/2month pe-
riod as made within such a short period
following the date the substantial risk of
forfeiture lapses that it may be treated as
paid when earned (and not deferred to a
subsequent period). Also similar to the
rule governing the timing of deductions,
the exclusion from coverage under section
409A permits only limited exceptions to
the requirement that the amount actually
be paid by the relevant deadline. Pending
further study, the Treasury Department and
the IRS believe that providing further flex-
ibility with respect to meeting the deadline
would create the potential for abuse and
enforcement difficulty.
C.Stock options and stock appreciation
rights
1.In general
The legislative history states that sec-
tion 409A does not cover grants of stock
options where the exercise price can never
be less than the fair market value of the
underlying stock at the date of grant (a
non-discounted option). See H.R. Conf.
Rep. No. 108–755, at 735 (2004). Thus
an option with an exercise price that is or
may be below the fair market value of the
underlying stock at the date of grant (a dis-
counted option) is subject to the require-
ments of section 409A. Consistent with the
legislative history and with Notice 2005–1,
Q&A–4, these regulations provide that a
non-discounted stock option, that has no
other feature for the deferral of compen-
sation, generally is not covered by section
409A. However, a stock option granted
with an exercise price below the fair mar-
ket value of the underlying shares of stock
on the date of grant generally would be
subject to section 409A except to the ex-
tent the terms of the option only permit ex-
ercise of the option during the short-term
deferral period.
Commentators stressed that in many
respects, a stock appreciation right can be
the economic equivalent of a stock op-
tion, especially a stock option that allows
the holder to exercise in a manner other
than by the payment of cash (a cashless
exercise feature). Accordingly, Notice
2005–1, Q&A–4 exempted from coverage
certain non-discounted stock appreciation
rights that most closely resembled stock
options — stock appreciation rights settled
in stock. The Treasury Department and
the IRS were concerned that the manip-
ulation of the purported stock valuation
for purposes of determining whether the
stock appreciation right was issued at a
discount or settled at a premium could lead
to a stock appreciation right being used
to circumvent section 409A. Accordingly,
the exception was limited to stock appre-
ciation rights issued with respect to stock
traded on an established securities market.
Commentators criticized the distinction
between public corporations and non-pub-
lic corporations, asserting that this dis-
tinction is not meaningful and unfairly
discriminated against the latter corpora-
tions and placed such corporations at a
severe competitive disadvantage. In ad-
dition, commentators questioned whether
the distinction between stock-settled and
cash-settled stock appreciation rights was
relevant, where the amount of income
generated would be identical.
In response to the comments, these
regulations treat stock appreciation rights
similarly to stock options, regardless of
whether the stock appreciation right is
settledincashandregardlessofwhether
the stock appreciation right is based upon
service recipient stock that is not readily
tradable on an established securities mar-
ket. The Treasury Department and the
IRS remain concerned that manipulation
of stock valuations, and manipulation of
the characteristics ofthe underlying stock,
may lead to abuses with respect to stock
options and stock appreciation rights (col-
lectively referred to as stock rights). To
that end, these regulations contain more
detailed provisions with respect to the
identification of service recipient stock
October 24, 20057902005–43 I.R.B.

that may be subject to, or used to deter-
mine the amount payable under, stock
rights excluded from the application of
section 409A, and the valuation of such
service recipient stock, discussed below.
2.Definition of service recipient stock
The legislative history of section 409A
states that the exception from coverage un-
der section 409A for certain nonstatutory
stock options was intended to cover op-
tions granted on service recipient stock.
H.R. Conf. Rep. No. 108–755, at 735
(2004). Section 409A(d)(6) provides that,
for purposes of determining the identity of
the service recipient under section 409A,
aggregation rules similar to the rules in
section 414(b) and (c) apply. Taxpayers re-
quested that the definition of service recip-
ient be expanded for purposes of the ex-
ception for stock rights to cover entities
that would not otherwise be treated as part
of the service recipient applying the rules
under section 414(b) and (c). The Treasury
Department and the IRS agree that the ex-
clusion for nonstatutory stock rights was
not meant to apply so narrowly. Accord-
ingly, for purposes of the provisions ex-
cluding certain stock rights on service re-
cipient stock, the stock right, or the plan or
arrangement under which the stock right is
granted, may provide that section 414(b)
and (c) be applied by modifying the lan-
guage and using “50 percent” instead of
“80 percent” where appropriate, such that
stock rights granted to employees of enti-
ties in which the issuing corporation owns
a 50 percent interest generally will not be
subject to section 409A.
Commentators also requested that the
threshold be dropped below 50 percent to
cover joint ventures and other similar ar-
rangements, where the participating cor-
poration does not have a majority interest.
These regulations provide for such a lower
threshold, allowing for the stock right, or
the plan or arrangement under which the
stock right is granted, to provide for the
modification of the language and use of
“20 percent” instead of “80 percent” in ap-
plying section 414(b) and (c), where the
use of such stock with respect to stock
rights is due to legitimate business crite-
ria. For example, the use of such stock
with respect to stock rights issued to em-
ployees of a joint venture that were for-
mer employees of a corporation with at
least a 20 percent interest in the joint ven-
ture generally would be due to legitimate
business criteria, and accordingly would
be treated as service recipient stock for
purposes of determining whether the stock
right was subject to section 409A. A des-
ignation by a service recipient to use either
the 50 percent or the 20 percent threshold
must be applied consistently to all com-
pensatory stock rights, and any designa-
tion of a different permissible ownership
threshold percentage may not be made ef-
fective until 12 months after the adoption
of such change.
The increased ability to issue stock
rights with respect to a related corporation
for whom the service provider does not
directly perform services could increase
the potential for service recipients to ex-
ploit the exclusion for certain stock rights
by establishing a corporation within the
group of related corporations, the pur-
pose of which is to serve as an investment
vehicle for nonqualified deferred com-
pensation. Accordingly, these regulations
provide that other than with respect to ser-
vice providers who are primarily engaged
in providing services directly to such cor-
poration, the term service recipient for
purposes of the definition of service recip-
ient stock does not include a corporation
whose primary purpose is to serve as an
investment vehicle with respect to the cor-
poration’s interest in entities other than
the service recipient (including entities
aggregated with the corporation under the
definition of service recipient incorporat-
ingsection414(b)and(c)).
Commentators also questioned whether
the exception for certain stock rights could
apply where a servicerecipient provides
a stock right with respect to preferred
stock or a separate class of common stock.
The Treasury Department and the IRS
believe this exception was intended to
cover stock rights with respect to service
recipient stock the fair market value of
which meaningfully relates to the poten-
tial future appreciation in the enterprise
value of the corporation. The use of a
separate class of common stock created
for the purpose of compensating service
providers, or the use of preferred stock
with substantial characteristics of debt,
could create an arrangement that more
closely resembles traditional nonquali-
fied deferred compensation arrangements
rather than an interest in appreciation of
the value of the service recipient. An
exception that excluded these arrange-
ments from coverage under section 409A
would undermine the effectiveness of the
statute to govern nonqualified deferred
compensation arrangements, contrary to
the legislative intent. Accordingly, these
regulations clarify that service recipient
stock includes only common stock, and
only the class of common stock that as of
the date of grant has the highest aggre-
gate value of any class of common stock
of the corporation outstanding, or a class
of common stock substantially similar to
such class of stock (ignoring differences
in voting rights). In addition, service re-
cipient stock does not include any stock
that provides a preference as to dividends
or liquidation rights.
With respect to the foreign aspects
of such arrangements, commentators re-
quested clarification that service recipient
stock may include American Depositary
Receipts (ADRs). These regulations clar-
ify that stock of the service recipient may
include ADRs, provided that the stock to
which the ADRs relate would otherwise
qualify as service recipient stock.
Commentators also requested that cer-
tain equity appreciation rights issued by
mutual companies, intended to mimic
stock appreciation rights, be excluded
from coverage under section 409A. These
regulations expand the exclusion for stock
appreciation rights to include equity ap-
preciation rights with respect to mutual
company units. A mutual company unit
is defined as a specified percentage of the
fair market value of the mutual company.
For this purpose, a mutual company may
value itself under the same provisions
applicable to the valuation of stock of a
corporation that is not readily tradable
on an established securities market. The
Treasury Department and the IRS request
comments as to the practicability of this
provision, and whether such a provision
should be expanded to cover equity appre-
ciation rights issued by other entities that
do not have outstanding shares of stock.
3.Valuation
Notice 2005–1, Q&A–4(d)(ii) provides
that for purposes of determining whether
the requirements for exclusion of a non-
statutory stock option have been met, any
reasonable valuation method may be used.
2005–43 I.R.B.791October 24, 2005

Commentators expressed concern that the
standard was too vague, given the potential
consequences of a failure to comply with
the requirements of section 409A.
These regulations provide that with re-
spect to service recipient stock that is read-
ily tradable on an established securities
market, a valuation of such stock may be
based on the last sale before or the first
sale after the grant, or the closing price on
the trading day before or the trading day
of the grant, or any other reasonable basis
using actual transactions in such stock as
reported by such market and consistently
applied. Commentators pointed out that
certain service recipients, generally cor-
porations in certain foreign jurisdictions,
would not be able to meet this requirement
because the service recipient is subject to
foreign laws requiring pricing based on an
average over a period of time. To allow
compliance with these requirements, these
regulations further provide that service re-
cipients (including U.S. service recipients)
maysettheexercisepricebasedonanav-
erage of the price of the stock over a spec-
ifiedperiodprovidedsuchperiodoccurs
within the 30 days before and 30 days af-
ter the grant date, and provided further that
the terms of the grant are irrevocably es-
tablished before the beginning of the mea-
surement period used to determine the ex-
ercise price.
Commentators asked for clarification of
the definition of stock that is readily trad-
able on an established securities market.
Specifically, commentators requested clar-
ification of the scope of an established se-
curities market, and whether that term in-
cludes over-the-counter markets and for-
eign markets. The regulations adopt the
definition of an established securities mar-
ket set forth in §1.897–1(m). Under that
definition, over-the-counter markets gen-
erally are treated as established securities
markets, as well as many foreign markets.
However, the stock must also be readily
tradable within suchmarkets to qualify as
stock readily tradable on an established se-
curities market.
With respect to corporations whose
stockisnotreadilytradableonanestab-
lished securities market, these regulations
provide that fair market value may be
determined through the reasonable appli-
cation of a reasonable valuation method.
The regulations contain a description of
the factors that will be taken into account
in determining whether a given valuation
method is reasonable. In addition, in an
effort to provide more certainty, certain
presumptions with respect to the reason-
ableness of a valuation method have been
set forth. Provided one such method is
applied reasonably and used consistently,
the valuation determined by applying such
method will be presumed to equal the
fair market value of the stock, and such
presumption will be rebuttable only by
a showing that the valuation is grossly
unreasonable. A method will be treated as
used consistently where the same method
is used for all equity-based compensation
granted to service providers by the service
recipient, including for purposes of de-
termining the amount due upon exercise
or repurchase where the stock acquired is
subject to an obligation of the service re-
cipient to repurchase, or a put or call right
providing for the potential repurchase by
the service recipient, as applicable.
Commentators specifically requested
clarification as to whether a valuation
method based upon an appraisal will be
treated as reasonable, and if so with re-
spect to what period. These regulations
provide that the use of an appraisal will
be presumed reasonable if the appraisal
satisfies the requirements of the Code with
respect to the valuation of stock held in
an employee stock ownership plan. If
those requirements are satisfied, the val-
uation will be presumed reasonable for a
one-year period commencing on the date
as of which the appraisal values the stock.
Commentators also specifically re-
quested clarification of whether a valua-
tion method based on a nonlapse restric-
tion addressed in §1.83–5(a) will be treated
as reasonable. Under §1.83–5(a), in the
case of property subject to a nonlapse re-
striction (as defined in §1.83–3(h)), the
price determined under the formula price
is considered to be the fair market value
of the property unless established to the
contrary by the Commissioner, and the
burden of proof is on the Commissioner
with respect to such value. If stock in a
corporation is subject to a nonlapse re-
striction that requires the transferee to sell
such stock only at a formula price based on
book value, a reasonable multiple of earn-
ings or a reasonable combination thereof,
the price so determined ordinarily is re-
garded as determinative of the fair market
value of such property for purposes of
section 83.
The Treasury Department and the IRS
do not believe that this standard, in and
of itself, is appropriate with respect to the
application of section 409A. The Treasury
Department and the IRS are not confident
that a formula price determined pursuant to
a nonlapse restriction will, in every case,
adequately approximate the value of the
underlying stock. The Treasury Depart-
ment and the IRS are also concerned that
such formula valuations, in the absence of
other criteria, may be subject to manipula-
tion or to the provision of predictable re-
sults that are inconsistent with a true eq-
uity appreciation right. Further, the Trea-
sury Department and the IRS do not be-
lieve that the burden of proof with respect
to valuation should be shifted to the Com-
missioner in all cases where such formulas
have been utilized. Accordingly, the use
of a valuation method based on a nonlapse
restriction that meets the requirements of
§1.83–5(a) does not by itself result in a
presumption of reasonableness. However,
where the method is used consistently for
both compensatory and noncompensatory
purposes in all transactions in which the
service recipient is either the purchaser or
seller of such stock, such that the nonlapse
restriction formula acts as a substitute for
the value of the underlying stock, the for-
mula will qualify for the presumption that
the valuation method is reasonable for pur-
poses of section 409A. In addition, de-
pending on the facts and circumstances of
the individual case, the use of a nonlapse
restriction to determine value may be rea-
sonable, taking into account other relevant
valuation criteria.
Commentators also expressed concern
about the valuation of illiquid stock of cer-
tain start-up corporations. These commen-
tators argued that the value of such stock
is often highly speculative, rendering ap-
praisals of limited value. Commentators
also noted that such stock often is not sub-
ject to put rights or call rights that could
be viewed as a nonlapse restriction. Given
the illiquidity and speculative value, com-
mentators argued that the risk that taxpay-
ers would use rights on such shares as a de-
vice to pay deferred compensation is low.
In response, these regulations propose ad-
ditional conditions under which the val-
uation of illiquid stock in a start-up cor-
poration will be presumed to be reason-
October 24, 20057922005–43 I.R.B.

able. A valuation of an illiquid stock of a
start-up corporation will be presumed rea-
sonable if the valuation is made reason-
ably and in good faith and evidenced by
a written report that takes into account the
relevant factors prescribed for valuations
generally under these regulations. For this
purpose, illiquid stock of a start-up corpo-
ration refers to service recipient stock of a
service recipient that is in the first 10 years
of the active conduct of a trade or busi-
ness and has no class of equity securities
that are traded on an established securities
market, where such stock is not subject to
any put or call right or obligation of the ser-
vice recipient or other person to purchase
such stock (other than a right of first re-
fusal upon an offer to purchase by a third
party that is unrelated to the service re-
cipient or service provider), provided that
this rule does not apply to the valuation of
any stock if the service recipient or service
provider reasonablymay anticipate, as of
the time the valuation is applied, that the
service recipient will undergo a change in
control event or participate in a public of-
fering of securities within the 12 months
following the event to which the valuation
is applied (for example, the grant date of
an award). A valuation will not be treated
as made reasonably and in good faith un-
less the valuation is performed by a person
or persons with significant knowledge and
experience or trainingin performing simi-
lar valuations.
As stated in the preamble to Notice
2005–1, the Treasury Department and the
IRS are concerned about the treatment of
stock rights where the service recipient is
obligated to repurchase the stock acquired
pursuant to the stock right, or the service
provider retains a put or call right with
respect to the stock. Where the service
provider retains such a right, the ability to
receive a purchase price that differs from
the fair market value of the stock could be
used to circumvent the application of sec-
tion 409A. Accordingly, these regulations
generally require that where someone is
obligated to purchase the stock received
upon the exercise of a stock right, or the
stock is subject to a put or call right, the
purchase price must also be set at fair
market value, the determination of which
is also subject to the consistency require-
ments for the methods used in determining
fair market value.
4.Modification
Commentators asked under what condi-
tions a modification, extension, or renewal
of a stock right will be treated as a new
grant. The treatment as a new grant is
relevant because although the original
grant may have been excluded from cov-
erage under section 409A, if the new grant
has an exercise price that is less than the
fair market value of the underlying stock
on the date of the new grant, the new
grant would not qualify for the exclusion
from coverage under section 409A. Ac-
cordingly, the regulations set forth rules
governing the types of modifications, ex-
tensions or renewals that will result in
treatment as a new grant. The regulations
provide that the termmodificationmeans
any change in the terms of the stock right
that may provide the holder of the right
with a direct or indirect reduction in the
exercise price of the stock right, or an
additional deferral feature, or an extension
or renewal of the stock right, regardless of
whether the holder in fact benefits from
the change in terms. Under this defini-
tion, neither the addition of a provision
permitting the transfer of the stock right
nor a provision permitting the service
provider to exchange the stock right for
a cash amount equal to the amount that
would be available if the stock right were
exercised would be modifications of the
stock right. In addition, these regulations
explicitly provide that both a change in
thetermsofastockrighttoallowfor
payment of the exercise price through
the use of pre-owned stock, and a change
in the terms of a stock right to facilitate
the payment of employment taxes or re-
quired withholding taxes resulting from
the exercise of the right, are not treated as
modifications of the stock right for pur-
poses of section 409A.
Generally, a change to the exercise
price of the stock right (other than in
connection with certain assumptions or
substitutions of a stock right in connec-
tion with a corporate transaction or certain
adjustments resulting from a stock split,
stock dividend or similar change in cap-
italization) is treated as a modification,
resulting in a new grant that may be ex-
cluded from section 409A if it satisfies
the requirements in these regulations as of
the new grant date. However, depending
upon the facts and circumstances, a series
of repricings of the exercise price may in-
dicate that the original right had a floating
or adjustable exercise price and did not
meet the requirements of the exclusion at
the time of the original grant.
Generally, an extension granting the
holder an additional periodwithinwhich
to exercise the stock right beyond the time
originally prescribed will be treated as
evidencing an additional deferral feature
meaning that the stock right was subject
to section 409A from the date of grant.
Commentators stated that it is not uncom-
mon upon a termination of employment to
extend the exercise period for some brief
period of time to allow the terminated em-
ployee a chance to exercise the stock right.
In response, these regulations provide that
it is not an extension of a stock right if the
exercise period is extended to a date no
laterthanthelaterofthefifteenthdayof
the third month following the date, or De-
cember 31 of the calendar year in which,
the right would otherwise have expired
if the stock right had not been extended,
based on the terms of the stock right at
the original grant date. The regulations
further provide that it is not an extension
of a stock right if at the time the stock
right would otherwise expire, the stock
right is subject to a restriction prohibiting
the exercise of the stock right because
such exercise would violate applicable
securities laws and the expiration date of
the stock right is extended to a date no
later than 30 days after the restrictions on
exercise are no longer required to avoid a
violation of applicable securities laws.
These regulations also provide that if
the requirements of §1.424–1 (providing
rules under which an eligible corporation
may, by reason of a corporate transaction,
substitute a new statutory option for an
outstanding statutory option or assume
an old option without such substitution
or assumption being considered a modi-
fication of the old option) would be met
if the right were a statutory option, the
substitution of a new right pursuant to a
corporate transaction for an outstanding
right or the assumption of an outstanding
right will not be treated as the grant of
a new right or a change in the form of
payment for purposes of section 409A.
Section 1.424–1 applies several require-
ments. Among them is the requirement
under §1.424–1(a)(5)(ii) that the excess
of the aggregate fair market value of the
2005–43 I.R.B.793October 24, 2005

shares subject to the new option over the
exercise price immediately after the sub-
stitution must not exceed the excess of
the fair market value of the shares subject
to the old option over the exercise price
immediately before the substitution. In
addition, §1.424–1(a)(5)(iii) requires that
on a share by share comparison, the ratio
of the exercise price to the fair market
value of the shares subject to the option
immediately after the substitution not be
more favorable than the ratio of the exer-
cise price to the fair market value of the
shares subject to the old option immedi-
ately before the substitution.
Commentators expressed concern that
the use of the regulations contained in
§1.424–1, and specifically the ratio test
prescribed in §1.424–1(a)(5)(iii), would
prove difficult to apply in circumstances
where, to reduce dilution, the acquiring
corporation wished to issue a smaller num-
ber of shares than the shares underlying
the old option, but also wished to retain
the entire aggregate difference between
the fair market value of the shares and the
exercise price that had been available to
the service provider before the substitu-
tion. In response, Notice 2005–1, Q&A–4
and these regulations provide that the re-
quirement of §1.424–1(a)(5)(iii) will be
deemed to be satisfied if the ratio of the
exercise price to the fair market value of
the shares subject to the right immediately
after the substitution or assumption is not
greater than the ratio of the exercise price
to the fair market value of the shares sub-
ject to the right immediately before the
substitution or assumption. For example,
if an employee had an option to purchase
25 shares for $2 per share, and imme-
diately prior to a substitution by reason
of a corporate transaction the fair market
value of a share was $5, then the aggregate
spread amount would be $75 (25 shares
multiplied by ($5 - $2) = $75). The ratio
of the exercise price to the fair market
value would be $2/$5 = .40. As a part of
the transaction, new employer wishes to
substitute for the option an option to pur-
chase 5 shares of new employer, when the
shares have a fair market value of $20 per
share. To maintain the aggregate spread
of $75, the new grant has an exercise price
of $5 (5 shares multiplied by ($20 - $5) =
$75). The ratio of the exercise price to the
fair market value immediately after the
substitution is $5/$20 = .25, which is not
greater than the ratioimmediately before
the substitution. Provided that the other
requirements of §1.424–1 were met, this
substitution would not be considered a
modification of the original stock option
for purposes of section 409A.
One commentator asked for more flex-
ible rules concerning adjustments to and
substitutions of options following a spinoff
or similar transaction because short-term
trading activity in the period immediately
following such a transaction frequently
does not accurately reflect the relative
long-term fair market values of the stock
of the distributing and distributed cor-
porations. To address this problem, the
regulations provide that such adjustments
or substitutions may be made based on
market quotations as of a predetermined
date not more than 60 days after the trans-
action, or based on an average of such
market prices overa period of not more
than 30 days ending not later than 60 days
after the transaction.
These provisions addressing substitu-
tions and assumptions of rights apply to
stock appreciation rights, as well as stock
options. However, the guidance provided
in these regulations with respect to the as-
sumption of stock appreciation right lia-
bilities should not be interpreted as guid-
ance with respect to issues raised under
any other provision of the Code or com-
monlawtaxdoctrine.
D.Restricted property
Consistent with Notice 2005–1,
Q&A–4(e), these regulations provide
that if a service provider receives property
from, or pursuant to, a plan maintained
by a service recipient, there is no defer-
ral of compensation merely because the
value of the property is not includible in
income in the year of receipt by reason
of the property being nontransferable and
subject to a substantial risk of forfeiture,
or is includible in income solely due to a
valid election under section 83(b). How-
ever, a plan under which a service provider
obtains a legally binding right to receive
property (whether or not the property is
restricted property) in a future year may
provide for the deferral of compensation
and, accordingly, may constitute a non-
qualified deferred compensation plan.
Commentators asked for clarification
with respect to how this provision applies
to a promise to transfer restricted property
in a subsequent tax year. Specifically,
commentators questioned how section
409A would apply to a bonus program
offering a choice between a payment in
cash and a payment in substantially non-
vested property. Because the promise
grants the service recipient a legally bind-
ing right to receive property in a future
year, this promise generally could not con-
stitute property for section 83 purposes
under §1.83–3(e), and could constitute
deferred compensation for purposes of
section 409A. However, the regulations
provide that the vesting of substantially
nonvested property subject to section 83
may be treated as a payment for purposes
of section 409A, including for purposes
of applying the short-term deferral rule.
Accordingly, where the promise to trans-
fer the substantially nonvested property
and the right to retain the substantially
nonvested property after the transfer are
both subject to a substantial risk of for-
feiture (as defined for purposes of section
409A), the arrangement generally would
constitute a short-term deferral because
the payment would occur simultaneously
with the vesting of the right to the prop-
erty. For example, where an employee
participates in a two-year bonus program
such that, if the employee continues in
employment for two years, the employee
is entitled to either the immediate payment
of a $10,000 cash bonus or the grant of
restricted stock with a $15,000 fair mar-
ket value subject to a vesting requirement
of three additional years of service, the
arrangement generally would constitute a
short-term deferral because under either
alternative the payment would be received
within the short-term deferral period.
E.Arrangements between partnerships
and partners
The statute and legislative history to
section 409A do not specifically address
arrangements between partnerships and
partners providing services to a partner-
ship, and do not explicitly exclude such ar-
rangements from the application of section
409A. The application of section 409A to
such arrangements raises a number of
issues,relatingbothtothescopeofthe
arrangements subjectto section 409A, and
the coordination of the provisions of sub-
chapter K and section 409A with respect
October 24, 20057942005–43 I.R.B.

to those arrangements that are subject to
section 409A. The Treasury Department
and the IRS continue to analyze the issues
raised in this area, and accordingly these
regulations do not address arrangements
between partnerships and partners. Notice
2005–1, Q&A–7 provides interim guid-
ance regarding the application of section
409A to arrangements between partner-
ships and partners. Until further guidance
is issued, taxpayers may continue to rely
on Notice 2005–1, Q&A–7.
Commentators have asked whether sec-
tion 409A applies to guaranteed payments
for services described in section 707(c).
Until further guidance is issued, section
409A will apply to guaranteed payments
described in section 707(c) (and rights to
receive such guaranteed payments in the
future), only in cases where the guaran-
teed payment is for services and the part-
ner providing services does not include the
payment in income by the 15
th
day of the
third month following the end of the tax-
able year of the partner in which the part-
ner obtained a legally binding right to the
guaranteed payment or, if later, the taxable
year in which the right to the guaranteed
payment is first no longer subject to a sub-
stantial risk of forfeiture.
The Treasury Department and the IRS
continue to request comments with respect
to the application of section 409A to ar-
rangements between partnerships and part-
ners.
F.Foreign arrangements
The regulations provide guidance with
respect to the application of section 409A
to various foreign arrangements. As an
initial matter, the regulations provide that
an arrangement does not provide for a de-
ferral of compensation subject to section
409A where the compensation subject to
the arrangement would not have been in-
cludible in gross income for Federal tax
purposes if it had been paid to the service
provider at the time that the legally binding
right to the compensation first arose or, if
later, the first time that the legally binding
right was no longer subject to a substan-
tial risk of forfeiture, if the service provider
was a nonresident alien at such time. Ac-
cordingly, if, for example, a foreign citizen
works outside the United States and then
retires to the United States, the compensa-
tion deferred and vested while working in
the foreign country generally will not be
subject to section 409A.
With respect to U.S. citizens or resident
aliens working abroad, the regulations pro-
vide that an arrangement does not provide
for a deferral of compensation subject to
section 409A where the compensation sub-
ject to the arrangement would have con-
stituted foreign earned income (within the
meaning of section 911) paid to a qualified
individual (as definedin section 911(d)(1))
and the amount of the compensation is less
than or equal to the difference between the
maximum section 911 exclusion amount
and the amount actually excludible from
gross income under section 911 for the tax-
able year for the individual. This hypo-
thetical exclusion is applied at the time that
the legally binding right to the compensa-
tion first exists or, if later, the time that the
legally binding right is no longer subject
to a substantial risk of forfeiture. Under
section 911, a U.S. citizen or resident alien
who resides in a foreign jurisdiction gener-
ally may exclude up to $80,000 of foreign
earned income (to be adjusted for infla-
tion after 2007). For example, an individ-
ual with $70,000 of foreign earned income
excluded under section 911 in 2006 could
also defer up to $10,000 of additional com-
pensation that would not be subject to sec-
tion 409A, if the additional compensation
would qualify as foreign earned income if
paid to the individual in 2006. This excep-
tion to coverage under section 409A is in-
tended to be applied on an annual basis, so
that individuals will not be entitled to carry
over any unused portion of the exclusion
under section 911 to a future year. This ex-
ception also is not intended to modify the
rules under section 911 or the regulations
thereunder.
Similarly, these regulations also ad-
dress deferrals of compensation income
that would be excluded from gross income
for Federal income tax purposes under
section 893 (generally covering compen-
sation paid to foreign workers of a foreign
government or international organization
working in the United States), section 872
(generally coveringcertain compensation
earned by nonresident alien individuals),
section 931 (generally covering certain
compensation earned bybona fideresi-
dents of Guam, American Samoa, or the
Northern Mariana Islands) and section 933
(generally coveringcertain compensation
earned bybona fideresidents of Puerto
Rico). The regulations provide that an ar-
rangement does not provide for a deferral
of compensation subject to section 409A
where the compensation subject to the
arrangement would have been excluded
from gross income for Federal tax pur-
poses under any of these sections, if the
compensation had been paid to the service
provider at the time that the legally bind-
ing right to the compensation first arose
or, if later, the time that the legally binding
right was no longer subject to a substantial
risk of forfeiture.
The Treasury Department and the IRS
understand that nonresident aliens may
work for very limited periods in the United
States. Many deferrals of the compensa-
tion earned by nonresident aliens for ser-
vices rendered in the United States will not
be covered by section 409A, because under
an applicable treaty the amount of com-
pensation deferred would not be includible
in gross income for Federal tax purposes if
paid at the time the legally binding right to
the compensation deferred was no longer
subject to a substantialrisk of forfeiture.
However, certain compensation earned in
the United States by a nonresident alien
might be includible in gross income un-
der such circumstances, where there is no
applicable treaty or where the treaty does
not provide an exclusion. Where a non-
resident alien defers such compensation
earned in the United States under a foreign
nonqualified deferred compensation plan
— for example because the service in the
United States is credited under the plan
— the application of section 409A to the
deferrals of the compensation subject to
Federal income tax could be exceedingly
burdensome in light of the relatively small
amounts attributable to the service in the
United States. Accordingly, these regula-
tions adopt ade minimisexception, under
which section 409A will not apply to an
amount of compensation deferred under a
foreign nonqualified deferred compensa-
tion plan for a given calendar year where
the individual service provider is a nonres-
ident alien for that calendar year and the
amount deferred does not exceed $10,000.
Commentators requested clarification
of the application of section 409A to
participation by U.S. citizens and res-
ident aliens in foreign plans. In this
context, it should be noted that under
these regulations, transfers that are taxable
under section 402(b) of the Code gener-
2005–43 I.R.B.795October 24, 2005

ally are not subject to section 409A. See
§1.409A–1(b)(6) of these regulations and
Notice 2005–1, Q&A–4. Such transfers
may consist of contributions to an employ-
ees’ trust, where the trust does not qualify
under section 501(a). Many foreign plans
that hold contributions in a trust will con-
stitute funded plans. To the extent that a
contribution to the trust is subject to inclu-
sion in income for Federal tax purposes
under section 402(b), such a contribution
will not be subject to section 409A.
These regulations also provide that sec-
tion 409A does not override treaty provi-
sions that govern the U.S. Federal taxation
of participation in particular foreign plans.
Where a treaty provides that amounts con-
tributed to a foreign plan by or on behalf of
a service provider are not subject to U.S.
Federal income tax, section 409A will not
cause such amounts to be subject to inclu-
sion in gross income.
Some commentators requested that any
participation in a foreign plan be exempted
from section 409A, or that only deferrals
of U.S. source compensation income be
subject to section 409A. However, with
respect to U.S. citizens working abroad,
and with respect to resident aliens in the
United States, compensation income gen-
erally is subject to U.S. Federal income tax
absent an applicable treaty provision. Ac-
cordingly, the provisions of section 409A
generally are applicable to this type of
deferred compensation. In addition, the
Treasury Department and the IRS are con-
cerned that providing a broad exception
for foreign plans or foreign source income
would create opportunities for U.S. citi-
zens and resident aliens to avoid applica-
tion of section 409A through participation
in a foreign plan, or through reallocations
of deferrals among U.S. source and foreign
source income.
The regulations provide, however, that
with respect to non-U.S. citizens who
are not lawful permanent residents of the
United States, amounts deferred under
certain broad-based foreign retirement
plans are not subject to section 409A. This
exception is intended to allow a worker
who is not a green card holder to continue
to participate in a broad-based foreign
retirement plan that does not comply with
section 409A without incurring adverse
tax consequences due solely to the worker
earning some income in the United States
that is in some manner credited under the
plan.
Commentators expressed concerns as
to U.S. citizens and lawful permanent res-
idents working abroad, and their ability
to participate in broad-based plans of for-
eign employers. Generally, these workers’
incomes are subject to Federal income
tax, including section 409A. However,
when U.S. citizens and lawful permanent
residents work abroad for employers who
sponsor broad-based foreign retirement
plans providing relatively low levels of
retirement benefits and such plans are
nonelective, the worker’s ability to con-
trol the timing of the income is limited.
In such cases, the concerns with respect
to the potential manipulation of the tim-
ing of compensation income addressed
by section 409A are also limited, and do
not outweigh the administrative burdens
that would arise if a foreign employer’s
failure to amend these plans to be consis-
tent with the provisions of section 409A
would result in substantial adverse tax
consequences to U.S. citizens and lawful
permanent residents working abroad who
are covered by such plans. Accordingly,
an exception for foreign broad-based re-
tirement plans also applies with respect to
U.S. citizens and lawful permanent resi-
dents, but only with respect to nonelective
deferrals of foreign earned income and
only to the extent that the amount deferred
in a given year does not exceed the amount
of contributions or benefits that may be
provided by a qualified plan under section
415 (calculated by treating the foreign
source income as compensation for pur-
poses of section 415).
Commentators also requested that cer-
tain types of payments, referred to as
expatriate allowances, be exempted from
coverage under section 409A. These pay-
ments were defined broadly to include
many types of payments to U.S. citizens
working abroad, intended to put the ser-
vice providers in substantially the same
economic position as the service providers
would have been in had the services
been provided in the United States. One
very common arrangement involves pay-
ments intended to compensate the service
provider for any differences in tax rates,
often referred to as tax equalization plans.
With respect to these plans, the Treasury
Department and the IRS recognize that
such payments often must be delayed be-
cause of the need to calculate foreign tax
liabilities after the end of the year. In
addition, where the amounts are limited
to the amounts necessary to make up for
difference in tax rates, the potential for
abuse with respect to the timing of com-
pensation income is not great, since the
compensation will directly relate to taxes
that the service provider has paid to a
foreign jurisdiction. Accordingly, these
regulations exempt tax equalization plans
from coverage under section 409A pro-
vided that the payment is made no later
than the end of the second calendar year
beginning after the calendar year in which
the individual’s U.S. Federal income tax
return is required to be filed (including
extensions) for the year to which the tax
equalization payment relates.
Other payments are not excluded from
section 409A merely because they are de-
nominated as expatriate allowances. The
Treasury Department and the IRS believe
that the rules provided in these regulations
with respect to setting and meeting pay-
ment dates under a nonqualified deferred
compensation plan will provide sufficient
flexibility to permit arrangements involv-
ing expatriate allowances to satisfy the re-
quirements of section 409A. For example,
as discussed more fully below, these reg-
ulations generally provide that to meet the
requirement that a payment be made upon
a permissible payment event or a fixed
date, the service recipient may make the
payment by the later of the earliest date
administratively practicable following, or
December 31 of the calendar year in which
occurs, the permissible payment event or
fixed date. At the minimum, this should
offer almost 12 months of flexibility with
respect to a payment scheduled for January
1 of a calendar year. The Treasury De-
partment and the IRS request comments,
however, as to circumstances in which this
flexibility will not be sufficient.
Commentators also requested a grace
period during which arrangements with
persons who have become resident aliens
during a calendar year may be amended
to comply with the requirements of sec-
tion 409A. These regulations generally
provide such relief. With respect to the
initial year in which the service provider
becomes a resident alien, the plan may
be amended with respect to the service
provider through the end of that year to
comply with (or be excluded from cover-
October 24, 20057962005–43 I.R.B.

age under) section 409A, including allow-
ing the service provider the right to change
the time and form of a payment. Provided
that the election is made before the amount
is paid or payable, initial deferral elections
may also be made with respect to com-
pensation related to services in that initial
year, if the election is made by the end of
the year or, if later, the 15
th
day of the third
month after the service provider meets the
requirements to be a resident alien. The
relief generally does not extend further
because a service recipient and service
provider should reasonably anticipate the
potential application of section 409A af-
ter the initial year in which the service
provider attains the status of a resident
alien. However, the Treasury Department
and the IRS also recognize that there may
be significant gaps between the years in
which the service provider is treated as
a resident alien. Accordingly, the grace
period is available in a subsequent year,
provided that the service provider has
been a nonresident alien for at least five
consecutive calendar years immediately
preceding the year in which the service
provider is again a resident alien.
Commentators also requested that
amounts contributed or benefits paid un-
der a foreign social security system that
is the subject of a totalization agreement
be exempted from coverage under section
409A. Totalization agreements refer to
bilateral agreements between the United
States and foreign jurisdictions intended
to coordinate coverage under the Social
Security system in the United States and
similar systems of the foreign jurisdic-
tions. These agreements are intended to
minimize the potential for application of
two different employment taxes, and cor-
respondingly to coordinate the benefits
under the two different social security
systems. The Treasury Department and
the IRS believe that section 409A was
not intended to apply to benefits to which
the service provider is entitled under the
foreign jurisdiction social security system.
Accordingly, these types of plans have
been excluded from the definition of a
nonqualified deferred compensation plan
for purposes of section 409A. Similarly,
for jurisdictions not covered by a totaliza-
tion agreement, these regulations provide
that amounts deferred under a government
mandated social security system are not
subject to section 409A.
G.Separation pay arrangements
1.In general
Many commentators requested clarifi-
cation of the application of section 409A
to plans or arrangements providing pay-
ments upon a termination of services,
generally described as severance plans.
Some commentators requested that all
such arrangements be excluded from
coverage under section 409A. However,
section 409A(d)(1)(B) contains a list of
welfare benefits that are specifically ex-
cluded from coverage under section 409A,
includingbona fidevacation leave, sick
leave, compensatory time, disability pay
and death benefit plans. Noticeably absent
from this list is an exception for severance
plans. This is particularly noteworthy
because section 457(e)(11) contains the
identical list of exclusions, with the one
exception that the list of excluded plans
under section 457(e)(11) includes sever-
ance pay plans, while the list of excluded
plans under section 409A(d)(1)(B) does
not. Therefore, it appears that Congress
intended that severance payments could
constitute deferred compensation under
section 409A. To avoid confusion with
other Code provisions, such as the specific
exclusion from coverage under section
457(e)(11) for severance plans or the treat-
ment of such arrangements under section
3121(v)(2), these regulations generally
refer to such arrangements as separation
pay arrangements.
With respect to payments available
upon a voluntary termination of services,
there is no substantive distinction be-
tween a plan labeled a severance plan or
separation pay plan and a nonqualified
deferred compensation plan that provides
for payments upon a separation from ser-
vice. If, as is often the case, the service
recipient reserves the right to eliminate
such arrangement at any time, the service
provider may not have a legally binding
right to the payment until payment ac-
tually occurs, or such other time as the
service recipient’s discretion to eliminate
the right to the payments lapses. However,
as provided in these regulations, where
such negative discretion lacks substantive
significance, or the person granted the
discretion is controlled by, or related to,
the service provider to whom the payment
will be made, the service provider will be
considered to have a legally binding right
to the compensation.
Commentators requested that the ex-
clusion from coverage under section 409A
contained in Notice 2005–1, Q&A–19(d)
for payments during the calendar year
2005 to non-key employees pursuant to
severance plans that are classified as wel-
fare plans, rather than pension plans, in
accordance with the Department of Labor
regulations, be made a permanent exclu-
sion. This approach generally would be
consistent with the regulations under sec-
tion 3121(v)(2) of the Code. However,
the Department of Labor regulations re-
flect different concerns with respect to
separation pay arrangements from the
concerns addressed in section 409A. The
Department of Labor regulations focus
on whether an arrangement sufficiently
resembles a retirement plan to require
funding of the obligations under such a
plan, or rather is a welfare plan that would
not require funding. In contrast, section
409A focuses on the manipulation of the
timing of inclusion of compensation in-
come. Accordingly, these regulations do
not categorically exclude these arrange-
ments from coverage under section 409A,
although a modified version of this ex-
ception has been provided, as discussed
below.
Some commentators requested that the
Treasury Department and the IRS adopt
an exclusion for all amounts payable upon
an involuntary separation. This request
is based upon the position under certain
other Code provisions, and stated in cer-
tain court cases, that payments to which
an individual becomes entitled upon an
involuntary separation from service do
not constitute nonqualified deferred com-
pensation. SeeKraft Foods North Amer-
ica v. U.S., 58 Fed. Cl. 507 (2003);
§31.3121(v)(2)–1(b)(4)(iv). As discussed
above, the statutory language and struc-
ture of section 409A strongly suggest that
separation pay arrangements, including ar-
rangements providing separation pay upon
an involuntary separation, were meant to
be covered by section 409A. Furthermore,
the Treasury Department and the IRS be-
lieve that section 409A was not intended
to be applied so narrowly. Section 409A
addresses the manipulation of the timing
of inclusion of compensation. Payments
due to a separation from service, regard-
less of whether voluntary or involuntary,
2005–43 I.R.B.797October 24, 2005

constitute a payment of compensation.
Accordingly, the ability to manipulate the
timing of the inclusion of income related
to the receipt of those amounts is within
the scope of section 409A.
Much of the discussion above relates
to predetermined arrangements, where
the right to the payment upon an invol-
untary termination of services arises as
part of an arrangement covering multi-
ple service providers, often covering a
service provider from the time the ser-
vice provider begins performing services.
Where the separation pay arrangement
involves an agreement negotiated with a
specific service provider at the time of
the involuntary separation from service,
commentators asked how deferral elec-
tions could be provided that would meet
the requirement that the election be made
in the year before the year in which the
services were performed. Commenta-
tors pointed out that even if the service
provider does not already participate in
any involuntary separation pay arrange-
ment, the rule in section 409A(a)(4)(B)
that allows an initial deferral election to be
made within 30 days of initial eligibility
under a plan applies only with respect to
services performed after the election. To
address these concerns, these regulations
provide that where separation pay due to
an involuntary termination has been the
subject ofbona fide, arm’s length negotia-
tions, the election as to the time and form
of payment may be made on or before the
date the service provider obtains a legally
binding right to the payment.
The Treasury Department and the IRS
recognize that separation pay arrange-
ments providing for short-term payments
upon an involuntary separation from ser-
vice are common arrangements, and that
compliance with the provisions of section
409A may be burdensome. In addition,
the Treasury Department and the IRS
recognize that where both the amount of
the payments and the time over which
such payments may be made are limited,
these arrangements create fewer concerns
with respect to manipulation of the timing
of compensation income. Accordingly,
these regulations generally exempt such
arrangements where the entire amount of
payments does not exceed two times the
service provider’s annual compensation
or, if less, two times the limit on annual
compensation that may be taken into ac-
count for qualified plan purposes under
section 401(a)(17) ($210,000 for calendar
year 2005), each for the calendar year be-
fore the year in which the service provider
separates from service, and provided fur-
ther that the arrangement requires that all
payments be made by no later than the end
of the second calendar year following the
year in which the service provider termi-
nates service. These limitations generally
are consistent with the safe harbor under
which severance plans may be treated as
welfare plans under the applicable De-
partment of Labor regulations, and should
allow most of these arrangements to avoid
coverage under section 409A.
The Treasury Department and the IRS
further recognize that separation pay ar-
rangements often occur in the context of a
window program, where certain groups of
service providers are identified as being
subject to a separation from service, and
the service recipient provides the iden-
tified service providers an incentive to
voluntarily separate from service and ob-
tain a benefit. Although technically these
programs involve a voluntary separation
from service, these regulations generally
treat separations due to participation in
a window arrangement the same as ar-
rangements with respect to involuntary
separations from service for purposes of
the exceptions to coverage from section
409A.
These exclusions for separation pay are
not intended to allow for rights to pay-
ments that would otherwise be deferred
compensation subjectto section 409A to
avoid application of section 409A by being
recharacterized as separation pay. Accord-
ingly, the exclusions for separation pay do
not apply to the extent the separation pay
acts as a substitute for, or a replacement
of, amounts that would otherwise be sub-
ject to section 409A. For example, a right
to separation pay obtained in exchange for
the relinquishment of a right to a payment
of deferred compensation subject to sec-
tion 409A will not be excluded from cover-
age under section 409A, but rather will be
treated as a payment of the original amount
of deferred compensation.
2.Treatment as a separate plan
Commentators have stated that arrange-
ments involving payments due to an in-
voluntary separation often operate sepa-
rately from more traditional types of non-
qualified deferred compensation plans. In
addition, especially in the case of agree-
ments covering an individual, the involun-
tary separation pay agreement may involve
many different types of payments that are
of a much smaller magnitude than amounts
deferred under other types of nonqualified
deferred compensation plans. Commen-
tators expressed concerns that inadvertent
violations of section 409A with respect to
these unique arrangements could lead to
much larger amounts being included in in-
come and subject to the additional tax un-
der section 409A due to the aggregation of
such involuntary separation pay arrange-
ments with other arrangements under the
definition of a plan. The Treasury Depart-
ment and the IRS have concluded that a
nonqualified deferred compensation plan
providing separation pay due to an invol-
untary separation from service, or partic-
ipation in a window program, should be
treated as a separate type of plan from ac-
count balance plans, nonaccount balance
plans, and other types of plans (generally
equity-based compensation arrangements)
in which the service provider may partici-
pate that do not provide separation pay due
to an involuntary separation from service,
or participation in a window program.
3.Application of the short-term deferral
rule to separation pay arrangements
Many commentators asked for a clari-
fication with respect to the application of
the short-term deferral rule to separation
pay arrangements. The right to a payment
that will only be paid upon an involuntary
termination of services generally would be
viewed as a nonvested right. Accordingly,
an involuntary separation pay arrangement
maybestructuredtomeettherequirements
of the short-term deferral exception.
Some commentators also requested that
arrangements involving rights to payments
upon termination of services for good rea-
son be treated as a right subject to a sub-
stantial risk of forfeiture. These arrange-
ments are common, especially following a
transaction resulting in a change in con-
trol of the service recipient. The Trea-
sury Department and the IRS are not con-
fident that amounts payable upon a volun-
tary separation from service, and amounts
payable only upon a termination of ser-
vices for good reason, always may be ad-
October 24, 20057982005–43 I.R.B.

equately distinguished. Furthermore, even
if the types of good reasons sufficient to
constitute a substantial risk of forfeiture
could be elucidated, the application of such
a rule would involve intensive factual de-
terminations, leaving taxpayers uncertain
in their planning and creating a significant
potential for abuse. Accordingly, the reg-
ulations do not treat the right to a payment
upon a separation from service for good
reason categorically as a right subject to
a substantial risk of forfeiture. However,
the Treasury Department and the IRS re-
quest comments as to what further guid-
ance may be useful with respect to arrange-
ments containing these types of provisions.
4.Reimbursement arrangements
Many commentators requested clar-
ification with respect to the application
of section 409A to reimbursement agree-
ments, involving the service recipient
reimbursing expenses of the terminated
service provider. Because the promise to
reimburse the former service provider is
not contingent on the provision of any sub-
stantial services for the service provider,
the right to the payment generally would
not be treated as subject to a substantial
risk of forfeiture. Accordingly, if the
period in which expenses incurred will
be reimbursed extends beyond the year
in which the legally binding right arises,
the right to the amount generally would
constitute deferred compensation. The
Treasury Department and the IRS rec-
ognize that reimbursement arrangements
following a termination of services are
common, and that requiring the service re-
cipient to designatean amount at the time
of the termination conflicts with the ser-
vice recipient’s desire to pay only amounts
that the former service provider has actu-
ally incurred as an expense. However, a
categorical exclusion for reimbursement
arrangements is not tenable, because such
an exclusion would allow for a limitless
amount of deferred compensation to be
paid without regard to the rules of section
409A, where such compensation took the
form of the reimbursement of personal
expenses (for example, reimbursements of
home mortgage payments). These regula-
tions provide that certain reimbursement
arrangements related to a termination of
services are not covered by section 409A,
to the extent that the reimbursement ar-
rangement covers only expenses incurred
and reimbursed before the end of the sec-
ond calendar year following the calendar
year in which the termination occurs. The
types of reimbursement arrangements ex-
cluded include reimbursements that are
otherwise excludible from gross income,
reimbursements for expenses that the ser-
vice provider can deduct under section 162
or section 167, as business expenses in-
curred in connection with the performance
of services (ignoring any applicable lim-
itation based on adjusted gross income),
outplacement expenses, moving expenses,
medical expenses, as well as any other
types of payments that do not exceed
$5,000 in the aggregate during any given
taxable year.
For purposes of this provision, re-
imbursement arrangements include the
provision of in-kind benefits, or direct
payments by the service recipient to the
person providing the goods or services
to the terminated service provider, if the
provision of such in-kind benefits or direct
payments would be treated as reimburse-
ment arrangements if the service provider
had paid for such in-kind benefits or such
goods or services and received reimburse-
ment from the service recipient.
H.Split-dollar life insurance
arrangements
Commentators suggested that split-dol-
lar life insurance arrangements should be
excluded from the requirements of section
409A. However, the Treasury Depart-
ment and the IRS believe that in applying
the general definition of deferred com-
pensation to split-dollar life insurance
arrangements, the requirements of section
409A may apply to certain types of such
arrangements (as described in §1.61–22).
Split-dollar life insurance arrangements
that provide only death benefits (as de-
fined in these proposed regulations) to
or for the benefit of the service provider
may be excluded from coverage under
section 409A under the exception from
the definition of a nonqualified deferred
compensationplanprovidedinthesepro-
posed regulations for death benefit plans.
Also, split-dollar life insurance arrange-
ments treated as loan arrangements under
§1.7872–15 generally will not give rise
to deferrals of compensation within the
meaning of section 409A, provided that
there is no agreement under which the
service recipient will forgive the related
indebtedness and no obligation on the part
of the service recipient to continue to make
premium payments without charging the
service provider a market interest rate on
the funds advanced. However, policies
structured under the endorsement method,
where the service recipient is the owner of
the policy but where the service provider
obtains a legally binding right to compen-
sation includible in income in a taxable
year after the year in which a substantial
risk of forfeiture (if any) lapses, may pro-
vide for a deferral of compensation. Just
as a promise to transfer property in a future
year may provide for a deferral of com-
pensation (even though the transfer itself
is subject to section 83), an endorsement
method split-dollar life insurance arrange-
ment that grants the service provider a
legally binding right to a future transfer
of interests in a policy owned by the ser-
vice recipient may provide for a deferral of
compensation subject to section 409A. For
example, where a service recipient enters
into an endorsement method split-dollar
life insurance arrangement with respect
to a service provider, and irrevocably
promises to pay premiums in future years,
the arrangement may provide for a defer-
ral of compensation within the meaning of
section 409A.
Commentators raised concerns about
the impact of changes to a split-dollar life
insurance arrangement to comply with sec-
tion 409A, where the split-dollar life insur-
ance arrangement was entered into on or
before September 17, 2003, and is not oth-
erwise subject to the regulations set forth
in §1.61–22 (a grandfathered split-dol-
lar life insurance arrangement). Pur-
suant to §1.61–22(j)(2), if a grandfathered
split-dollar life insurance arrangement is
materially modified after September 17,
2003, the arrangement is treated as a new
arrangement enteredinto on the date of the
modification. Commentators expressed
concern that modifications necessary to
comply with section 409A may cause the
split-dollar life insurance arrangement to
be treated as materially modified for pur-
poses of §1.61–22(j)(2). Comments are
requested as to the scope of changes that
may be necessary to comply with, or avoid
application of, section 409A, and under
what conditions those changes should not
2005–43 I.R.B.799October 24, 2005

be treated as material modifications for
purposes of §1.61–22(j)(2).
III.Definition of Plan
A.Plan aggregation rules
These regulations generally retain the
plan aggregation rules set forth in No-
tice 2005–1, Q&A–9. Under the notice,
all amounts deferred under an account
balance plan are treated as deferred un-
der a single plan, all amounts deferred
under a nonaccount balance are treated
as deferred under a single plan, and all
amounts deferred under any other type
of plan (generally equity-based compen-
sation) are treated as deferred under a
single plan. As discussed above, these
regulations expand this rule so that all
amounts deferred under certain separation
pay arrangements are treated as a single
plan. The purposes behind these aggre-
gation rules are two-fold. First, because
the provisions of section 409A are applied
on an individual participant basis, rather
than disqualifying the arrangement as to
all participants, planaggregation rules are
necessary to implement the compliance
incentives intended under the provision.
Without such rules, multitudes of separate
arrangements could be established for a
single participant. Should the participant
want access to an amount of cash, the
participant would amend one or more of
these separate arrangements and receive
payments. The participant would argue
that only those separate arrangements un-
der which the amounts were paid failed to
meet the requirements of section 409A and
were subject to the income inclusion and
additional tax, although in fact amounts
were also available under the additional
separate arrangements. Under that analy-
sis, section 409A essentially would act as
a 20 percent penalty required to receive a
payment, similar to the haircut provisions
that were intended to be prohibited by
section 409A. The Treasury Department
and the IRS do not believe that Congress
intended that the consequences of section
409Acouldbelimitedinsuchamanner.
However, the Treasury Department and
the IRS also believe that complex plan
aggregation rules, especially rules reliant
on the particular facts and circumstances
underlying each arrangement, would lead
to unwarranted complexities and burdens
with respect to service recipient planning
and IRS enforcement. Accordingly, these
regulations adopt rules intended to be
simple and relatively easy to administer
that retain the integrity of the compliance
incentives inherent in the statute.
Commentators asked whether an iso-
lated violation of a term of an arrange-
ment with respect to one participant will be
treated as a violation of the same arrange-
ment term with respect to other partici-
pants covered by the same arrangement.
First, the terms of the arrangement with
respect to each participant must be deter-
mined, based upon the rights the individ-
ual participant has under the plan. Gener-
ally, these rights will be determined based
upon the written provisions applicable un-
der a particular arrangement, as evidenced
by a plan document, agreement, or some
combination of documents that specify the
terms of the contract under which the com-
pensation is to be paid. However, where
the terms of a plan or arrangement com-
ply with section 409A, but the service re-
cipient does not follow such terms, an in-
dividual participant’s actual rights under
the arrangement may be unclear. Where a
violation of a provision is not an isolated
incident, or involves a number of partici-
pants or an identifiable subgroup of partic-
ipants under the arrangement, the violation
mayresultinafindingthatevenwithre-
spect to a participant who did not directly
benefit from the violation, the actual terms
of the arrangement differ from the written
terms of the arrangement. For example, if
a plan document provides for installment
payments upon a separation from service,
but participants in the arrangement repeat-
edly are offered theopportunity to receive
a lump sum payment, the facts and circum-
stances may indicate that the arrangement
provides for an election of a lump sum pay-
ment for all participants.
An analogous analytical framework ap-
plies where the service recipient offers dif-
ferent benefits to separate participants in
the same plan or arrangement. Under the
terms of the overall arrangement, the ser-
vice provider may grant many different
types of rights, including some rights that
would not be subject to the requirements of
section 409A and some rights that would
be subject to those requirements. With re-
spect to the application of section 409A,
a plan or arrangement is analyzed as con-
sisting of the rights and benefits that have
actually been granted to a particular ser-
vice provider. For example, with respect
to an equity-based omnibus plan that per-
mits the grant of discounted stock options
that would be subject to the requirements
of section 409A, as well as other types
of stock options which would be excluded
from coverage under section 409A, only
those service providers actually granted
the discounted stock options will be treated
as having deferred an amount of compen-
sation subject to section 409A, and then
only with respect to the stock options sub-
ject to section 409A.
B.Written plan requirement
Although the statute does not explicitly
state that a plan or arrangement must be in
writing, the statute requires that a plan con-
tain certain provisions in order to comply
with section 409A. For example, section
409A(a)(2)(A) requires that a plan provide
that compensation deferred under the plan
may not be distributed earlier than certain
specific events. Section 409A(a)(4)(B) re-
quires that a plan provide certain restric-
tions with respect to initial deferral elec-
tions. Section 409A(a)(4)(C) requires that,
if a plan permits under a subsequent elec-
tion a delay in a payment or a change in
the form of payment, the plan must require
certain limits on the scope of such a delay
or change. The clear implication of these
provisions of section 409A is that the plan
or arrangement must be set forth in writ-
ing and these regulations incorporate that
requirement.
IV. Definition of Substantial Risk of
Forfeiture
The scope of the definition of a substan-
tial risk of forfeiture is central to the ap-
plication of section 409A. In addition to
the timing of the potential inclusion of in-
come under section 409A, the existence of
a substantial risk of forfeiture may also de-
termine whether an amount is subject to
section 409A or whether it qualifies for
the exclusion under the short-term defer-
ral rule. These regulations generally adopt
the same definition as provided in Notice
2005–1, Q&A–10. This definition reflects
the concerns of the Treasury Department
and the IRS that the use of plan terms
that purport to prescribe a substantial risk
of forfeiture but, in fact, do not put the
right to the payment at a substantial risk,
October 24, 20058002005–43 I.R.B.

may be used to circumvent the applica-
tion of section 409A in a manner inconsis-
tent with the legislative intent. The defi-
nition of a substantial risk of forfeiture in
these regulations contains certain restric-
tions. Certain amendments of an arrange-
ment to extend a substantial risk of forfei-
ture will not be recognized. The ability to
periodically extend, or roll, the risk of for-
feiture is sufficiently suspect to question
whether the parties ever intended that the
right be subject to any true substantial risk,
or rather whether the period is being ex-
tended through periods in which the ser-
vice recipient can be reasonably assured
that the forfeiture condition will not occur.
Similarly, the risk that a right will be for-
feited due to the violation of a noncompete
agreement can be illusory, such as where
the service provider has no intent to com-
pete or to provide such services. In addi-
tion, a rational service provider normally
would not agree to subject amounts that
have already been earned, such as salary
payments, to a condition that creates a real
possibility of forfeiture, unless the service
provider is offered a material inducement
to do so, such as an additional amount of
compensation. Accordingly, these provi-
sions will not be treated as creating a sub-
stantial risk of forfeiture for purposes of
section 409A.
V.Initial Deferral Election Rules
A.In general
Section 409A(a)(4)(B)(i) provides that
in general, a plan must provide that com-
pensation for services performed during a
taxable year may be deferred at the partici-
pant’s election only if the election to defer
such compensation is made not later than
the close of the preceding taxable year or
at such other time as provided in regula-
tions. The legislative history indicates that
the taxable year to which the statute refers
is the service provider’s taxable year, as
it indicates that the Secretary may issue
guidance “providing coordination rules, as
appropriate, regarding the timing of elec-
tions in the case when the fiscal year of
the employer and the taxable year of the
individual are different.” H.R. Conf. Rep.
No. 108–755, at 732 (2004). Accordingly,
these regulations provide as a general rule
that a service provider must make a defer-
ral election in his or her taxable year be-
fore the year in which the services are per-
formed. As discussed below, certain co-
ordination rules for fiscal year employers
have been provided.
An election to defer an amount includes
an election both as to the time and form
of the payment. An election is treated as
made as of the date the election becomes
irrevocable. Changes may be made to
an initial deferral election, provided that
the election becomes irrevocable (except
to the extent the plan permits a subse-
quent deferral election consistent with
these regulations) no later than the last
date that such an election may be made.
Commentators had questioned whether
an evergreen deferral election, or a de-
ferral election as to future compensation
that remains in place unless the service
provider changes the election, would be
effective for purposes of section 409A.
Such an election satisfies the initial de-
ferral election requirements only if the
election becomes irrevocable with respect
to future compensation no later than the
last permissible date an affirmative initial
deferral election could have been made
with respect to such compensation. For
example, with respect to a salary defer-
ral program under which an employee
makes an initial deferral election to defer
10 percent of the salary earned during
the subsequent calendar year, a plan may
provide that the deferral election remains
effective unless and until changed by the
employee, provided that with respect to
salary earned during any future taxable
year, the election to defer 10 percent of
such salary becomes irrevocable no later
than the December 31 of the preceding
calendar year.
B.Nonelective arrangements
Some commentators asked whether the
initial deferral election rules apply to non-
elective arrangements. The requirement
that the election be made in the year before
the services are performed is not applica-
ble where the participant is not provided
any election with respect to the amount de-
ferred, or the time and form of the pay-
ment. However, as stated in the legislative
history, “[t]he time and form of distribu-
tion must be specified at the time of initial
deferral.” H.R. Conf. Rep. No. 108–755,
at 732 (2004). In addition, the application
of the subsequent deferral rules becomes
problematic if the original time and form
of deferred payment established by the ser-
vice recipient is not viewed as an initial de-
ferral election. Therefore, in order to avoid
application of the initial deferral rules, a
plan may not provide a service provider
or service recipient with ongoing discre-
tion as to the time and form of payment,
but rather must set the time and form of
payment no later than the time the service
provider obtains a legally binding right to
the compensation.
C.Performance-based compensation
Section 409A(a)(4)(B)(iii) provides
that in the case of any performance-based
compensation based on services per-
formed over a period of at least 12 months,
a participant’s initial deferral election may
be made no later than six months before
the end of the period. The legislative his-
tory indicates that the performance-based
compensation should be required to meet
certain requirements similar to those under
section 162(m), but not all requirements
under that section. H.R. Conf. Rep. No.
108–755, at 732 (2004). An example in
the legislative history, adopted in these
regulations, is that the requirement of a
determination by the compensation com-
mittee of the board of directors is not
required.
Notice 2005–1 did not provide a defini-
tion of performance-based compensation.
Rather, Notice 2005–1, Q&A–22 provided
a definition of bonus compensation that,
until further guidance was issued, could be
used for purposes of applying the excep-
tion to the general rule regarding initial de-
ferral elections.
Under these regulations, performance-
based compensation is defined as compen-
sation the payment of which or the amount
of which is contingent on the satisfaction
of preestablished organizational or indi-
vidual performance criteria. Performance-
based compensation does not include any
amount or portion of any amount that will
be paid either regardless of performance,
or based upon a level of performance that
is substantially certain to be met at the time
the criteria are established.
Performance-based compensation gen-
erally may include payments based upon
subjective performancecriteria, provided
that the subjective performance criteria
relate to the performance of the partici-
2005–43 I.R.B.801October 24, 2005

pant service provider, a group of service
providers that includes the participant ser-
vice provider, or a business unit for which
the participant service provider provides
services (which may include the entire or-
ganization), and the determination that the
subjective performance criteria have been
met is not made by the service provider or
amemberoftheserviceprovider’sfamily,
or a person the service provider supervises
or over whose compensation the service
provider has any control.
Commentators requested that, sim-
ilar to the provision contained in
§1.162–27(e)(2) governing the require-
ments for establishing performance crite-
ria for purposes of applying the deduction
limitation under section 162(m), service
recipients be allowed to establish per-
formance criteria within 90 days of the
commencement of a performance period
of 12 months or more, rather than hav-
ingtoestablishsuchcriteriabeforethe
commencement of the period. These reg-
ulations adopt a similar provision with re-
spect to the establishment of performance
criteria for purposes of the exception un-
der the deferral election rules, permitting
the criteria to be established up to 90 days
after the commencement of the period of
service to which the criteria relates, pro-
vided that the outcome is not substantially
certain at the time the criteria are estab-
lished.
The legislative history indicates that
to constitute performance-based com-
pensation, the amount must be (1) vari-
able and contingent on the satisfaction
of preestablished organizational or indi-
vidual performance criteria and (2) not
readily ascertainable at the time of the
election. H.R. Conf. Rep. No. 108–755,
at 732 (2004). These regulations clarify
that where the right to receive a specified
amount is itself not substantially certain,
the amount is not readily ascertainable as
the amount paid could either be the spec-
ified amount or zero. Accordingly, these
regulations provide that at the time of the
initial deferral election, either the amount
must not be readily ascertainable, or the
right to the amount must not be substan-
tially certain. So, for example, the right
to a $10,000 bonus that otherwise quali-
fies as performance-based compensation
could be deferred by an employee up to
six months before the end of the perfor-
mance period, provided that at the time of
the deferral election the employee is not
substantially certain to meet the criteria
and receive the $10,000 payment.
Under the definition of bonus com-
pensation provided in Notice 2005–1,
Q&A–22, bonus compensation does not
include any amount or portion of any
amount that is based solely on the value
of, or appreciation in value of, the ser-
vice recipient or the stock of the service
recipient. Commentators criticized this
limitation as inconsistent with the provi-
sions of §1.162–27 governing application
of the deduction limitation under section
162(m), and the legislative history to sec-
tion 409A indicating that the definition
of performance-based compensation for
purposes of section 409A would be simi-
lar to that provided under section 162(m)
and the regulations thereunder. These pro-
posed regulations eliminate this limitation,
so that performance-based compensation
may be based solely upon an increase in
the value of the service recipient, or the
stock of the service recipient, after the date
of grant or award. However, if an amount
of compensation the service provider will
receive pursuant to a grant or award is not
basedsolelyonanincreaseinthevalueof
the stock after the grant or award (for ex-
ample, in the case of restricted stock units
or a stock right granted with an exercise
price that is less than the fair market value
of the stock as of the date of grant), and
that other amount would not otherwise
qualify as performance-based compensa-
tion, none of the compensation attributable
to the grant or award is performance-based
compensation. Nonetheless, an award of
equity-based compensation may consti-
tute performance-based compensation if
entitlement to the compensation is sub-
ject to a condition that would cause a
non-equity-based award to qualify as per-
formance-based compensation, such as a
performance-based vesting condition.
The Treasury Department and the IRS
are concerned that the inclusion of such
amounts in the definition of performance-
based compensation could lead to a con-
clusion that an election to defer amounts
payable under a stock right will necessarily
comply with section 409A if the initial de-
ferral election is made at least 6 months be-
fore the date of exercise. However, under
these proposed regulations, a stock right
with a deferral feature is subject to section
409A from the date of grant. To comply
with section 409A, the arrangement would
be required to specify a permissible pay-
ment time and a form of payment. The
requirement would not be met if, at some
point during the term of the stock right, the
stock right becomes immediately exercis-
able and the holder may decide whether
andwhentoexercisethestockright.Inad-
dition, where a deferral feature is added to
an existing stock right the stock right gen-
erally would violatesection 409A because
the stock right wouldhave a deferral fea-
ture and would not have specified a per-
missible payment time or event.
D.First year of eligibility
Section 409A and these proposed regu-
lations contain an exception to the general
rule regarding initial deferral elections, un-
der which a service provider newly eligible
for participation in a plan may make a de-
ferral election within the first 30 days of
participation in the plan, provided that the
election may only apply to compensation
with respect to services performed after the
election. These regulations further provide
that for compensation that is earned based
upon a specified performance period (for
example, an annual bonus), where a defer-
ral election is made in the first year of eligi-
bility but after the beginning of the service
period, the election is deemed to apply to
compensation paid for service performed
subsequent to the election if the election
applies to the portion of the compensation
that is no greater than the total amount of
compensation for the performance period
multiplied by the ratio of the number of
days remaining in the performance period
after the election over the total number of
days in the performance period.
Commentators had requested that the
plan aggregation rules not apply in de-
termining whether a service provider is
newly eligible for participation in a plan.
The concern is that a mid-year promotion,
or management reorganization or other
corporate event may make the service
provider eligible for an arrangement that
is of the same type as an arrangement in
which the service provider already partic-
ipates. For example, an employee partici-
pating in a salary deferral account-balance
plan may become eligible for a bonus and
a bonus deferral arrangement that would
also be an account-balance plan.
October 24, 20058022005–43 I.R.B.

The Treasury Department and the IRS
believe that the plan aggregation rules are
necessary in this context. Without such a
rule, service providers may attempt to take
advantage of the new eligibility exception
by establishing serial arrangements. For
example, an employer may argue that a
2007 salary deferral program is a new pro-
gram, and not a continuation of the 2006
salary deferral program. Commentators
argue that standards should be provided
comparing the terms of the two plans to
distinguish new arrangements from those
that are merely continuations of existing
arrangements. However, such rules would
by necessity be complicated and burden-
some, generally relying on the facts and
circumstances of the individual arrange-
ments and resulting in administrative
burden and uncertainties. Accordingly,
these regulations retain the plan aggrega-
tion rules.
However, as discussed below, certain
other initial deferral election rules have
been provided that address many of the
situations in which service recipients de-
sire to grant service providers the opportu-
nity to make initial deferral elections due
to eligibility in new programs. For ex-
ample, the rule governing initial deferral
elections with respect to certain forfeitable
rights discussed below allows initial de-
ferral elections upon eligibility for many
bonus programs andad hocequity-based
compensation grants. The Treasury De-
partment and the IRS request comments as
to whether these rules adequately address
the concerns raised with respect to the def-
inition of plan for purposes of applying the
initial eligibility exception.
E.Initial deferral election with respect to
short-term deferrals
As discussed above, an amount that is
paid by the 15
th
day of the third month
following the end of the first taxable year
in which the payment is no longer subject
to a substantial risk of forfeiture generally
will not constitute a deferral of compen-
sation. Commentators asked how the de-
ferral election rules applytoanelectionto
defer such an amount. Generally, once the
service provider has begun performing the
services required to vest, no election to de-
fer could be made that would meet the tim-
ing requirements for initial deferral elec-
tions. Commentators suggested that the
rules governing subsequent changes to the
time and form of payment could be ap-
plied to elections to defer these amounts.
The regulations provide that for purposes
of an election to defer amounts that would
not otherwise be subject to section 409A
due to the short-term deferral rule, the date
the substantial risk of forfeiture lapses is
treated as the original time of payment es-
tablished by an initial deferral election, and
the form in which the payment would be
made absent a deferral election is treated
as the original form of payment established
by an initial deferral election. Accord-
ingly, the service provider may elect to de-
fer the payment beyond the time at which
the payment originally was scheduled to
be made, in accordance with the rules gov-
erning subsequent changes in the time and
form of payment. In general, this means
that the service provider must make the
election at least 12 months before the right
to the payment vests, and must defer the
payment for a period of not less than 5
years from the date the right to the pay-
ment could vest. Thus, no payment could
be made within 5 years of the date the right
to the payment vests (including upon a sep-
aration from service), except for instances
of a change in control of the corporation,
death, disability or an unforeseeable emer-
gency. This would also mean that if the
right to the payment actually vests within
12 months of the election, and the election
is given effect so that the payment is not
made within the short-term deferral period,
the deferral of the payment would violate
the requirements of section 409A.
For example, an employee may be enti-
tled to the immediate payment of a bonus
upon the occurrence ofan initial public of-
fering, where such a condition qualifies as
a substantial risk of forfeiture so that the
arrangement would constitute a short-term
deferral. At some point after obtaining the
right to the payment but before the initial
public offering, the employee elects to de-
fer any potential bonus payment to a date
5 years from the date of the initial public
offering. To comply with the initial de-
ferral election rules, that deferral election
must not be given effect for 12 months.
Accordingly, if the initial public offering
occurred within 12 months of the deferral
election, the payment must be made at the
time of the initial public offering in accor-
dance with the short-term deferral rules. If
the payment is not made at such time, but
rather is made, for example, 5 years from
the date of the initial public offering, the
payment would be deemed deferred pur-
suant to an invalid initial deferral election
effective before the required lapse of 12
months and the arrangement would violate
section 409A.
F.Initial deferral election with respect to
certain forfeitable rights
Commentators asked how the initial
deferral election rules would apply with
respect to grants of nonqualified deferred
compensation that occur in the middle
of a taxable year, especially where such
grants were unforeseeable by the service
provider. Under these circumstances, an
initial deferral election could not be made
by the service provider during the taxable
year before the year in which the award
was granted, unless the service recipi-
ent had the foresight to request such an
election in the prior year. The Treasury
Department and the IRS do not believe
that a categorical exclusion from the ini-
tial deferral election rules is appropriate,
because such a rule would encourage the
characterization of all grants of nonqual-
ified deferred compensation as occurring
in the middle of the year and in large
part render ineffective the initial deferral
election rules set forth in section 409A.
However, these regulations provide that
where a grant of nonqualified deferred
compensation is subject to a forfeiture
condition requiring the continued perfor-
mance of services for a period of at least
12 months, the initial deferral election
may be made no later than 30 days after
the date of grant, provided that the election
is made at least 12 months in advance of
the end of the service period. Under these
circumstances, the election still must be
made in all cases at least 12 months before
the service provider has fully earned the
amount of compensation, analogous to
the general requirement that the election
be made no later than the end of the year
before the services are performed. The
Treasury Department and the IRS believe
that such a rule will provide a reason-
able accommodation to service recipients
granting certainad hocawards, such as
restricted stock units, that often are subject
to a requirement that the service provider
continue to perform services for at least
12 months.
2005–43 I.R.B.803October 24, 2005

G.Initial deferral election with respect to
fiscal year compensation
The legislative history to section 409A
indicates that the Treasury Department and
the IRS are to provide guidance coordinat-
ing the initial deferral election rules with
respect to compensation paid by service
recipients with fiscal years other than the
calendar year. H.R. Conf. Rep. No.
108–755, at 732 (2004). These regula-
tions provide such a rule, generally per-
mitting an initial election to defer fiscal
year compensation on or before the end of
the fiscal year immediately preceding the
first fiscal year in which any services are
performed for which the compensation is
paid. For these purposes, fiscal year com-
pensation does not encompass all compen-
sation paid by a fiscal year service recipi-
ent. Where the compensation is not specif-
ically based upon the service recipient’s
fiscal year as the measurement period, the
timing requirements applicable to an ini-
tial deferral election are unchanged. Ac-
cordingly, the rule applies to compensation
based on service periods that are coexten-
sive with one or more of the service recip-
ient’s consecutive fiscal years, where no
amount of such compensation is payable
during the service period. For example, a
bonus based upon a service period of two
consecutive fiscal years payable after the
completion of the second fiscal year would
be fiscal year compensation. In contrast,
periodic salary payments or bonuses based
on service periods other than the service
recipient’s fiscal year would not be fis-
cal year compensation, and the deferral of
such amounts would be subject to the gen-
eral rule.
H.Deferral elections with respect to
commissions
Commentators requested clarification
with respect to the application of section
409A to commissions. These regulations
address commissions earned by a service
provider where a substantial portion of the
services provided bythe service provider
consists of the direct sale of a product or
service to a customer, each payment of
compensation by the service recipient to
the service provider consists of a portion
of the purchase price for the product or
service (for example, 10 percent of the
purchase price), or an amount calculated
solely by reference to the volume of sales
(for example, $100 per item sold), and
each compensation payment is contin-
gent upon the service recipient receiving
payment from an unrelated customer for
the product or services. In that case,
the service provideris treated as having
performed the services to which the com-
mission compensation relates during the
service provider’s taxable year in which
the unrelated customer renders payment
for such goods or services. Accordingly,
under the general initial deferral election
rule an individual service provider could
make an initial deferral election with
respect to such compensation through De-
cember 31 of the calendar year preceding
the year in which the customer renders the
payment from which the commission is
derived.
VI.Time and Form of Payment
A.In general
The regulations incorporate the statu-
tory requirement that payments be made
at a fixed date or under a fixed schedule,
or upon any of five events: a separation
from service, death, disability, change in
the ownership or effective control of a cor-
poration (to the extent provided by the Sec-
retary), or unforeseeable emergency. As
requested by commentators, these regula-
tions provide guidance on what it means
for a payment to be made upon one of
these events. Where the time of payment
is based upon the occurrence of a speci-
fied event (such as one of the five events
listed above or upon the lapse of a substan-
tial risk of forfeiture as discussed below),
the plan must designate an objectively de-
terminable date or year following the event
upon which the payment is to be made.
For example, the plan may designate the
payment date as 30 days following a sep-
aration from service, or the first calendar
year following a service provider’s death.
The Treasury Department and the IRS rec-
ognize that it may not be administratively
feasible to make a payment upon the exact
date or year designated. Furthermore, the
Treasury Department and the IRS recog-
nize that certain minimal delays that do not
meaningfully affect the timing of the inclu-
sion of income should not result in a viola-
tion of the requirements of section 409A.
Accordingly, a payment will be treated as
made upon the designated date if the pay-
ment is made by the later of the first date
it is administratively feasible to make such
payment on or after the designated date, or
the end of the calendar year containing the
designated date (or the end of the calen-
dar year if only a year is designated). This
relaxation of the timing rules for admin-
istrative necessity is not intended to pro-
vide a method for the service provider to
further defer the payment. Accordingly,
any inability to make the payment that is
caused by an action or inaction of the ser-
vice provider, or any person related to, or
under the control of, the service provider,
will not be treated as causing the making
of the payment to be administratively in-
feasible.
Once an event upon which a payment
is to be made has occurred, the desig-
nated date generally is treated as the fixed
date on which, or the fixed schedule un-
der which, the payment is to be made (but
not for purposes of the application of sec-
tion 409A(a)(2)(B) generally requiring a
six month delay in any payment upon a
separation from service to a key employee
of a corporation whose stock is traded on
an established securities market). Accord-
ingly, the recipient may change the time
and form of payment after the event has
occurred, provided that the change would
otherwise be timely and permissible un-
der these regulations. For example, a plan
provides for payment of a lump sum on
the third anniversary following a separa-
tion from service. A service provider has
a separation from service on July 1, 2010.
The July 1, 2013, payment date is now
treated as the fixed date upon which the
payment is to be made. Accordingly, the
service provider generally could elect to
defer the time and form of payment pro-
vided that the election were made on or be-
fore June 30, 2012, and deferred the pay-
ment to at least July 1, 2018. For a discus-
sion of the application of the subsequent
deferral rules when only a calendar year of
payment is specified, see section VI.B of
this preamble.
B.Specified time or fixed schedule of
payments
Generally a plan will be deemed to pro-
vide for a specified time or fixed sched-
ule of payments where, at the time of the
deferral, the specific date upon which the
October 24, 20058042005–43 I.R.B.

payment or payments will be made may
be objectively determined. As requested
by commentators, these regulations permit
plans to specify simply the calendar year or
years in which the payments are scheduled
to be made, without specifying the partic-
ular date within such year on which the
payment will be made. Although this pro-
vision would be consistent with the flexi-
bility allowed with respect to meeting the
specified time or fixed schedule of pay-
ments requirement, the provision must be
coordinated with the subsequent deferral
rules. Section 409A(a)(4)(C)(iii) requires
that if a plan permits under a subsequent
election a delay in a payment or a change in
the form of payment with respect to a pay-
ment payable at a specified time or a fixed
schedule, the plan must require that the
election be made not less than 12 months
prior to the date of the first scheduled pay-
ment. Application of such a provision re-
quiresaspecificdateforthefirstsched-
uled payment. For a plan that does not des-
ignate a specific date, but rather only the
year in which the payment is to be made,
the first scheduled payment is deemed to
be scheduled to be paid as of January 1 of
such year for this purpose.
Commentators asked whether a speci-
fied time or fixed schedule of payments
could be determined based upon the date
the service provider vests in the amount of
deferred compensation, where the vesting
is based upon the occurrence of an event.
These regulations provide that a plan pro-
vides for payment at a specified time or
fixed schedule of payments if the plan pro-
vides at the time of the deferral that the
paymentwillbemadeatadateordatesthat
are objectively determinable based upon
the date of the lapsing of a substantial risk
of forfeiture, disregarding any acceleration
of the vesting other than due to death or
disability. So, for example, a plan that pro-
vides at the time the service provider ob-
tains a legally binding right to the payment
that the payment will be made in three in-
stallment payments, payable each Decem-
ber 31 following an initial public offering,
where the condition that an initial public
offering occur before the service provider
is entitled to a payment constitutes a sub-
stantial risk of forfeiture, would satisfy the
requirement that the plan provide for pay-
ments at a specified time or pursuant to a
fixed schedule.
C.Separation from service
Section 409A(a)(2)(A)(i) provides that
a plan may permit a payment to be made
upon a separation from service as deter-
mined by the Secretary (except a payment
to a specified employee, in which case
the payment must be made subject to a
six-month delay, discussed more fully be-
low). These regulations provide guidance
as to the circumstances under which ser-
vice providers, including employees and
independent contractors, will be treated
as separating from service for purposes
of section 409A. These rules are intended
solely as guidance with respect to section
409A(a)(2)(A)(i), and should not be relied
upon with respect to any other Code pro-
visions, such as provisions with respect
to distributions under qualified plans and
provisions related to the service recipients’
employment tax and information reporting
obligations.
1.Employees
These regulations provide that an em-
ployee experiences a separation from ser-
vice if the employee dies, retires, or oth-
erwise has a termination of employment
with the employer. However, the employ-
ment relationship is treated as continuing
intact while the individual is on military
leave, sick leave, or otherbona fideleave
of absence (such as temporary employ-
ment by the Government) if the period of
such leave does not exceed six months, or
if longer, so long as the individual’s right
to reemployment with the service recipi-
ent is provided either by statute or by con-
tract. If the period of leave exceeds six
months and the individual’s right to reem-
ployment is not provided either by statute
or by contract, the employment relation-
ship is deemed to terminate on the first date
immediately following such six-month pe-
riod.
Whether the employee has experi-
enced a termination of employment is
determined based on the facts and circum-
stances. The Treasury Department and the
IRS do not intend for this standard to al-
low for the extension of deferrals through
the use of consulting agreements or other
devices under which the service provider
technically agrees to perform services as
demanded, but for which there is no in-
tent that the service provider perform any
significant services. Accordingly, the reg-
ulations provide an anti-abuse rule stating
that where an employee either actually or
purportedly continues in the capacity as an
employee, such as through the execution
of an employment agreement under which
the service provider agrees to be available
to perform services if requested, but the
facts and circumstances indicate that the
employer and the service provider did not
intend for the service provider to provide
more than insignificant services for the
employer, an employee will be treated as
having a termination of employment and
a separation from service. For these pur-
poses, an employer and employee will be
deemed to have intended for the employee
to provide more than insignificant services
if the employee provides services at an an-
nual rate equal to at least 20 percent of the
services rendered and the annual remuner-
ation for such services is equal to at least
20 percent of the average remuneration
earned during the immediately preceding
three full calendar years of employment
(or, if the employee was employed for less
than three years, such lesser period).
In addition, the Treasury Department
and the IRS do not intend for this standard
to be circumvented to create a separation
from service where the service provider
continues to performsignificant services
for the service recipient. For these pur-
poses, the regulations provide that where
an employee continues to provide services
to a previous employer in a capacity other
than as an employee, a separation from ser-
vice will be treated as not having occurred
if the former employee provides services at
an annual rate that is 50 percent or more of
the services rendered, on average, during
the final three full calendar years of em-
ployment (or, if less, such lesser period)
and the annual remuneration for such ser-
vices is 50 percent or more of the aver-
age annual remuneration earned during the
immediately preceding three full calendar
years of employment (or if less, such lesser
period).
Commentators asked whether the pre-
vious positions of the Treasury Depart-
ment and the IRS with respect to a sepa-
ration from service for purposes of section
401(k), generally referred to as the same
desk rule, would apply in these circum-
stances. Under that rule, in certain situa-
tions where the identity of the employee’s
employer changed, such as with respect to
2005–43 I.R.B.805October 24, 2005

a sale of substantiallyall of the assets of the
original employer to a new employer who
hired the employee, the employee would
not be treated as having a separation from
service where the duties and responsibil-
ities of the employee had not materially
changed. These regulations do not incor-
porate this standard.
Commentators had requested the abil-
ity to elect whether to apply the same desk
rule in the case of a corporate transaction,
such as a sale of substantially all of the as-
sets of the original employer. The Treasury
Department and the IRS do not believe that
such a rule would be consistent with the
provisions of section 409A, which gener-
ally restrict such control over the time and
form of payment.
2.Independent contractors
The definition of a separation from ser-
vice of an independent contractor in these
proposed regulations generally is derived
from the definition of severance from
employment provided in §1.457–6(b)(2).
Comments are requested with respect to
any changes that may be necessary to ad-
dress issues arising under section 409A.
3.Delay for key employees
Section 409A(a)(2)(B)(i) provides that
payments upon a separation from ser-
vice to a key employee of a corporation
whose stock is publicly traded on an estab-
lished securities market must be delayed
at least six months following the separa-
tion from service. For these purposes, a
key employee is defined in accordance
with section 416(i), disregarding sec-
tion 416(i)(5). Commentators asked for
guidance on when a determination as to
whether an individual is a key employee
must be made. Section 416 relies upon
plan year concepts, which generally are
not relevant to the application of section
409A. In addition, the Treasury Depart-
ment and the IRS wish to establish rules
that minimize the administrative burden,
while implementing the legislative intent.
Accordingly, the regulations provide that
the identification of key employees is
based upon the 12-month period ending
on an identification date chosen by the
service recipient. Persons who meet the
requirements of section 416(i)(1)(A)(i),
(ii) or (iii) during that 12-month period
are considered key employees for the
12-month period commencing on the first
day of the 4
th
month following the end
of the 12-month period. For example, if
an employer chose December 31 as an
identification date, any key employees
identified during the calendar year ending
December 31 would be treated as speci-
fied employees for the 12-month period
commencing the following April 1. In
this manner, service recipients generally
may know in advance whether the person
to whom a payment is scheduled to be
made will be subject to the provision. In
addition, service recipients may choose an
identification date other than December
31, provided that the date must be used
consistently and provided that any change
in the identification date may not be effec-
tive for a period of at least 12 months.
Some commentators had requested that
certain types of payments, generally life
annuities or longer-term installment pay-
ments, be excepted from the six-month
delay requirement. The statutory language
does not contemplate such an exception.
Where an executive is aware that the
source of funds to pay for his nonqualified
deferred compensation are at significant
risk, the executive may separate from ser-
vice to obtain initial annuity or installment
payments while such funds exist. Com-
mentators argue that annuity payments or
long-term installment payments generally
would be less significant in amount. How-
ever, the Treasury Department and the
IRS are not inclined to establish arbitrary
limits, where such amounts may actually
be quite significant due to the overall
amount of the entire benefit, the number
of installment payments, or the age of the
participant, especially where the statutory
language does not contemplate the cre-
ation of such an exception. Rather, the
Treasury Department and the IRS believe
that the provisions with respect to separa-
tion pay should provide service recipients
the ability to provide reasonably signif-
icant amounts of benefits to terminating
executives, that may respond to many of
the concerns underlying the request to
relax the six-month delay requirement.
To meet the six-month delay require-
ment, a plan may provide that any pay-
ment pursuant to a separation of service
due within the six-month period is delayed
until the end of the six-month period, or
that each scheduled payment that becomes
payable pursuant to a separation from ser-
vice is delayed six months, or a combi-
nation thereof. For example, a nonquali-
fied deferred compensation plan of a cor-
poration whose stock is publicly traded on
an established securities market may pro-
vide that a participant is entitled to 60
monthly installment payments upon sep-
aration from service, payable commenc-
ing the first day of the first month fol-
lowing the date of separation from ser-
vice. To comply with the requirement of a
six-month delay for payments to key em-
ployees, the plan may provide that in the
case of an affected participant, the aggre-
gate amount of the first seven months of
installments is paid at the beginning of the
seventh month following the date of sepa-
ration from service, or may provide that the
commencement date of the 60 months of
installment payments is the first day of the
seventh month following the date of sepa-
ration from service, or may provide for a
combination of these provisions. A plan
may be amended to specify or change the
manner in which the delay will be imple-
mented, provided that the amendment may
not be effective for at least 12 months. Be-
cause the delay requirement applies only to
certain public corporations, a corporation
or other entity not covered by the require-
ment may have failed to include a pro-
vision in its plans at the time the corpo-
ration is contemplating becoming a pub-
lic corporation. These regulations pro-
vide that where the stock of the service
recipient is not publicly traded on an es-
tablished securities market, a plan may be
amended to specify or change the manner
in which the delay will be implemented, ef-
fective immediately upon adoption of the
amendment. A plan may provide a service
provider an election as to the manner in
which the six-month delay is to be imple-
mented, provided that such election is sub-
ject to otherwise applicable deferral elec-
tion rules.
D.Death or disability
Asprovidedinsection
409A(a)(2)(A)(ii) and (iii), these regula-
tions state that the death or disability of the
service provider are permissible payment
events. The regulations incorporate the
definition of disability provided in section
409A(a)(2)(C). These regulations clarify
that a plan that provides for a payment
October 24, 20058062005–43 I.R.B.

upon a disability need not provide for a
payment upon all disabilities identified
in section 409A(a)(2)(C), as long as any
disability upon which a payment would
be made is contained within the definition
provided in section 409A(a)(2)(C). In
addition, these regulations provide that
a service recipient may rely upon a
determination of the Social Security Ad-
ministration with respect to the existence
of a disability.
E.Change in ownership or effective
control of the corporation
The provisions defining a change in
ownership or effective control of a cor-
poration remain substantially unchanged
from Notice 2005–1, Q&As–11 through
14. These provisions are based largely
upon the discussion in the legislative his-
tory, indicating that the guidance should
provide a similar, but more restrictive,
definition of a change in the ownership
or effective control of a corporation as
compared to the definition used for pur-
poses of the golden parachute provisions
of section 280G. H.R. Conf. Rep. No.
108–755, at 730 (2004). Accordingly, the
provisions largely mirror the regulations
under section 280G, though the percentage
changes in ownership necessary to qual-
ify as permissible payment events have
increased. However, unlike the golden
parachute provisions, a change in control
event may occur that does not relate to
the entire group of affiliated corporations.
Rather, the relevant analysis for purposes
of section 409A generally is whether the
corporation for whom the service provider
performed services at the time of the event,
the corporation or corporations liable for
the payment at the time of the event, or a
corporate majority shareholder of one of
these corporations, experienced a change
in control event.
Commentators asked whether the pro-
visions relating to the change in ownership
or effective control of a corporation will be
extended to non-corporate entities. Specif-
ically, some commentators asked whether
change in control provisions could be ap-
plied in the case of a partnership or other
pass-through entity. Neither the statute nor
the legislative history refers to a permissi-
ble distribution upon a change in owner-
ship or effective control of any type of en-
tity other than a corporation.
However, the Treasury Department
and the IRS plan to issue regulations un-
der section 409A(a)(3) that will allow an
acceleration of payments upon a change
in the ownership of a partnership or in
the ownership of a substantial portion
of the assets of the partnership. Until
further guidance is issued, the section
409A rules regarding permissible distri-
butions upon a change in the ownership
of a corporation (as described in proposed
§1.409A–3(g)(5)(v)) or a change in the
ownership of a substantial portion of the
assets of a corporation (as described in
proposed §1.409A–3(g)(5)(vii)) may be
applied by analogy to changes in the own-
ership of a partnership and changes in
the ownership of a substantial portion of
the assets of a partnership. For purposes
of this paragraph, any references in pro-
posed §1.409A–3(g)(5) to corporations,
shareholders, and stock shall be treated
as referring also to partnerships, partners,
and partnership interests, respectively, and
any reference to “majority shareholder”
as applied by analogy to the owner of a
partnership shall be treated as referring to
a partner that (a) owns more than 50 per-
cent of the capital and profits interests of
such partnership, and (b) alone or together
with others is vested with the continuing
exclusive authorityto make the manage-
ment decisions necessary to conduct the
business for which the partnership was
formed. The Treasury Department and
the IRS request comments with respect
to the application of a change in con-
trol provision to partnerships and other
non-corporate entities, as well as sug-
gestions with respect to the formulation
of which types of events should qualify
and would be analogous to the corporate
events described in the regulations.
Commentators also raised questions re-
garding the application of section 409A to
earn-out provisions where an acquirer con-
tracts to make an immediate payment at the
closing of the transaction with additional
amounts payable at a later date, subject to
the satisfaction of specified conditions. In
such situations, the later payments could
create delays in payments of compensa-
tion calculated by reference to the value
of target corporation shares. These regu-
lations address this situation by providing
that compensation payable pursuant to the
purchase by the servicerecipient of service
recipient stock or a stock right held by a
service provider, or payment of amounts of
deferred compensation calculated by refer-
ence to the value of service recipient stock,
may be treated as paid at a specified time
or pursuant to a fixed schedule in con-
formity with the requirements of section
409A if paid on the same schedule and un-
der the same terms and conditions as pay-
ments to shareholders generally pursuant
to a change in the ownership of a corpo-
ration that qualifies as a change in control
event or as payments to the service recipi-
ent pursuant to a change in the ownership
of a substantial portion of a corporation’s
assets that qualifies as a change in control
event, and any amounts paid pursuant to
such a schedule and such terms and condi-
tions will not be treated as violating the ini-
tial or subsequent deferral election rules,
to the extent that such amounts are paid
not later than five years after the change
in control event.
F.Unforeseeable emergency
The regulations contain provisions
defining the types of circumstances that
constitute an unforeseeable emergency,
and the amounts that may be paid due to
the unforeseeable emergency. Generally
these provisions are derived directly from
section 409A(a)(2)(B)(ii). Commentators
requested that in the case of an unfore-
seeable emergency, a service provider be
permitted to cancel future deferrals. This
issue is discussed in this preamble at para-
graph VII.D.
G.Multiple payment events
The regulations permit a plan to pro-
vide that payments may be made upon
the earlier of, or the later of, two or more
specified permissible payment events or
times. In addition, the regulations pro-
vide that a different form of payment may
be elected for each potential payment
event. For example, a plan may provide
that a service provider will receive an in-
stallment payment upon separation from
service or, if earlier, a lump sum payment
upon death. The application of the rules
governing changes in time and form of
payment and the anti-acceleration rules
to amounts subject to multiple payment
events, is discussed below.
2005–43 I.R.B.807October 24, 2005

H.Delay in payment by the service
recipient
Commentators notedthat for certain
compelling reasons, a service recipient
may be unwilling or unable to make a pay-
ment of an amount due under a nonqual-
ified deferred compensation plan. These
regulations generally provide that in the
case of payments the deduction for which
would be limited or eliminated by the
application of section 162(m), payments
that would violate securities laws, or pay-
ments that would violate loan covenants
or other contractual terms to which the
service recipient is a party, where such a
violation would result in material harm to
the service recipient, the plan may pro-
vide that the payment will be delayed. In
addition, plans may be amended to add
such provisions, but such an amendment
cannot be effective for a period of at least
12 months. However, if a plan is amended
to remove such a provision with respect to
amounts deferred previously, the amend-
ment will constitute an acceleration of the
payment. In the case of amounts for which
the deduction would be limited or reduced
by the application of section 162(m), these
regulations require that the payment be
deferred either to a date in the first year
in which the service recipient reasonably
anticipates that a payment of such amount
would not result in a limitation of a deduc-
tion with respect to the payment of such
amount under section 162(m) or the year
in which the service provider separates
from service. In the case of amounts that
would violate loan covenants or similar
contracts, or would result in a violation of
Federal securities laws or other applicable
laws, the arrangement must provide that
the payment will be made in the first cal-
endar year in which the service recipient
reasonably anticipates that the payment
would not violate the loan contractual
terms, the violation would not result in
material harm to the service recipient, or
the payment would not result in a violation
of Federal securities law or other applica-
ble laws. These regulations also provide
that the Commissioner may prescribe
through guidance published in the Internal
Revenue Bulletin other circumstances in
which a plan may provide for the delay
of a payment of a deferred amount. The
Treasury Department and the IRS specif-
ically request comments as to what other
circumstances may be appropriate to in-
clude in such guidance.
I.Disputed payments and refusals to pay
In addition to situations in which a plan
may delay payment due to certain business
circumstances, commentators expressed
concern about the possibility that a service
recipient will refuse to pay deferred com-
pensation when the payment is due, and
whether such refusal to pay would result
in taxation of the service provider under
section 409A. Generally these situations
will arise where either the obligation to
make the payment, or the amount of the
payment, is subject to dispute. But this
situation may also arise where the service
recipient simply refuses to pay. In either
situation, these proposed regulations gen-
erally provide that the payment will be
deemed to be made upon the date sched-
uled under the terms of the arrangement,
provided that the service provider is acting
in good faith and makes reasonable, good
faith efforts to collect the amount. Factors
relevant in determining whether a service
provider is acting in good faith and mak-
ing reasonable, good faith efforts to collect
the amount include both the amount of the
payment, or portion of a payment, in dis-
pute, as well as the size of the disputed
portioninrelationtotheentirepayment.
Although a payment may be delayed un-
der this provision without violating section
409A because the service recipient refuses
to make the payment, the payment may not
be made subject to a subsequent deferral
election because the payment was delayed.
Rather, the payment must be made by the
later of the end of the calendar year in
which, or the 15
th
day of the third month
following the date that, the service recip-
ient and the service provider enter into a
legally binding settlement of such dispute,
the service recipient concedes that the full
amount is payable, or the service recipient
is required to make such payment pursuant
to a final and nonappealable judgment or
other binding decision. This paragraph
is not intended to serve as a means of
deferring payments without application
of section 409A, by feigning a dispute or
surreptitiously requesting that the service
recipient refuse to pay the amount at the
due date. Where the service provider is
not acting in good faith, for example cre-
ating a dispute with no or tenuous basis, or
where the service provider is not making
reasonable, good faith efforts to collect
the amount, the failure to receive the pay-
ment at the date originally scheduled may
result in a violation of the permissible
payment requirements. Among the factors
to be considered is the practice of the ser-
vice recipient with respect to payments of
nonqualified deferred compensation. In
addition, these regulations provide that the
service provider is treated as having re-
quested that a payment not be made, rather
than the service recipient having refused
to make such payment, where the decision
that the service recipient will not make the
payment is made by the service provider,
or any person or group of persons under
the supervision of the service provider at
the time the decision is made.
VII.Anti-acceleration Provision
A.In general
Under section 409A(a)(3), a payment
of deferred compensation may not be ac-
celerated except as provided in regulations
by the Secretary. Certain permissible pay-
ment accelerations were listed in Notice
2005–1, Q&A–15, including payments
necessary to comply with a domestic rela-
tions order, payments necessary to comply
with certain conflict of interest rules, pay-
ments intended to pay employment taxes,
and certainde minimispayments related to
the participant’s termination of his or her
interest in the plan. All the permissible
payment accelerations contained in Notice
2005–1, Q&A–15, are included in these
regulations.
B.Payments upon income inclusion under
section 409A
These regulations provide that a plan
may permit the acceleration of the time
or schedule of a payment to a service
provider to pay the amount the service
provider includes inincome as a result of
the plan failing to meet the requirements of
section 409A. For this purpose, a service
provider will be deemed to have included
the amount in income if the amount is
timely reported on a Form W–2, “Wage
and Tax Statement”, or Form 1099–MISC,
“Miscellaneous Income”, as appropriate.
October 24, 20058082005–43 I.R.B.

C.Plan terminations
Some commentators requested that
service recipients be allowed to retain
the right to accelerate payments upon a
termination of the arrangement, where
the termination is at the discretion of the
service recipient. A general ability of a
service recipient to make such payments
raises the potential for abuse, especially
with respect to arrangements with indi-
vidual service providers. Where a service
provider retains sufficient influence to ob-
tain a termination of the arrangement, the
service recipient’s discretion to terminate
the plan in substance would mean that
amounts deferred were available to the
service provider upon demand. Such a
condition would be inconsistent with the
provisions of and legislative intent behind
section 409A.
Some commentators requested that ser-
vice recipients be permitted to terminate
arrangements where the arrangements are
broad-based, covering a significant num-
ber of service providers. Due to concerns
about administrability and equity, the reg-
ulations do not adopt the suggestion.
Some commentators also suggested that
service recipients be permitted to termi-
nate arrangements due tobona fidebusi-
ness reasons. However, the Treasury De-
partment and the IRS are not confident
that such a standard could be applied on a
consistent and coherent basis, leaving ser-
vice recipients unable to plan with confi-
dence and creating the potential for abuse.
The Treasury Department and the IRS are
considering further guidance establishing
criteria or circumstances under which a
plan could be terminated. For that pur-
pose, these regulations provide authority to
the Commissioner to establish such crite-
ria or circumstances in generally applica-
ble guidance published in the Internal Rev-
enue Bulletin.
These proposed regulations provide
three circumstances under which a plan
may be terminated at the discretion of the
service recipient in accordance with the
terms of the plan. The first addresses a ser-
vice recipient that wants to cease providing
a certain category of nonqualified deferred
compensation, such as account balance
plans, entirely. A plan may be terminated
provided that all arrangements of the same
type (account balance plans, nonaccount
balance plans, separation pay plans or
other arrangements) are terminated with
respect to all participants, no payments
other than those otherwise payable under
the terms of the plan absent a termination
of the plan are made within 12 months
of the termination of the arrangement, all
payments are made within 24 months of
the termination of the arrangement, and
the service recipient does not adopt a new
arrangement that would be aggregated
with any terminated arrangement under
the plan aggregation rules at any time for
aperiodoffiveyearsfollowingthedateof
termination of the arrangement.
The remaining two exceptions relate
to events that are both objectively deter-
minable to have occurred-and so may be
determined consistently-and are of such
independent significance that they are
unlikely to be related to any attempt to
accelerate payments under a nonqualified
deferred compensation plan in a manner
inconsistent with the intent of the statute.
These regulations provide that during the
12 months following a change in control
of a corporation, the service recipient may
elect to terminate a plan and make pay-
ments to the participants. In addition, a
plan may provide that the plan terminates
upon a corporate dissolution taxed under
section 331, or with the approval of a
bankruptcy court pursuant to 11 U.S.C.
§503(b)(1)(A), provided that the amounts
deferred under the plan are included in the
participants’ gross incomes by the latest
of (i) the calendar year in which the plan
termination occurs, (ii) the calendar year
in which the amount is no longer subject to
a substantial risk of forfeiture, or (iii) the
first calendar year in which the payment is
administratively practicable.
D.Terminations of deferral elections
following an unforeseeable emergency or
a hardship distribution
Commentators noted that although sec-
tion 409A provides that a service provider
may receive a payment upon an unforesee-
able emergency, there is no provision ex-
plicitly permitting or requiring the service
provider to halt all elective deferrals to re-
ceive such a payment. In addition, com-
mentators noted thatto receive a hardship
distribution under a qualified plan with a
qualified cash or deferred arrangement un-
der section 401(k), a participant generally
would be required pursuant to the regula-
tions under section 401(k) to halt any elec-
tive deferrals of compensation into a non-
qualified deferred compensation plan. In
response, these regulations provide that a
plan may provide that a deferral election
terminates if a service provider obtains
a payment upon an unforeseeable emer-
gency. Similarly, these regulations pro-
vide that a plan may provide that a deferral
election is terminated if required for a ser-
vice provider to obtain a hardship distribu-
tion under a qualified plan with a qualified
cash or deferred arrangement under sec-
tion 401(k). In each case, the deferral elec-
tion must be terminated, and not merely
suspended. A deferral election under the
arrangement made after a termination of a
deferral election due to a hardship distri-
bution or an unforeseeable emergency will
be treated as an initial deferral election.
E.Distributions to avoid a nonallocation
year under section 409(p)
Commentators noted that in the case of
an S corporation sponsoring an employee
stock ownership plan, under certain condi-
tions distributions from a nonqualified de-
ferred compensation plan may be neces-
sary to avoid a nonallocation year (within
the meaning of section 409(p)(3)). These
regulations provide rules under which such
distributions may be made to avoid such a
nonallocation year.
VIII.Subsequent Changes in the Time and
Form of Payment
A.In general
Section 409A(a)(4)(C) and these regu-
lations provide that, in the case of a plan
that permits a service provider to make a
subsequent election to delay a payment or
to change the form of a payment (provided
that any such payment is the subject of
an initial deferral election), the following
conditions must be met:
(1) The plan must require that such
election not take effect until at least 12
months after the date on which the elec-
tion is made,
(2) In the case of an election related to a
payment other than a payment on account
of death, disability or the occurrence of
an unforeseeable emergency, the plan re-
quires that the firstpayment with respect
to which such election is made be deferred
for a period of not less than 5 years from
2005–43 I.R.B.809October 24, 2005

the date such payment would otherwise
have been made (the 5-year rule), and
(3) The plan requires that any election
related to a payment at a specified time or
pursuant to a fixed schedule may not be
made less than 12 months prior to the date
of the first scheduled payment.
B.Definition of payment
Commentators requested clarification
whether the individual amounts paid in a
defined stream of payments, such as in-
stallment payments, are treated as separate
payments or as one payment. This affects
the application of the rules governing sub-
sequent deferral elections, particularly the
5-year rule.
These proposed regulations provide
generally that each separately identified
amount to which a service provider is
entitled to payment under a plan on a
determinable date is a separate payment.
Accordingly, if an amount is separately
identified as a payment, either because the
right arises under a separate arrangement
or because the arrangement identifies the
amount as a separate payment, the amount
will not be aggregated with other amounts
for purposes of the rules relating to sub-
sequent changes in the time and form of
payment and the anti-acceleration rule.
For example, an arrangement may provide
that 50 percent of the benefit is paid as a
lump sum at separation from service, and
that the remainder of the benefit is paid as
a lump sum at age 60, which would iden-
tify each amount as a separate payment.
However, once a payment has been iden-
tified separately, the payment may only
be aggregated with another payment if the
aggregation would otherwise comply with
the rules relating to subsequent changes
in the time and form of payment and the
anti-acceleration rule.
The Treasury Department and the IRS
recognize that most taxpayers view the
ability to elect installment payments as a
choice of a single form of payment. Ac-
cordingly, the entitlement to a series of in-
stallment payments under a particular ar-
rangement generallyis treated as a sin-
gle payment for purposes of the subse-
quent deferral rules. However, taxpayers
could also view each individual payment
in the series of payments as a separate pay-
ment. Accordingly, these regulations pro-
vide that an arrangement may specify that
a series of installment payments is to be
treated as a series of separate payments.
An installment payment must be treated
consistently both with respect to the rules
governing subsequent changes in the time
and form of payment, and with respect
to the anti-acceleration rules. For exam-
ple, if a 5-year installment payment is
treated as a single payment and is sched-
uled to commence on July 1, 2010, then
consistent with the 5-year rule a service
provider generally could change the time
and form of the payment to a lump sum
payment on July 1, 2015, provided the
other conditions related to a change in the
time and form of payment were met. In
contrast, if a 5-year installment payment
is designated as five separate payments
scheduled for the years 2010 through
2014, then the service provider could not
change the time and form of the payment
to a lump sum payment to be made on July
1, 2015, because the separate payments
scheduled for the years 2011 through 2014
would not have been deferred at least 5
years. Rather, the service provider gen-
erally could change the time and form of
payment to a lump sum payment only if
the payment were scheduled to occur no
earlier than 2019 (5 years after the last of
the originally scheduled payments).
One exception to this rule is a life annu-
ity, the entitlement to which is treated as a
single payment. The Treasury Department
and the IRS believe that taxpayers gener-
ally view an entitlement to a life annuity
as a single form of payment, rather than a
series of separate payments. In addition,
treating a life annuity as a series of pay-
ments would lead to difficulty in applying
the rules governing subsequent changes in
the time and form of payment, because the
aggregate amount of the payments and the
duration of the payments are unknown, as
their continuation depends on the contin-
ued life of the service provider or other in-
dividual. For example, if a single life an-
nuity were treated as a series of separate
payments, an election to change a form of
payment to a lump sum payment could be
made only if the lump sum payment were
deferred to a date no earlier than five years
after the death of the participant.
C.Application to multiple payment events
As discussed above, a plan may provide
that a payment will be made upon the ear-
lier of, or the later of, multiple specified
permissible payment events. In addition,
a plan may provide for a different form
of payment depending upon the payment
event. For example, a plan may provide
that a service providerisentitledtoanan-
nuity at age 65 or, if earlier, a lump sum
payment upon separation from service.
Thequestionthenarisesastohowthe
provisions governing changes in the time
and form of payment and the anti-accelera-
tion provision apply where there are multi-
ple potential payment events, and possibly
multiple forms of payment as well. The
regulations provide that these provisions
are to apply to each payment event sepa-
rately. In the example above, these provi-
sions would apply separately to the entitle-
ment to the installment payment at age 65,
and the entitlement to the lump sum pay-
ment at separation from service. Accord-
ingly, the service provider generally would
be able to delay the annuity payment date
subject to the rules governing changes in
the time and form of payment, while re-
taining a separate right to receive a lump
sum payment at separation from service if
that occurred at an earlier date. In other
words, the 5-year rule would apply to the
annuity payment date (delaying payment
from age 65 to at least age 70) but not to
the unchanged lumpsum payment avail-
able upon separation from service before
age 70.
Similarly, a plan may provide that an in-
tervening event that is a permissible pay-
ment event under section 409A may over-
ride an existing payment schedule already
in payment status. For example, a plan
could provide that a participant would re-
ceive six installment payments commenc-
ing at separation from service, but also pro-
vide that if the participant died after the
payments commenced, all remaining ben-
efitswouldbepaidinalumpsum.
An additional question arises where a
new payment event, or a fixed time or
fixed schedule of payments, is added to the
plan. Generally, the addition of the pay-
ment event or date will be subject to the
rules governing changes in the time and
form of payment and the anti-acceleration
rules. Accordingly, no fixed time of pay-
ment could be added that did not defer the
payment at least five years from the date
the fixed time was added. In addition, no
payment due to any other added permissi-
bleeventcouldbemadewithinfiveyears
October 24, 20058102005–43 I.R.B.

of the addition of the event. For example, a
service provider entitled to a payment only
on January 1, 2050, could not make a sub-
sequent deferral election to be paid on the
later of January 1, 2050, or separation from
service, but could make a subsequent de-
ferral election to be paid at the later of sep-
aration from service or January 1, 2055.
IX.Application of Rules to Nonqualified
Deferred Compensation Plans Linked to
Qualified Plans
A.In general
Commentators raised many issues con-
cerning the application of section 409A
to nonqualified deferred compensation
plans linked to qualified plans. These
linked plans exist in a variety of formats,
and are referred to under various labels
such as excess plans, wrap plans, and
supplemental employee retirement plans
(SERPs). Typically the purpose of such
plans is to replace the benefits that would
have been provided under the qualified
plan absent the application of certain lim-
its contained in the Code (for example,
section 415, section 401(a)(17) or section
402(g)). Often the amounts deferred under
the nonqualified deferred compensation
plan are established through an offset for-
mula, where the amount deferred equals
an amount determined under a formula,
offset by any benefits credited under the
qualified plan. Because of the close rela-
tionship between the qualified plan and the
nonqualified deferred compensation plan,
sponsor and participant actions under the
qualified plan may affect the calculation
or payment of the amounts deferred under
the nonqualified deferred compensation
plan. Commentators asked for guidance
regarding the circumstances under which
an action (or failure to act) under the
qualified plan may betreated as violating
section 409A, to the extent the action (or
failure to act) also affects the amounts
deferred under the nonqualified deferred
compensation plan.
These proposed regulations generally
adopt rules under which nonqualified de-
ferred compensation plans linked to quali-
fied plans may continue to operate, though
certain changes may be required. The in-
tent of these rules generally is to permit the
qualified plan to be established, amended
and operated under the rules governing
qualified plans, without causing the linked
nonqualified deferred compensation plan
to violate the rules of section 409A. How-
ever, the relief provided under certain rules
to accommodate the linked plan structure
is not intended to relax the rules generally
with respect to all of the amounts deferred
under the nonqualified deferred compen-
sation plan, simply because a limited por-
tion of the amounts deferred may be af-
fected by actions under the qualified plan.
Accordingly, in certain circumstances the
relief provided relates solely to amounts
deferred under the nonqualified deferred
compensation plan that do not exceed the
applicable limit on the qualified plan ben-
efit for the taxable year.
B.Actions that do not constitute deferral
elections or accelerations
Where amounts deferred under a non-
qualified deferred compensation plan are
linked to the benefits under a qualified
plan, certain participant actions taken with
respect to the benefit accrued under the
qualified plan may affect the amounts
deferred under the nonqualified deferred
compensation plan.Where the amounts
deferred under the nonqualified deferred
compensation plan increase, the issue is
whether the action taken with respect to
the benefit accrued under the qualified
plan constitutes a deferral election. Where
the amounts deferred under the nonquali-
fied deferred compensation plan decrease,
the issue is whether the action taken with
respect to the benefit accrued under the
qualified plan constitutes an impermissi-
ble acceleration of a payment under the
nonqualified deferred compensation plan.
With respect to the benefits provided
under the qualified plan, these regulations
provide generally that neither the amend-
ment of the qualified plan to increase or
decrease such benefits under the qualified
plan nor the cessation of future accruals
under the qualified plan is treated as a de-
ferral election or an acceleration of a pay-
ment under the nonqualified deferred com-
pensation plan. Similarly, the addition,
removal, increase or reduction of a sub-
sidized benefit or ancillary benefit under
the qualified plan, or a participant elec-
tion with respect to a subsidized benefit or
ancillary benefit under the qualified plan,
will not constitute either a deferral election
or an acceleration of a payment under the
nonqualified deferred compensation, even
where such action results in an increase
or decrease in amounts deferred under the
nonqualified deferred compensation plan.
Additional relief is provided with re-
spect to nonqualified deferred compensa-
tion plans linked to defined contribution
plans that include a 401(k) or similar cash
or deferred arrangement. Specifically,
the regulations provide that a service
provider’s action or inaction under a qual-
ified plan that is subject to section 402(g),
including an adjustment to a deferral elec-
tion under such qualified plan, will not be
treated as either a deferral election or an
acceleration of a payment under the linked
nonqualified deferred compensation plan,
provided that for any given calendar year,
the service provider’s actions or inactions
under the qualified plan do not result in
an increase in the amounts deferred under
all nonqualified deferred compensation
plans in which the service provider partic-
ipates in excess of the limit with respect to
elective deferrals under section 402(g) in
effect for the year in which such actions or
inactions occur. The Treasury Department
and the IRS intend for this provision to ad-
dress common arrangements whereby the
amounts deferred under the nonqualified
deferred compensation plan are linked to
amounts deferred under a 401(k) arrange-
ment (often referred to as 401(k) wrap
plans), but only to the extent the amount
of affected deferrals under the nonquali-
fied deferred compensation plan does not
exceed the maximum amount that ever
could have been electively deferred under
the qualified plan.
Similar relief is provided with respect
to plans involving matching contributions.
The regulations provide that a service
provider’s action or inaction under a qual-
ified plan with respect to elective deferrals
or after-tax contributions by the service
provider to the qualified plan that affects
the amounts that are credited under a
nonqualified deferred compensation ar-
rangement as matching amounts or other
amounts contingent on service provider
elective deferrals orafter-tax contribu-
tions will not be treated as either a deferral
election or an acceleration of payment,
provided that such matching or contingent
amounts, as applicable, are either forfeited
or never credited under the nonqualified
deferred compensation arrangement in the
absence of such service provider’s elec-
2005–43 I.R.B.811October 24, 2005

tive deferral or after-tax contribution, and
provided the service provider’s actions
or inactions under the qualified plan do
not result in an increase or decrease in the
amounts deferred under all nonqualified
deferred compensation plans in which the
service provider participates in excess of
the limit with respect to elective deferrals
under section 402(g) in effect for the year
in which such actions or inactions occur.
Although the section 402(g) limit applies
to elective deferrals, rather than matching
contributions, the Treasury Department
and the IRS believe that matching con-
tributions in excess of 100 percent of the
elective deferrals of pre-tax contributions
or after-tax contributions will be rare.
X.Statutory Effective Dates
A.Effective dates — earned and vested
amounts
Consistent with Notice 2005–1,
Q&A–16, these regulations provide that
an amount is considered deferred before
January 1, 2005, and thus is not subject to
section 409A, if the service provider had a
legally binding right to be paid the amount
and the right to the amount was earned and
vested as of December 31, 2004. For these
purposes, a right to an amount is earned
and vested only if the amount is not sub-
ject to either a substantial risk of forfeiture
or a requirement to perform further ser-
vices. Some commentators questioned the
application of section 409A to contrac-
tual arrangements entered into before the
enactment of the statute. However, the
statutory effective date is tied to the date
the amount is deferred and the legislative
history states that for these purposes, “an
amount is considered deferred before Jan-
uary 1, 2005, if the amount is earned and
vested before such date.” H.R. Conf. Rep.
No. 108–755, at 737 (2004). Accordingly,
these regulations are consistent with the
legislative intent that deferred amounts
that were not earned, or were not vested,
as of December 31, 2004, are subject to
the provisions of section 409A.
Clarification has been provided with re-
spect to when a stock right or similar right
to compensation will be treated as earned
and vested. The issue arises because of-
ten a stock right terminates upon a sepa-
ration from service. Taxpayers questioned
whether this meant that the right had not
been earned and vested, because future ser-
vices would be required to retain the right.
These regulations clarify that a stock right
or similar right will be treated as earned
and vested by December 31, 2004, if on
or before such date the right was either
immediately exercisable for a payment of
cash or substantially vested property, or
was not forfeitable. Accordingly, stock op-
tions that on or before December 31, 2004,
were immediately exercisable for substan-
tially vested stock generally would not be
subject to section 409A. In contrast, a non-
statutory stock option that was immedi-
ately exercisable on or before December
31, 2004, but only for substantially non-
vested stock, generally would be subject to
section 409A.
B.Effective dates — calculation of
grandfathered amount
For account balance plans and plans
that are neither account balance plans
nor nonaccount balance plans (generally
equity-based compensation), these reg-
ulations generally retain the method of
calculating the grandfathered amount set
forth in Notice 2005–1, Q&A–17. Ac-
cordingly, for account balance plans the
grandfathered amount generally will equal
the vested account balance as of December
31, 2004, plus any earnings with respect
to such amounts. For equity-based com-
pensation, the grandfathered amount gen-
erally will equal the payment that would
be available if the right were exercised on
December 31, 2004, and any earnings with
respect to such amount. For this purpose,
the earnings generally would include the
increase in the payment available due to
appreciation in theunderlying stock.
Commentators argued that the defi-
nition of the grandfathered amount con-
tained in Notice 2005–1, Q&A–17 with
respect to nonaccount balance plans was
not sufficiently flexible to account for
subsequent increases in benefits unrelated
to any further performance of services or
increases in compensation after December
31, 2004. For example, a participant’s
benefit may increase if the participant be-
comes eligible for a subsidized benefit at
a specified age that the participant reaches
after December 31, 2004. In response,
these proposed regulations provide that
for nonaccount balanceplans, the grand-
fathered amount specifically equals the
present value as of December 31, 2004, of
the amount to which the service provider
would be entitled under the plan if the
service provider voluntarily terminated
services without cause on December 31,
2004, and received a payment of the ben-
efits with the maximum value available
from the plan on the earliest possible date
allowed under the plan to receive a pay-
ment of benefits following the termination
of services. Notwithstanding the fore-
going, for any subsequent calendar year,
the grandfathered amount may increase to
equal the present value of the benefit the
service provider actually becomes enti-
tled to, determined under the terms of the
plan (including applicable limits under the
Code), as in effect on October 3, 2004,
without regard to any further services
rendered by the service provider after
December 31, 2004, or any other events
affecting the amount of or the entitlement
to benefits (other than the participant’s
survival or a participant election under the
terms of the plan with respect to the time
or form of an available benefit).
Because separation pay plans with re-
spect to involuntary terminations and win-
dow programs are now treated as separate
plans, these regulations provide a rule for
calculating the grandfathered amount un-
der such plans. For these purposes, the
principles used to calculate the grandfa-
thered amounts under a nonaccount bal-
ance plan and an account balance plan are
to be applied by analogy, depending upon
the structure of the separation pay plan.
C.Material modifications
Commentators have pointed out that a
grandfathered plan may become subject to
section 409A upon any material modifi-
cation, even if such modification occurs
many years after 2004. Given the substan-
tial amounts of compensation that are de-
ferred under grandfathered plans, as well
as the potential for these amounts to grow
through accumulated grandfathered earn-
ings, the consequences of such a modifi-
cation could be significant. Commenta-
tors expressed concern that as long as these
plans exist, there will be the potential for a
change to the plan to mistakenly cause the
plan to become subject to section 409A. In
response, these regulations include a pro-
vision stating that to the extent a modi-
fication is rescinded before the earlier of
October 24, 20058122005–43 I.R.B.

thedateanyadditional right granted under
the modification is exercised or the end of
the calendar year in which the modifica-
tion was made, the modification will not
be treated as a material modification of the
plan. For example, if a subsequent deferral
feature is added that would allow partici-
pants to extend the time and form of pay-
ment of a grandfathered deferred amount,
and if the right is removed before the ear-
lier of the time the participant exercises the
right or the end of the calendar year, then
the modification will not be treated as a
material modification of the plan. How-
ever, this provision is not intended to cover
material modifications that are made with
the knowledge that the modification will
subject the amounts to section 409A, but
are then rescinded.
Consistent with Notice 2005–1,
Q&A–18(a), these regulations also pro-
vide that it is not a material modification
to change a notional investment mea-
sure to, or to add, an investment mea-
sure that qualifies as a predetermined
actual investment within the meaning of
§31.3121(v)(2)–1(d)(2) of this chapter.
Commentators requested similar flexibil-
ity with respect to investment measures re-
flecting reasonable rates of interest. These
regulations provide such flexibility, gen-
erally adopting a modified version of the
rules contained in §31.3121(v)(2)–1(d)(2)
of this chapter. Under these regulations, it
is not a material modification to change a
notional investment measure to, or to add,
an investment measure that qualifies as a
predetermined actual investment within
the meaning of §31.3121(v)(2)–1(d)(2) of
this chapter or, for any given taxable year,
reflects a reasonable rate of interest. For
this purpose, if with respect to an amount
deferred for a period, a plan provides for
a fixed rate of interest to be credited, and
the rate is to be reset under the plan at a
specified future datethat is not later than
the end of the fifth calendar year that be-
gins after the beginning of the period, the
rate is reasonable at the beginning of the
period, and the rate is not changed before
the reset date, then the rate will be treated
as reasonable in all future periods before
the reset date. These proposed regulations
also contain other clarifications of the ap-
plication of the material modification rule.
XI.Transition Relief
A.In general
Until the effective date of these regula-
tions, Notice 2005–1 generally remains in
effect. Notice 2005–1, Q&As–18 through
23, provided transition relief that was lim-
ited to the 2005 calendar year. Commen-
tators generally reacted favorably to the
scope of the transition rules. The Treasury
Department and the IRS intended for the
transition rules to be generous during the
calendar year 2005, both to enable taxpay-
ers to familiarize themselves with the new
provisions, and also to provide a period
during which the Treasury Department and
the IRS could develop regulations and tax-
payers generally could be confident that ei-
ther their plans were not in violation of sec-
tion 409A, or could be corrected to avoid
additional tax under the statute.
Because final regulations are not yet in
place, the IRS and the Treasury Depart-
ment are hereby extending through 2006
certain aspects of the transition relief pro-
vided for 2005 by Notice 2005–1. In ad-
dition, in response to questions, certain
provisions of Notice 2005–1 are clarified
below. However, because taxpayers will
have had, by the end of 2005, over a year
to implement the statute, certain other tran-
sition relief is not being extended through
2006.
B.Amendment and operation of plans
adopted on or before December 31, 2006
Pursuant to Notice 2005–1, Q&A–19,
a plan adopted on or before December 31,
2005, will not be treated as violating sec-
tion 409A(a)(2), (3) or (4) only if the plan
is operated in good faith compliance with
the provisions of section 409A and No-
tice 2005–1 during the calendar year 2005,
and the plan is amended on or before De-
cember 31, 2005, to conform to the pro-
visions of section 409A with respect to
amounts subject to section 409A. To allow
time to finalize these regulations, and for
practitioners to implement the final regu-
lations, the deadline by which plan docu-
ments must be amended to comply with the
provisions of section 409A and the regula-
tions is hereby extended to December 31,
2006. Accordingly, in order to be treated
as complying with section 409A(a)(2), (3)
or (4), a plan adopted before December 31,
2006, must be amended on or before De-
cember 31, 2006, either to conform to the
provisions of section 409A with respect
to amounts subject to section 409A, or to
provide a compensation arrangement that
does not provide for a deferral of compen-
sation for purposes of section 409A.
The good faith compliance period pro-
vided under Q&A–19 of Notice 2005–1 is
also hereby extended through December
31, 2006. Accordingly, a plan adopted
on or before December 31, 2006, will
be treated as complying with section
409A(a)(2), (3) or (4) only if the plan is
operated through December 31, 2006, in
good faith compliance with the provisions
of section 409A and Notice 2005–1. If
any other guidance of general applicabil-
ity under section 409A is published in the
Internal Revenue Bulletin with an effec-
tive date prior to January 1, 2007, the plan
must also comply with such published
guidance as of its effective date. To the
extent an issue is not addressed in Notice
2005–1 or such other published guidance,
the plan must follow a good faith, reason-
able interpretation of section 409A, and,
to the extent not inconsistent therewith,
the plan’s terms.
These regulations are not proposed to
become effective prior to January 1, 2007,
and, accordingly, a plan is not required to
comply with either these proposed regula-
tions or the final regulations prior to Jan-
uary 1, 2007. However, compliance with
either these proposed regulations or the fi-
nal regulations will be good faith compli-
ance with the statute. In general, these pro-
posed regulations expand upon, and should
be read consistently with, the provisions
of Notice 2005–1. However, to the ex-
tent that a provision of either these pro-
posed regulations or the final regulations
is inconsistent with a provision of Notice
2005–1, the plan may comply with the pro-
vision of the proposed or final regulations
in lieu of the corresponding provision of
Notice 2005–1.
A plan will not be operating in good
faith compliance if the plan sponsor ex-
ercises discretion under the terms of the
plan, or a service provider exercises discre-
tion with respect to that service provider’s
benefits, in a manner that causes the plan
to fail to meet the requirements of section
409A. For example, if an employer retains
the discretion under the terms of the plan
to delay or extend payments under the plan
2005–43 I.R.B.813October 24, 2005

and exercises such discretion, the plan will
notbeconsideredtobeoperatedingood
faith compliance with section 409A with
regard to any plan participant. However,
an exercise of a right under the terms of
theplanbyaserviceprovidersolelywith
respect to that service provider’s benefits
under the plan, in a manner that causes the
plan to fail to meet the requirements of sec-
tion 409A, will not be considered to result
in the plan failing to be operated in good
faith compliance with respect to other par-
ticipants. For example, the request for and
receipt of an immediate payment permit-
ted under the terms of the plan if the par-
ticipant forfeits 20 percent of the partici-
pant’s benefits (a haircut) will be consid-
ered a failure of the plan to meet the re-
quirements of section 409A with respect
to that service provider, but not with re-
spect to all other service providers under
the plan.
C.Change in payment elections or
conditions on or before December 31,
2006
Notice 2005–1, Q&A–19(c) provided
generally that with respect to amounts
subject to section 409A, a plan could be
amended to provide for new payment
elections without violating the subsequent
deferral and anti-acceleration rules, pro-
vided that the plan was amended and the
participant made the election on or before
December 31, 2005. The period during
which a plan may be amended and a ser-
vice provider may be permitted to change
payment elections, without resulting in
an impermissible subsequent deferral or
acceleration, is hereby extended through
December 31, 2006, except that a service
provider cannot in 2006 change payment
elections with respect to payments that the
service provider would otherwise receive
in 2006, or to cause payments to be made
in 2006. Other provisions of the Internal
Revenue Code and common law doctrines
continue to apply to any such election.
Accordingly, with respect to amounts
subject to section 409A and amounts that
would be treated as a short-term deferral
within the meaning of §1.409A–1(b)(4),
a plan may provide, or be amended to
provide, for new payment elections on or
before December 31, 2006, with respect
to both the time and form of payment of
such amounts and the election will not be
treated as a change in the form and tim-
ing of a payment under section 409A(a)(4)
or an acceleration of a payment under sec-
tion 409A(a)(3), provided that the plan
is so amended and the service provider
makes any applicable election on or be-
fore December 31, 2006, and provided that
the amendment and election applies only
to amounts that would not otherwise be
payable in 2006 and does not cause an
amount to be paid in 2006 that would not
otherwise be payable in such year. Simi-
larly, an outstanding stock right that pro-
vides for a deferral of compensation sub-
ject to section 409A may be amended to
provide for fixed payment terms consis-
tent with section 409A, or to permit hold-
ers of such rights to elect fixed payment
terms consistent with section 409A, and
such amendment or election will not be
treated as a change in the time and form
of a payment under section 409A(a)(4) or
an acceleration of a payment under sec-
tion 409A(a)(3), provided that the option
or right is so amended and any elections
are made, on or before December 31, 2006.
D.Payments based upon an election under
aqualifiedplanforperiodsendingonor
before December 31, 2006
For calendar year 2005, Notice 2005–1
Q&A–23 provides relief for nonqualified
deferred compensation plans where the
time and form of payment is controlled
by the time and form of payment elected
by the service provider under a qualified
plan. Commentators indicated that this
is a common arrangement with respect to
nonqualified deferred compensation plans
providing benefits calculated in relation to
benefits accrued under a defined benefit
qualified plan. Generally, the provisions
with respect to the election of a time and
form of a payment with respect to a qual-
ified plan benefit would not comply with
the requirements of section 409A were the
plan subject to section 409A. Accordingly,
election provisions under a nonqualified
plan that mirrored or depended upon an
election under a qualified plan generally
would not comply with section 409A. The
Treasury Department and the IRS were
concerned that serviceproviders, service
recipients and plan administrators would
not have sufficient time to solicit, retain
and process new elections from service
providers to comply with section 409A in
2005. Accordingly, relief was provided
in Notice 2005–1, Q&A–23, under which
an election under a nonqualified deferred
compensation plan that was controlled by
an election under a qualified plan could
continue in effect during the calendar year
2005.
Commentators requested that this re-
lief be a permanent provision in the reg-
ulations. Although the Treasury Depart-
ment and the IRS understand that such a
provision would make the coordination of
benefits under a qualified plan and ben-
efits under a nonqualified deferred com-
pensation plan calculated by reference to
the qualified plan benefits easier to admin-
ister, the provisions of section 409A are
not as flexible with respect to the timing
of such elections as the qualified plan pro-
visions. Given that the benefits under a
nonqualified deferred compensation plan
often dwarf the benefits provided under
a qualified plan, the Treasury Department
and the IRS do not believe that the impor-
tation of the more flexible qualified plan
rules would be consistent with the legisla-
tive intent behind the enactment of sec-
tion 409A. Accordingly, the transition re-
lief has not been made permanent. How-
ever, because other transition relief grant-
ing a participant the ability to change a
time and form of payment through the end
of the calendar year 2006 would, in many
instances, allow a participant to elect the
same time and form of payment that had
been elected under the qualified plan, the
relief is hereby extended through the cal-
endar year 2006.
Accordingly, for periods ending on or
before December 31, 2006, an election
as to the timing and form of a payment
under a nonqualified deferred compensa-
tion plan that is controlled by a payment
election made by the service provider or
beneficiary of the service provider under
a qualified plan will not violate section
409A, provided that the determination of
the timing and form of the payment is
made in accordance with the terms of the
nonqualified deferred compensation plan
as of October 3, 2004, that govern pay-
ments. For this purpose, a qualified plan
means a retirement plan qualified under
section 401(a). For example, where a non-
qualified deferred compensation plan pro-
vides as of October 3, 2004, that the time
and form of payment to a service provider
or beneficiary will be the same time and
October 24, 20058142005–43 I.R.B.

form of payment elected by the service
provider or beneficiary under a related
qualified plan, it will not be a violation of
section 409A for the plan administrator to
make or commence payments under the
nonqualified deferred compensation plan
on or after January 1, 2005, and on or be-
fore December 31, 2006, pursuant to the
payment election under the related quali-
fied plan. Notwithstanding the foregoing,
other provisions of the Internal Revenue
Code and common law tax doctrines con-
tinue to apply to any election as to the
timing and form of a payment under a
nonqualified deferred compensation plan.
E.Initial deferral elections
Notice 2005–1, Q&A–21 provides re-
lief with respect to initial deferral elec-
tions, generally permitting initial deferral
elections with respect to deferrals relating
all or in part to services performed on or
before December 31, 2005, to be made on
or before March 15, 2005. No extension
is provided with respect to this relief with
respect to initial elections to defer com-
pensation. The Treasury Department and
the IRS believe that sufficient guidance has
been provided so that timely elections may
be solicited and received from plan partic-
ipants. In combination with the extension
of flexibility with respect to amending the
time and form of payments, the Treasury
Department and the IRS believe that par-
ticipants should be sufficiently informed
to make a decision with respect to defer-
ral elections.
F.Cancellation of deferrals and
termination of participation in a plan
Notice 2005–1, Q&A–20 provides a
limited time during which a plan adopted
before December 31, 2005, may provide a
participant a right to terminate participa-
tion in the plan, or cancel an outstanding
deferral election with regard to amounts
subject to section 409A. Generally to qual-
ify for this relief, if a plan amendment is
necessary to permit the participant to ter-
minate participation or cancel a deferral
election, the plan amendment must be en-
acted and effective on or before December
31, 2005, and whether or not the plan is
amended, the amount subject to the termi-
nation or cancellation must be includible
in income of the participant in the calendar
year 2005 or, if later, in the taxable year in
which the amounts are earned and vested.
The period during which a service
provider may cancel a deferral election
or terminate participation in the plan is
not extended. This relief was intended
as a temporary period during which ser-
vice providers could decide whether to
continue to participate in an arrangement
subject to section 409A. The Treasury
Department and the IRS believe that the
statute and existing guidance provide suf-
ficient information for service providers to
determine by December 31, 2005, whether
to continue to participate in a particular
arrangement, and that the further exten-
sion of this relief, and the relaxation of
constructive receipt rules it entails, is not
appropriate.
A termination or cancellation pursuant
to Notice 2005–1, Q&A–20 is treated as
effective as of January 1, 2005, for pur-
poses of section 409A, and may apply in
whole or in part to one or more plans in
which a service provider participates and
to one or more outstanding deferral elec-
tions the service provider has made with
regard to amounts subject to section 409A.
The exercise of a stock option, stock ap-
preciation right or similar equity appreci-
ation right that provides for a deferral of
compensation, on or before December 31,
2005, will be treated as a cancellation of a
deferral.
G.Terminations of grandfathered plans
Notice 2005–1, Q&A–18(c) provides
that amending an arrangement on or be-
fore December 31, 2005, to terminate the
arrangement and distribute the amounts of
deferred compensation thereunder will not
be treated as a material modification, pro-
vided that all amounts deferred under the
plan are included in income in the taxable
year in which the termination occurs. For
the same reasons discussed above with re-
spect to the period during which plans may
allow participants to terminate participa-
tion in a plan, the relief provided in Notice
2005–1, Q&A–18(c) is not extended.
To qualify for the relief provided in No-
tice 2005–1, Q&A–18(c), the amendment
to the plan must result in the termination of
the arrangement and the distribution of all
amounts deferred under the arrangement in
the taxable year of such termination. An
amendment to a plan to provide a partic-
ipant a right to elect whether to terminate
participation in the plan or to continue to
defer amounts under the plan would not
be covered by Q&A–18(c), and therefore
would constitute a material modification
of the plan. Accordingly, amounts that
were not distributed pursuant to such an
election and continued to be deferred un-
der the plan would be subject to section
409A.
H.Substitutions of non-discounted stock
options and stock appreciation rights
for discounted stock options and stock
appreciation rights
Notice 2005–1, Q&A–18(d) provides
that it will not be a material modification
to replace a stock option or stock appre-
ciation right otherwise providing for a de-
ferral of compensation under section 409A
with a stock option or stock appreciation
right that would not have constituted a de-
ferral of compensation under section 409A
if it had been granted upon the original
date of grant of the replaced stock op-
tion or stock appreciation right, provided
that the cancellationand reissuance occurs
on or before December 31, 2005. The
period during which the cancellation and
reissuance may occur is extended until De-
cember 31, 2006, but only to the extent
such cancellation and reissuance does not
result in the cancellation of a deferral in ex-
change for cash or vested property in 2006.
For example, a discounted option gener-
ally may be replaced through December
31, 2006, with an option that would not
have provided for a deferral of compensa-
tion, although the exercise of such a dis-
counted option in 2006 before the cancel-
lation and replacement generally would re-
sult in a violation of section 409A.
Commentators pointed out that this re-
lief could be interpreted as failing to cover
discounted stock options or stock appreci-
ation rights that were not earned and vested
before January 1, 2005. Where replace-
ment stock options or stock appreciation
rights that would not constitute deferred
compensation subject to section 409A are
issued in accordancewith the conditions
set forth in Notice 2005–1, Q&A–18(d)
and this preamble, such replacement stock
options or stock appreciation rights will be
treated for purposes of section 409A as if
granted on the grant date of the original
stock option or stock appreciation right.
2005–43 I.R.B.815October 24, 2005

For example, provided that the conditions
of Notice 2005–1, Q&A–18(d) and this
preamble are met, a discounted stock op-
tion granted in 2003 that was not earned
and vested before January 1, 2005, may
be replaced with a stock option with an
exercise price that would not have been
discounted as of the original 2003 grant
date, and the substituted stock option will
be treated for purposes of section 409A as
granted on the original 2003 grant date.
Accordingly, if the substituted stock op-
tion would not have been subject to section
409A had it been granted on the original
2003 grant date, the substituted stock op-
tion will not be subject to section 409A.
Commentators noted that some service
recipients may wish to compensate the ser-
vice provider for the lost discount. Com-
mentators proposed three methods to pro-
vide such compensation. First, the ser-
vice recipient may wish to pay the amount
of the discount in 2005 in cash. As a
cancellation of a deferral of compensa-
tion on or before December 31, 2005 pur-
suant to Notice 2005–1, Q&A–20(a), this
payment would not be subject to section
409A. Note that as a payment due to the
cancellation of a deferral, such a payment
could not be made in 2006 as this relief
has not been extended beyond December
31, 2005. Where the stock option re-
mains nonvested during the year of the op-
tion substitution, the service recipient may
wish to make the compensation for the lost
discount also subject to a vesting require-
ment. In that case, commentators also pro-
posed granting restricted stock with a fair
market value equal to the lost discount,
subject to a vesting schedule parallel to the
vesting schedule of the substituted option.
As a transfer of property subject to sec-
tion 83 that becomes substantially vested
after the year of substitution, this grant
would not be subject to section 409A. Fi-
nally, commentators proposed establishing
a separate plan, promising a payment of
the lost discount (plus earnings) subject to
a vesting schedule parallel to the vesting
schedule of the substituted option. Pro-
vided the right to the payment becomes
substantially vested in a future year and
otherwise meets the requirement of the
short-term deferral exception in these reg-
ulations, the right to this payment would
not constitute deferred compensation sub-
ject to section 409A. Alternatively, such
an arrangement could itself provide for de-
ferral of compensation beyond the year of
substantial vesting and be subject to the re-
quirements of section 409A, but if such re-
quirements are met, would not affect the
exclusion of the amended stock option or
stock appreciation right from the treatment
as a deferral of compensation subject to
section 409A.
XII.Calculation and Timing of Income
Inclusion Amounts
To more rapidly issue guidance neces-
sary to allow service recipients to com-
ply with section 409A, the Treasury De-
partment and the IRS have not included
in these regulations guidance with respect
to the calculation of the amounts of defer-
rals, or of the amounts of income inclu-
sion upon the violation of the provisions
of section 409A and these regulations, or
the timing of the inclusion of income and
related withholding obligations. The Trea-
sury Department and the IRS anticipate
that these topics will be addressed in sub-
sequent guidance. The Treasury Depart-
ment and the IRS request comments with
respect to the calculation and timing of the
income inclusion under section 409A, and
specifically request comments in two ar-
eas.
First, section 409A generally requires
that for any taxable year in which an
amount is deferred under a plan that fails
to meet certain requirements, all amounts
deferred must be included in income.
This provision generally treats earnings
(whether actual or notional) as amounts
deferred subject to the inclusion provision.
Service providers may experience nega-
tive earnings in a calendar year, such that
the amounts to which a service provider
has a right in a particular year are less than
the amounts to which a service provider
had a right in a previous year, even where
no actual payments have been made. The
Treasury Department and the IRS request
comments with respect to whether and
how such negative earnings may be ac-
counted for in determining the amount of
deferrals and the amount of income inclu-
sion for a given taxable year, particularly
where continuing violations of section
409A extend to successive tax years.
Second, the Treasury Department and
the IRS understand that a method of calcu-
lation of current deferrals and of amounts
to be included in income is needed for
service recipients tomeet their reporting
and withholding obligations. Comments
are requested as to what transitional re-
lief may be appropriate depending upon
when such future guidance is released.
For interim guidance regarding the infor-
mation reporting and wage withholding
requirements applicable to deferrals of
compensation within the meaning of sec-
tion 409A, see Notice 2005–1, Q&A–24
through Q&A–38. Until further guidance
is provided, taxpayers may rely on Notice
2005–1 regarding information reporting
and wage withholding obligations.
XIII.Funding Arrangements
Section 409A(b)(1) provides certain
tax consequences for the funding of de-
ferrals of compensation in offshore trusts
(or other arrangements determined by the
Secretary) or pursuant to a change in the
financial health of the employer. The con-
sequences of such funding are generally
consistent with a violation of section 409A
with respect to funded amounts. The Trea-
sury Department and the IRS intend to ad-
dress these provisions in future guidance.
Commentators have requested guidance
with respect to when assets will be treated
as set aside, especially with respect to ser-
vice recipients that are, or include, foreign
corporations. Comments are requested as
to what types of arrangements, other than
actual trusts, should be treated similarly
to trusts. In addition, these proposed reg-
ulations provide guidance with respect to
the types of arrangements that constitute
deferred compensation subject to section
409A. Because the funding rules of section
409A(b) apply only to amounts set aside
to fund deferred compensation subject
to section 409A, many issues raised by
commentators with respect to foreign ar-
rangements and funding may be addressed
or limited through the definition of de-
ferred compensation contained in these
proposed regulations.
Proposed Effective Date
These regulations are proposed to be
generally applicable for taxable years be-
ginning on or after January 1, 2007. As
discussed, taxpayers may rely on these
proposed regulations until the effective
date of the final regulations.
October 24, 20058162005–43 I.R.B.

Effect on Other Documents
These proposed regulations do not af-
fect the applicability of other guidance
issued with respect to section 409A, in-
cluding Notice 2005–1, 2005–2 I.R.B.
274 (published as modified on January
6, 2005). However, upon the effective
date of the final regulations, the Treasury
Department and the IRS anticipate that
Notice 2005–1 and certain other published
guidance will become obsolete for periods
after the effective date of the final regula-
tions.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and because the regulation does
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,
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-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for January 25, 2006, beginning at 10 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 Con-
stitution Avenue entrance. In addition, all
visitors must presentphoto identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments and
an outline of the topics to be discussed
and the time to be devoted to each topic
(a signed original and eight (8) copies) by
January 4, 2006. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared af-
ter the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting I
nformation
The principal author of these regula-
tions is Stephen Tackney of the Office of
Division Counsel/Associate Chief Coun-
sel(TaxExemptandGovernmentEnti-
ties). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Proposed Amendment to the
Regulations
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.409A–1 through
1.409A–6 are added to read as follows:
§1.409A–1 Definitions and covered
arrangements.
(a)Nonqualified deferred compen-
sation plan—(1)In general. Except as
otherwise provided in this paragraph (a),
the termnonqualified deferred compen-
sation planmeans any plan (within the
meaning of paragraph (c) of this section)
that provides for the deferral of compen-
sation (within the meaning of paragraph
(b)ofthissection).
(2)Qualified employer plans.Theterm
nonqualified deferred compensation plan
does not include—
(i) Any plan described in section 401(a)
that includes a trust exempt from tax under
section 501(a);
(ii) Any annuity plan described in sec-
tion 403(a);
(iii) Any annuity contract described in
section 403(b);
(iv) Any simplified employee pension
(within the meaning of section 408(k));
(v) Any simple retirement account
(within the meaning of section 408(p);
(vi) Any arrangement under which an
active participant makes deductible con-
tributions to a trust described in section
501(c)(18);
(vii) Any eligible deferred compensa-
tion plan (within the meaning of section
457(b)); and
(viii) Any plan described in section
415(m).
(3)Certain foreign plans—(i)Partici-
pationaddressedbytreaty. With respect
to an individual for a taxable year, the term
nonqualified deferred compensation plan
does not include any scheme, trust or ar-
rangement maintained with respect to such
individual, where contributions made by
or on behalf of such individual to such
scheme, trust or arrangement are exclud-
able by such individual for Federal income
tax purposes pursuant to any bilateral in-
come tax convention to which the United
States is a party.
(ii)Participation by nonresident aliens
and certain resident aliens.Withre-
spect to an alien individual for a taxable
year during which such individual is a
nonresident alien or a resident alien clas-
sified as a resident alien solely under
section 7701(b)(1)(A)(ii) (and not section
7701(b)(1)(A)(i)), the termnonqualified
deferred compensation plandoes not in-
clude any broad-based foreign retirement
plan (within the meaning of paragraph
(a)(3)(v) of this section) maintained by a
person that is not a United States person.
(iii)Participation by U.S. citizens and
lawful permanent residents. With respect
to an individual for a given taxable year
during which such individual is a U.S. cit-
izen or a resident alien classified as a resi-
dent alien under section 7701(b)(1)(A)(i),
and is not eligible to participate in a quali-
fied employer plan described in paragraph
(a)(2) of this section, the termnonquali-
fied deferred compensation plandoes not
include a broad-based foreign retirement
2005–43 I.R.B.817October 24, 2005

plan (within the meaning of paragraph
(a)(3)(v) of this section) maintained by a
service recipient that is not a United States
person, but only with respect to nonelec-
tive deferrals of foreign earned income (as
defined in section 911(b)(1)) and only to
the extent that the amounts deferred un-
der such plan in such taxable year do not
exceed the applicable limits under section
415(b) and (c) that would be applicable if
such plan were a plan subject to section
415 and the foreign earned income of such
individual were treated as compensation
for purposes of applying section 415(b)
and (c).
(iv)Plans subject to a totalization
agreement and similar plans.Theterm
nonqualified deferred compensation plan
does not include any social security system
of a jurisdiction to the extent that benefits
provided under or contributions made to
the system are subject to an agreement
entered into pursuant to section 233 of the
Social Security Act with any foreign juris-
diction. In addition, the termnonqualified
deferred compensation plandoes not in-
clude a social security system of a foreign
jurisdiction to the extent that benefits are
provided under or contributions are made
to a government-mandated plan as part of
that foreign jurisdiction’s social security
system.
(v)Broad-based retirement plan.For
purposes of this paragraph (a)(3), the
termbroad-based retirement plan means a
scheme, trust or arrangement that—
(A) Is written;
(B)Inthecaseofanemployer-main-
tained plan, is nondiscriminatory insofar
as it (alone or in combination with other
comparable plans)covers a wide range
of employees, substantially all of whom
are nonresident aliens or resident aliens
classified as resident aliens solely under
section 7701(b)(1)(A)(ii) (and not section
7701(b)(1)(A)(i)), including rank and file
employees, and actually provides signifi-
cant benefits for the range of covered em-
ployees;
(C)Inthecaseofanemployer-main-
tained plan, contains provisions that gen-
erally limit the employees’ ability to use
plan benefits for purposes other than re-
tirement or restrict access to plan benefits
prior to separation from service, such as re-
stricting in-service distributions except in
events similar to an unforeseeable emer-
gency (as defined in §1.409A–3(g)(3)(i))
or hardship (as defined for purposes of sec-
tion 401(k)(2)(B)(i)(IV)), and in all cases
is subject to tax or plan provisions that dis-
courage participants from using the assets
for purposes other than retirement; and
(D) Provides for payment of a reason-
able level of benefits at death, a stated age,
or an event related to work status, and oth-
erwise requires minimum distributions un-
der rules designed to ensure that any death
benefits provided to the participants’ sur-
vivors are merely incidental to the retire-
ment benefits provided to the participants.
(vi)Participation by a nonresident alien
— de minimis amounts. With respect to
a nonresident alien, the termnonqualified
deferred compensation plandoes not in-
clude any foreign plan maintained by a ser-
vice recipient that is not a United States
person for a taxable year, to the extent
that the amounts deferred under the foreign
plan based upon the nonresident alien’s
services performed in the United States
(including compensation received due to
services performed in the United States) do
not exceed $10,000 in the taxable year.
(4)Section 457 plans. A nonqualified
deferred compensation plan under sec-
tion 457(f) may constitute a nonqualified
deferred compensation plan for purposes
of this paragraph (a). The rules of sec-
tion 409A apply to nonqualified deferred
compensation plans separately and in ad-
dition to any requirements applicable to
such plans under section 457(f). In addi-
tion, nonelective deferred compensation
of nonemployees described in section
457(e)(12) and a grandfathered plan or
arrangement described in §1.457–2(k)(4)
may constitute a nonqualified deferred
compensation plan for purposes of this
paragraph (a). The termnonqualified de-
ferred compensation plandoes not include
a length of service award to abona fide
volunteer under section 457(e)(11)(A)(ii).
(5)Certain welfare benefits.Theterm
nonqualified deferred compensation plan
does not include anybona fidevacation
leave, sick leave, compensatory time, dis-
ability pay, or death benefit plan. For
these purposes, the termdisability pay
has the same meaning as provided in
§31.3121(v)(2)–1(b)(4)(iv)(C) of this
chapter, and the termdeath benefit plan
refers to a plan providing death benefits as
defined in §31.3121(v)(2)–1(b)(4)(iv)(C)
of this chapter. The termnonqualified
deferred compensation planalso does not
include any Archer Medical Savings Ac-
count as described in section 220, any
Health Savings Account as described in
section 223, or any other medical reim-
bursement arrangement, including a health
reimbursement arrangement, that satisfies
the requirements of section 105 and sec-
tion 106.
(b)Deferral of compensation—(1)In
general. Except as otherwise provided in
paragraphs (b)(3) through (b)(9) of this
section, a plan provides for the deferral of
compensation if, under the terms of the
plan and the relevant facts and circum-
stances, the service provider has a legally
binding right during a taxable year to com-
pensation that has not been actually or con-
structively received and included in gross
income, and that, pursuant to the terms of
the plan, is payable to (or on behalf of) the
service provider in a later year. A service
provider does not have a legally binding
right to compensation if that compensation
may be reduced unilaterally or eliminated
by the service recipient or other person af-
ter the services creating the right to the
compensation have been performed. How-
ever, if the facts andcircumstances indi-
cate that the discretion to reduce or elimi-
nate the compensation is available or exer-
cisable only upon a condition, or the dis-
cretion to reduce or eliminate the com-
pensation lacks substantive significance,
a service provider will be considered to
have a legally binding right to the compen-
sation. Whether the negative discretion
lacks substantive significance depends on
the facts and circumstances of the particu-
lar arrangement. However, where the ser-
vice provider to whom the compensation
may be paid has effective control of the
person retaining the discretion to reduce or
eliminate the compensation, or has effec-
tive control over any portion of the com-
pensation of the person retaining the dis-
cretion to reduce or eliminate the compen-
sation, or is a member of the family (as de-
finedinsection267(c)(4)appliedasifthe
family of an individual includes the spouse
of any member of the family) of the person
retaining the discretion to reduce or elim-
inate the compensation, the discretion to
reduce or eliminate the compensation will
not be treated as having substantive signif-
icance. For this purpose, compensation is
not considered subject to unilateral reduc-
tion or elimination merely because it may
be reduced or eliminated by operation of
October 24, 20058182005–43 I.R.B.

the objective terms of the plan, such as the
application of an objective provision cre-
ating a substantial risk of forfeiture. Sim-
ilarly, a service provider does not fail to
have a legally binding right to compensa-
tion merely because the amount of com-
pensation is determined under a formula
that provides for benefits to be offset by
benefits provided under a plan that is qual-
ified under section 401(a), or because ben-
efits are reduced due to actual or notional
investment losses, or in a final average pay
plan, subsequent decreases in compensa-
tion.
(2)Earnings. References to the defer-
ral of compensation include references to
earnings. When the right to earnings is
specified under the terms of the arrange-
ment, the legally binding right to earn-
ings arises at the time of the deferral of
the compensation to which the earnings re-
late. However, a plan may provide that the
right to the earnings is treated separately
from the right to the underlying compen-
sation. For example, provided that the
rules of section 409A are otherwise met,
a plan may provide that earnings will be
paid at a separate time or in a separate form
from the payment of the underlying com-
pensation. For the application of the de-
ferral election rules to current payments
of earnings and dividend equivalents, see
§1.409A–2(a)(13).
(3)Compensation payable pursuant
to the service recipient’s customary pay-
ment timing arrangement.Adeferralof
compensation does not occur solely be-
cause compensation is paid after the last
day of the service provider’s taxable year
pursuant to the timing arrangement un-
der which the service recipient normally
compensates service providers for ser-
vices performed during a payroll period
described in section 3401(b), or with re-
spect to a non-employee service provider,
a period not longer than the payroll pe-
riod described in section 3401(b) or if no
such payroll period exists, a period not
longer than the earlier of the normal tim-
ing arrangement under which the service
provider normally compensates non-em-
ployee service providers or 30 days after
the end of the service provider’s taxable
year.
(4)Short-term deferrals—(i)In gen-
eral. A deferral of compensation does not
occur if, absent an election by the ser-
vice provider (including an election under
§1.409A–2(a)(3)) to otherwise defer the
payment of the compensation to a later pe-
riod, an amount of compensation is actu-
ally or constructively received by the ser-
vice provider by the later of the 15
th
day
of the third month following the service
provider’s first taxable year in which the
amount is no longer subject to a substan-
tial risk of forfeiture or the 15
th
day of the
third month following the end of the ser-
vice recipient’s first taxable year in which
the amount is no longer subject to a sub-
stantial risk of forfeiture. In addition, the
arrangement must not otherwise defer the
payment to a later period. For example, an
arrangement that deferred a payment until
5 years after the lapsing of a condition that
constituted a substantial risk of forfeiture
would constitute a deferral of compensa-
tion even if the amount were actually paid
on the date the substantial risk of forfeiture
lapsed. For these purposes, an amount that
is never subject to a substantial risk of for-
feiture is considered to be no longer sub-
ject to a substantial risk of forfeiture on the
first date the service provider has a legally
binding right to the amount. For example,
an employer with a calendar year taxable
year who on November 1, 2008, awards a
bonus so that the employee is considered
to have a legally binding right to the pay-
ment as of November 1, 2008, will not be
considered to have provided for a deferral
of compensation if, absent an election to
otherwise defer the payment, the amount
is paid or made available to the employee
on or before March 15, 2009. An employer
with a taxable year ending August 31 who
on November 1, 2008, awards a bonus so
that the employee is considered to have a
legally binding right to the payment as of
November 1, 2008, will not be considered
to have provided for a deferral of compen-
sation if, absent an election to otherwise
defer the payment, the amount is paid or
made available to the employee on or be-
fore November 15, 2009.
(ii)Delayed payments due to unfore-
seeable events. A payment that other-
wise qualifies as a short-term deferral un-
der paragraph (b)(4)(i) of this section but
is made after the 15
th
day of the third
month following the end of the relevant
taxable year (the applicable 2
1
/2month pe-
riod) may continue to qualify as a short-
term deferral if the taxpayer establishes
that it was administratively impracticable
to make the payment by the end of the ap-
plicable 2
1
/2monthperiodorthatmaking
the payment by the end of the applicable
2
1
/2month period would have jeopardized
the solvency of the service recipient, and,
as of the date upon which the legally bind-
ing right to the compensation arose, such
impracticability or insolvency was unfore-
seeable, and also the payment is made as
soon as reasonably practicable. For exam-
ple, an amount that would otherwise qual-
ify as a short-term deferral except that the
payment is made after the applicable 2
1
/2
month period may continue to qualify as
a short-term deferral under this paragraph
(b)(4) to the extent that the delay is caused
either because the funds of the service re-
cipient were not sufficient to make the pay-
ment before the end of the applicable 2
1
/2
month period without jeopardizing the sol-
vency of the service recipient, or because
it was not reasonably possible to determine
by the end of the applicable 2
1
/2month pe-
riod whether payment of such amount was
to be made, and the circumstance causing
the delay was unforeseeable as of the date
upon which the legally binding right to
the compensation arose. Thus, the amount
will not continue to qualify as a short-term
deferral to the extent it was foreseeable,
as of date upon which the legally binding
right to the compensation arose, that the
amount would not be paid within the appli-
cable 2
1
/2month period. For purposes of
this paragraph (b)(4)(ii), an action or fail-
ure to act of the service provider or a per-
son under the service provider’s control,
such as a failure to provide necessary in-
formation or documentation, is not an un-
foreseeable event.
(5)Stock options, stock appreciation
rights and other equity-based compensa-
tion—(i)Stock rights—(A)Nonstatutory
stock options not providing for the deferral
of compensation. Anoptiontopurchase
service recipient stockdoes not provide for
a deferral of compensation if—
(1) The amount required to purchase
stock under the option (the exercise price)
may never be less than the fair market
value of the underlying stock (disregarding
lapse restrictions as defined in §1.83–3(i))
on the date the option is granted and the
number of shares subject to the option is
fixed on the original date of grant of the
option;
(2) The transfer or exercise of the option
is subject to taxation under section 83 and
§1.83–7; and
2005–43 I.R.B.819October 24, 2005

(3) The option does not include any fea-
ture for the deferral of compensation other
than the deferral of recognition of income
until the later of exercise or disposition
of the option under §1.83–7, or the time
the stock acquired pursuant to the exercise
of the option first becomes substantially
vested (as definedin §1.83–3(b)).
(B)Stock appreciation rights not pro-
viding for the deferral of compensation.A
right to compensation equal to the appre-
ciation in value of a specified number of
shares of stock of the service recipient oc-
curring between the date of grant and the
date of exercise of such right (a stock ap-
preciation right) does not provide for a de-
ferral of compensation if—
(1) Compensation payable under the
stock appreciation right cannot be greater
than the difference between the fair mar-
ket value of the stock (disregarding lapse
restrictions as defined in §1.83–3(i)) on
the date of grant of the stock appreciation
right and the fair market value of the stock
(disregarding lapse restrictions as defined
in §1.83–3(i)) on the date the stock appre-
ciation right is exercised, with respect to
a number of shares fixed on or before the
date of grant of the right;
(2) The stock appreciation right exer-
cise price may never be less than the fair
market value of the underlying stock (dis-
regarding lapse restrictions as defined in
§1.83–3(i)) on the date the right is granted;
and
(3) The stock appreciation right does
not include any feature for the deferral of
compensation other than the deferral of
recognition of income until the exercise of
the stock appreciation right.
(C)Stock rights that may provide for
the deferral of compensation.Anoption
to purchase stock other than service recipi-
ent stock, or a stock appreciation right with
respect to stock other than service recipi-
ent stock, generally will provide for the de-
ferral of compensation within the meaning
of this paragraph (b). If under the terms
of an option to purchase service recipient
stock (other than an incentive stock option
described in section 422 or a stock option
granted under an employee stock purchase
plan described in section 423), the amount
required to purchase the stock is or could
become less than the fair market value of
the stock (disregarding lapse restrictions as
defined in §1.83–3(i)) on the date of grant,
the grant of the option may provide for the
deferral of compensation within the mean-
ing of this paragraph (b). If under the terms
of a stock appreciation right with respect
to service recipient stock, the compensa-
tion payable under the stock appreciation
right is or could be any amount greater
than, with respect to a predetermined num-
ber of shares, the difference between the
stock value (disregarding lapse restrictions
as defined in §1.83–3(i)) on the date of
grant of the stock appreciation right and
the stock value (disregarding lapse restric-
tions as defined in §1.83–3(i)) on the date
the stock appreciation right is exercised,
the grant of the stock appreciation right
may provide for a deferral of compensa-
tion within the meaning of this paragraph
(b).
(D)Feature for the deferral of compen-
sation. To the extent a stock right grants
the recipient a right other than to receive
cash or stock on the date of exercise and
such additional rights allow for the defer-
ral of compensation, the entire arrange-
ment (including the underlying stock right)
provides for the deferral of compensation.
For purposes of this paragraph (b)(5)(i),
neither the right to receive substantially
nonvested stock (as defined in §1.83–3(b))
upon the exercise of a stock right, nor the
right to pay the exercise price with previ-
ously acquired shares, constitutes a feature
for the deferral of compensation.
(E)Rights to dividends declared.For
purposes of this paragraph (b)(5)(i), the
right to receive, upon the exercise of a
stock right, an amount equal to all or part
of the dividends declared and paid on the
number of shares underlying the stock
right between the date of grant and the
date of exercise of the stock right consti-
tutes an offset to the exercise price of the
stock option or an increase in the amount
payable under the stock appreciation right
(generally causing such stock rights to be
subject to section 409A), unless the right
to the dividends declared and paid on the
number of shares underlying the stock
right is explicitly set forth as a separate
arrangement. If set forth as a separate ar-
rangement, the arrangement may provide
for deferred compensation for purposes
of section 409A. However, the existence
of a separate arrangement to receive such
an amount that complies with the require-
ments of section 409A would not cause
a stock right to fail to satisfy the require-
ments of the exclusion from the definition
of deferred compensation provided in
paragraphs (b)(5)(i)(A) and (B) of this
section.
(ii)Statutory stock options.Thegrant
of an incentive stockoption as described
in section 422, or the grant of an option
under an employee stock purchase plan
described in section 423 (including the
grant of an option with an exercise price
discounted in accordance with section
423(b)(6) and the accompanying regula-
tions), does not constitute a deferral of
compensation. However, this paragraph
(b)(5)(ii) does not apply to a modification,
extension, or renewal of a statutory op-
tion that is treated as the grant of a new
option that is not a statutory option. See
§1.424–1(e). In such event, the option is
treated as if it were a nonstatutory stock
option at the date of the original grant,
so that the modification, extension or re-
newal of the stock option that caused the
stock option to be treated as the grant of
a new option under §1.424–1(e) is treated
as causing the option to be treated as the
grant of a new option for purposes of this
paragraph (b)(5) only if such modification,
extension or renewal of the stock option
would have been treated as resulting in
the grant of a new option under paragraph
(b)(5)(v) of this section.
(iii)Stock of the service recipient—(A)
In general. Except as otherwise provided
in paragraphs (b)(5)(iii)(B) and (C) of this
section, for purposes of this section, stock
of the service recipient means stock that,
as of the date of grant, is common stock of
a corporation that is a service recipient (in-
cluding any member of a group of corpo-
rations or other entities treated as a single
service recipient) that is readily tradable on
an established securities market, or if none,
that class of common stock of such corpo-
ration having the greatest aggregate value
of common stock issued and outstanding
of such corporation, or common stock with
substantially similar rights to stock of such
class (disregarding any difference in vot-
ing rights). However, under no circum-
stances does stock of the service recipient
include stock that is preferred as to liquida-
tion or dividend rights or that includes or is
subject to a mandatory repurchase obliga-
tion or a put or call right that is not a lapse
restriction as defined in §1.83–3(i) and is
based on a measure other than the fair mar-
ket value (disregarding lapse restrictions
as defined in §1.83–3(i)) of the equity in-
October 24, 20058202005–43 I.R.B.

terest in the corporation represented by the
stock.
(B)American depositary receipts.For
purposes of this section, an American
depositary receipt or American deposi-
tary share may constitute service recipient
stock, to the extent that the stock traded
on a foreign securities market to which the
American depositary receipt or American
depositary share relates qualifies as ser-
vice recipient stock.
(C)Mutual company units. For pur-
poses of this section, mutual company
units may constitute service recipient
stock. For this purpose, the termmutual
company unitmeans a fixed percentage
of the overall value of a non-stock mutual
company. For purposes of determining
the value of the mutual company unit, the
unit may be valued in accordance with the
rules set forth in paragraph (b)(5)(iv)(B)
of this section governing valuation of ser-
vice recipient stock the shares of which
are not traded on an established securities
market, applied as if the mutual company
were a stock corporation with one class of
common stock and the number of shares
of such stock determined according to the
fixed percentage. For example, an appre-
ciation right based on the appreciation of
10 mutual company units, where each unit
is defined as 1 percent of the overall value
of the mutual company, would be valued
as if the appreciation right were based
upon 10 shares of a corporation with 100
shares of common stock and no other class
of stock, whose shares are not readily trad-
able on an established securities market.
(D)Definition of service recipient—(1)
In general. For purposes of this para-
graph (b)(5)(iii), the termservice recipient
generally has the same meaning as pro-
vided in paragraph (g) of this section,
provided that a stock right, or the plan or
arrangement under which the stock right is
granted, may specify that in applying sec-
tion 1563(a)(1), (2) and (3) for purposes of
determining a controlled group of corpo-
rations under section 414(b), the language
“at least 50 percent” is used instead of
“at least 80 percent” each place it appears
in section 1563(a)(1), (2) and (3), and in
applying §1.414(c)–2 for purposes of de-
termining trades or businesses (whether or
not incorporated) that are under common
control for purposes of section 414(c),
the language “at least 50 percent” is used
instead of “at least 80 percent” each place
it appears in §1.414(c)–2. In addition,
where the use of such stock with respect
to the grant of a stock right to such service
provider is based upon legitimate business
criteria, the termservice recipienthas the
same meaning as provided in paragraph
(g) of this section, provided that the stock
right, or the plan or arrangement under
which the stock right is granted, may spec-
ify that in applying sections 1563(a)(1),
(2) and (3) for purposes of determining
a controlled group of corporations under
section 414(b), the language “at least 20
percent” is used instead of “at least 80 per-
cent” at each place it appears in sections
1563(a)(1), (2) and (3), and in applying
§1.414(c)–2 for purposes of determining
trades or businesses (whether or not incor-
porated) that are under common control
for purposes of section 414(c), the lan-
guage “at least 20 percent” is used instead
of “at least 80 percent” at each place it ap-
pears in §1.414(c)–2. For example, stock
of a corporation participating in a joint
venture involving an operating business,
used with respect to stock rights granted
to employees of the joint venture who are
former employees of such corporation,
generally will constitute use of such stock
based upon legitimate business criteria,
and therefore could constitute service
recipient stock with respect to such em-
ployees if the corporation owns at least 20
percent of the joint venture and the other
requirements of this paragraph (b)(5)(iii)
are met. A designation by a service re-
cipient to use the 50 percent or 20 percent
thresholds described in this paragraph
(b)(5)(iii)(D) must be applied consistently
as to all compensatory stock rights for
purposes of this paragraph (b)(5)(iii), and
any designation of a different permissible
ownership threshold percentage may not
be made effective until 12 months after
the adoption of such change.
(2)Investment vehicles. Notwith-
standing the provisions of paragraph
(b)(5)(iii)(D)(1) of this section, except
as to a service provider providing services
directly to such corporation, for purposes
of this paragraph (b)(5) the termservice
recipientdoes not include any corpora-
tion whose primary purpose is to serve as
an investment vehicle with respect to the
corporation’s interest in entities other than
the service recipient.
(3)Substitutions and assumptions by
reason of a corporate transaction.Ifthe
requirements of paragraph (b)(5)(v)(D) of
this section are met such that the substitu-
tion of a new stock right pursuant to a cor-
porate transaction for an outstanding stock
right, or the assumption of an outstanding
stock right pursuant to a corporate transac-
tion, would not be treated as the grant of
a new stock right or a change in the form
of payment for purposes of section 409A,
the stock underlying the stock right that is
substituted or assumed will be treated as
service recipient stock for purposes of ap-
plying this paragraph (b)(5) to the replace-
ment stock rights. For example, where by
reason of a spinoff transaction under which
a subsidiary corporation is spun off from a
distributing corporation, a distributing cor-
poration employee’s stock option to pur-
chase distributing corporation stock is re-
placed with a stock option to purchase dis-
tributing corporation stock and a stock op-
tion to purchase the spun off subsidiary
corporation’s stock, and where such sub-
stitution is not treated as a modification of
the original stock option pursuant to para-
graph (b)(5)(v)(D) of this section, both the
distributing corporation stock and the sub-
sidiary corporation stock are treated as ser-
vice recipient stock for purposes of apply-
ing this paragraph (b)(5) to the replace-
ment stock options.
(E)Stock rights granted on or before
December 31, 2004. Notwithstanding the
requirements of paragraph (b)(5)(iii)(A)
of this section, any class of common stock
of the service recipient with respect to
which stock rights were granted to service
providers on or before December 31, 2004,
is treated as service recipient stock for pur-
poses of this paragraph (b)(5)(iii), but only
with respect to stock rights granted on or
before December 31, 2004.
(iv)Determination of the fair market
value of service recipient stock—(A)Stock
readily tradable on an established securi-
ties market. For purposes of (b)(5)(i) of
this section, in the case of service recipi-
ent stock that is readily tradable on an es-
tablished securities market, the fair mar-
ket value of the stock may be determined
based upon the last sale before or the first
sale after the grant, the closing price on
the trading day before or the trading day
of the grant, or any other reasonable basis
using actual transactions in such stock as
reported by such market and consistently
applied. The determination of fair market
value also may be based upon an average
2005–43 I.R.B.821October 24, 2005

selling price during a specified period that
is within 30 days before or 30 days after
the grant, provided that the commitment
to grant the stock right based on such val-
uationmethodmustbeirrevocable before
the beginning of the specified period, and
such valuation method must be used con-
sistently for grants of stock rights under the
same and substantially similar programs.
(B)Stock not readily tradable on an
established securities market—(1)In gen-
eral. For purposes of paragraph (b)(5)(i)
of this section, in the case of service recip-
ient stock that is not readily tradable on an
established securities market, the fair mar-
ket value of the stock as of a valuation date
means a value determined by the reason-
able application of a reasonable valuation
method. The determination of whether a
valuation method is reasonable, or whether
an application of a valuation method is rea-
sonable, is made based on the facts and cir-
cumstances as of the valuation date. Fac-
tors to be considered under a reasonable
valuation method include, as applicable,
the value of tangible and intangible assets
of the corporation, the present value of
future cash-flows of the corporation, the
market value of stock or equity interests
in similar corporations and other entities
engaged in trades or businesses substan-
tially similar to those engaged in by the
corporation whose stock is to be valued,
the value of which can be readily deter-
mined through objective means (such as
through trading prices on an established
securities market or an amount paid in an
arm’s length private transaction), and other
relevant factors such as control premiums
or discounts for lack of marketability and
whether the valuation method is used for
other purposes that have a material eco-
nomic effect on the service recipient, its
stockholders or its creditors. The use of a
valuation method is not reasonable if such
valuation method does not take into con-
sideration in applying its methodology, all
available information material to the value
of the corporation. Similarly, the use of a
value previously calculated under a valua-
tion method is not reasonable as of a later
date if such calculation fails to reflect in-
formation available after the date of the
calculation that may materially affect the
value of the corporation (for example, the
resolution of material litigation or the is-
suance of a patent) or the value was cal-
culated with respect to a date that is more
than 12 months earlier than the date for
which the valuation is being used. The ser-
vice recipient’s consistent use of a valua-
tion method to determine the value of its
stock or assets for other purposes, includ-
ing for purposes unrelated to compensa-
tion of service providers, is also a factor
supporting the reasonableness of such val-
uation method.
(2)Presumption of reasonableness.For
purposes of this paragraph (b)(5)(iv)(B),
the consistent use of any of the following
methods of valuation is presumed to result
in a reasonable valuation, provided that the
Commissioner may rebut such a presump-
tion upon a showing that either the val-
uation method or the application of such
method was grossly unreasonable:
(i) A valuation of a class of stock de-
termined by an independent appraisal
that meets the requirements of section
401(a)(28)(C) and the regulations there-
under as of a date that is no more than 12
months before the relevant transaction to
which the valuation is applied (for exam-
ple, the grant date of a stock option).
(ii) A valuation based upon a formula
that, if used as part of a nonlapse restric-
tion (as defined in §1.83–3(h)) with re-
spect to the stock, would be considered to
be the fair market value of the stock pur-
suant to §1.83–5, provided that such stock
is valued in the same manner for purposes
of any nonlapse restriction applicable to
the transfer of any shares of such class
of stock (or substantially similar class of
stock), and all noncompensatory purposes
requiring the valuation of such stock, in-
cluding regulatory filings, loan covenants,
issuances to and repurchases of stock from
persons other than service providers, and
other third-party arrangements, and such
valuation method is used consistently for
all such purposes, and provided further that
this paragraph (b)(5)(iv)(B)(2)(ii)doesnot
apply with respect to stock subject to a
stock right payable in stock, where the
stock acquired pursuant to the exercise of
the stock right is transferable other than
through the operation of a nonlapse restric-
tion.
(iii) A valuation, made reasonably
and in good faith and evidenced by a
written report that takes into account the
relevant factors described in paragraph
(b)(5)(iv)(B)(1) of this section, of an illiq-
uid stock of a start-up corporation. For
this purpose, an illiquid stock of a start-up
corporation is service recipient stock of
a service recipient corporation that has
no trade or business that it or any pre-
decessor to it has conducted for a period
of 10 years or more and has no class of
equity securities that are traded on an es-
tablished securities market (as defined in
paragraph (k) of this section), where such
stock is not subject to any put or call right
or obligation of the service recipient or
other person to purchase such stock (other
than a right of first refusal upon an offer
to purchase by a third party that is unre-
lated to the service recipient or service
provider and other than a right or obliga-
tion that constitutes a lapse restriction as
defined in §1.83–3(i)), and provided that
this paragraph (b)(5)(iv)(B)(2)(iii)does
not apply to the valuation of any stock if
the service recipient or service provider
may reasonably anticipate, as of the time
the valuation is applied, that the service
recipient will undergo a change in control
event as described in§1.409A–3(g)(5)(v)
or §1.409A–3(g)(5)(vii) or make a public
offering of securities within the 12 months
following the event to which the valu-
ationisapplied(forexample,thegrant
of a stock option or exercise of a stock
appreciation right). For purposes of this
paragraph (b)(5)(iv)(B)(2)(iii), a valuation
will not be treated as made reasonably
and in good faith unless the valuation is
performed by a person or persons with
significant knowledge and experience or
training in performing similar valuations.
(3)Consistent use of a method.For
purposes of paragraph (b)(5)(iv)(B)(2)of
this section, the consistent use of a valu-
ation method means the consistent use of
the method for all equity-based compensa-
tion arrangements, including with respect
to stock rights, for purposes of determining
the exercise price, and with respect to stock
appreciation rights not paid in stock, for
purposes of determining the payment at the
date of exercise, and for stock appreciation
rights or stock options paid in stock sub-
ject to a put or call right providing for the
potential repurchase by the service recipi-
ent, or other obligation of the service recip-
ient or other person to purchase such stock,
for purposes of determining the payment
at the date of the purchase of such stock.
Notwithstanding the foregoing, a service
recipient may change the method prospec-
tively for purposes of new grants of eq-
uity-based compensation, including stock
October 24, 20058222005–43 I.R.B.

rights. In addition, where after the date of
grant, but before the date of exercise, of
the stock right, the service recipient stock
to which the stock right relates becomes
readily tradable on an established securi-
ties market, the service recipient must use
the valuation method set forth in paragraph
(b)(5)(iv)(A) of this section for purposes of
determining the payment at the date of ex-
ercise or the purchase of the stock, as ap-
plicable.
(v)Modifications, extensions, re-
newals, substitutions and assumptions
of stock rights—(A)Treatment of modified
stock right as a new grant. Any modifi-
cation of the terms of a stock right, other
than an extension or renewal of the stock
right, is considered the granting of a new
stock right. The new stock right may or
may not constitute a deferral of compen-
sation under paragraph (b)(5)(i) of this
section, determined at the date of grant of
the new stock right. Where a stock right
is extended or renewed, the stock right is
treated as having had an additional defer-
ral feature from the date of grant.
(B)Modification in general.Theterm
modificationmeans any change in the
terms of the stock right (or change in
the terms of the arrangement pursuant to
which the stock right was granted or in the
terms of any other agreement governing
the stock right) that may provide the holder
of the stock right with a direct or indirect
reduction in the exercise price of the stock
right, or an additional deferral feature,
or an extension or renewal of the stock
right, regardless of whether the holder in
fact benefits from the change in terms.
In contrast, a change in the terms of the
stock right shortening the period during
which the stock right is exercisable is not
a modification. It is not a modification to
add a feature providing the ability to ten-
der previously acquired stock for the stock
purchasable under the stock right, or to
withhold or have withheld shares of stock
to facilitate the payment of employment
taxes or required withholding taxes result-
ing from the exercise of the stock right.
In addition, it is not a modification for the
grantor to exercise discretion specifically
reserved under a stock right with respect
to the transferability of the stock right.
(C)Extensions and renewals.Anexten-
sion of a stock right refers to the granting
to the holder of an additional period of time
within which to exercise the stock right be-
yond the time originally prescribed, pro-
vided that it is not an extension if the ex-
ercise period of the stock right is extended
to a date no later than the later of the 15
th
day of the third month following the date
at which, or December 31 of the calendar
year in which, the stock right would oth-
erwise have expired if the stock right had
not been extended, based on the terms of
the stock right at the original grant date.
For example, an option granted January 1,
2011, that expires upon the earlier of Jan-
uary 1, 2021, or 30 days after separation
from service will not be considered to be
modified if, upon the holder’s separation
from service on July 1, 2015, the term is
extended to December 31, 2015. Notwith-
standing the foregoing, it is not an exten-
sion of a stock right if the expiration of the
stock right is tolled while the stock right
is unexercisable because an exercise of the
stock right would violate applicable secu-
rities laws, provided that the period during
which the stock right may be exercised is
not extended more than 30 days after the
exercise of the stock right first would no
longer violate applicable securities laws.
A renewal of a stock right is the granting
by the corporation of the same rights or
privileges contained in the original stock
right on the same terms and conditions.
(D)Substitutions and assumptions of
stock rights by reason of a corporate trans-
action. If the requirements of §1.424–1
would be met if the stock right were a
statutory option, the substitution of a new
stock right pursuant to a corporate transac-
tion for an outstanding stock right or the
assumption of an outstanding stock right
pursuant to a corporate transaction will not
be treated as the grant of a new stock right
or a change in the form of payment for
purposes of section 409A. For purposes of
the preceding sentence, the requirement of
§1.424–1(a)(5)(iii) will be deemed to be
satisfied if the ratio of the exercise price
to the fair market value of the shares sub-
ject to the stock right immediately after the
substitution or assumption is not greater
than the ratio of the exercise price to the
fair market value of the shares subject to
the stock right immediately before the sub-
stitution or assumption. In the case of
a transaction described in section 355 in
which the stock of the distributing cor-
poration and the stock distributed in the
transaction are both readily tradable on
an established securities market immedi-
ately after the transaction, for purposes of
this paragraph (b)(5)(v), the requirements
of §1.424–1(a)(5) may be satisfied by us-
ing market quotations for the stock of the
distributing corporation and the stock dis-
tributed in the transaction as of a predeter-
mined date not more than 60 days after the
transaction or based on an average of such
market prices over a predetermined period
of not more than 30 days ending not later
than 60 days after the transaction.
(E)Acceleration of date when exercis-
able. If a stock right is not immediately
exercisable in full, a change in the terms
of the right to accelerate the time at which
the stock right (or any portion thereof) may
be exercised is not a modification for pur-
poses of this section. With respect to a
stock right subject to section 409A, how-
ever, such an acceleration may constitute
an impermissible acceleration of a pay-
ment date under §1.409A–3(h). Addition-
ally, no modification occurs if a provision
accelerating the time when a stock right
may first be exercised is removed before
the year in which it would otherwise be
triggered.
(F)Discretionary added benefits.Ifa
change to a stock right provides, either by
its terms or in substance, that the holder
may receive an additional benefit under
the stock right at the future discretion of
the grantor, and the addition of such ben-
efit would constitute a modification, then
the addition of such discretion is a modi-
fication at the time that the stock right is
changed to provide such discretion.
(G)Change in underlying stock in-
creasing value. A change in the terms
of the stock subject to a stock right that
increases the value of the stock is a mod-
ification of such stock right, except to
the extent that a new stock right is sub-
stituted for such stock right by reason of
the change in the terms of the stock in
accordance with paragraph (b)(5)(v)(D) of
this section.
(H)Change in the number of shares
purchasable. If a stock right is amended
solely to increase the number of shares
subject to the stock right, the increase is
not considered a modification of the stock
right but is treated as the grant of a new
additional stock right to which the addi-
tional shares are subject. Notwithstand-
ing the previous sentence, if the exercise
price and number of shares subject to a
stock right are proportionally adjusted to
2005–43 I.R.B.823October 24, 2005

reflect a stock split (including a reverse
stock split) or stock dividend, and the only
effect of the stock split or stock dividend
is to increase (or decrease) on apro rata
basis the number of shares owned by each
shareholder of the class of stock subject to
the stock right, then the stock right is not
modified if it is proportionally adjusted to
reflect the stock split or stock dividend and
the aggregate exercise price of the stock
right is not less than the aggregate exercise
price before the stock split or stock divi-
dend.
(I)Rescission of changes. Any change
to the terms of a stock right (or change in
the terms of the plan pursuant to which the
stock right was granted or in the terms of
any other agreement governing the right)
that would inadvertently result in treat-
ment as a modification under paragraph
(b)(5)(v)(A) of this section is not consid-
ered a modification of the stock right to
the extent the change in the terms of the
stock right is rescinded by the earlier of
the date the stock right is exercised or the
last day of the calendar year during which
such change occurred. Thus, for example,
if the terms of a stock right are changed
on March 1 to extend the exercise period
and the change is rescinded on Novem-
ber 1, then if the stock right is not exer-
cised before the change is rescinded, the
stock right is not considered modified un-
der paragraph (b)(5)(v)(A) of this section.
(J)Successive modifications.Therules
of this paragraph (b)(5)(v) apply as well
to successive modifications, including suc-
cessive extensions or renewals.
(6)Restricted Property—(i)In general.
If a service provider receives property
from, or pursuant to, a plan maintained
by a service recipient, there is no defer-
ral of compensation merely because the
value of the property is not includible in
income in the year of receipt by reason of
the property being substantially nonvested
(as defined in §1.83–3(b)), or is includible
in income solely due to a valid election
under section 83(b). For purposes of this
paragraph (b)(6)(i), a transfer of property
includes the transfer of a beneficial inter-
est in a trust or annuity plan, or a transfer
to or from a trust or under an annuity plan,
to the extent such a transfer is subject
to section 83, section 402(b) or section
403(c).
(ii)Promises to transfer property.A
plan under which a service provider ob-
tains a legally binding right to receive
property (whether or not the property will
be substantially nonvested (as defined in
§1.83–3(b)) at the time of grant) in a fu-
ture year may provide for the deferral of
compensation and, accordingly, may con-
stitute a nonqualified deferred compen-
sation plan. The vesting of substantially
nonvested property subject to section 83
may be treated as a payment for purposes
of section 409A, including for purposes
of applying the short-term deferral rules
under paragraph (b)(4) of this section.
Accordingly, where the promise to trans-
fer the substantially nonvested property
and the right to retain the substantially
nonvested property are both subject to a
substantial risk of forfeiture (as defined
under paragraph (d) of this section), the
arrangement generally would constitute a
short-term deferral under paragraph (b)(4)
of this section because the payment would
occur simultaneously with the vesting
of the right to the property. For exam-
ple, where an employee participates in a
two-year bonus program such that, if the
employee continues in employment for
two years, the employee is entitled to ei-
ther the immediate payment of a $10,000
cash bonus or the grant of restricted stock
with a $15,000 fair market value subject to
a vesting requirement of three additional
years of service, the arrangement gener-
ally would constitute a short-term deferral
under paragraph (b)(4) of this section be-
cause under either alternative the payment
would be received within the short-term
deferral period.
(7)Arrangements between partnerships
and partners. [Reserved.]
(8)Certain foreign arrangements—(i)
Arrangements with respect to compensa-
tion covered by treaty or other interna-
tional agreement. An arrangement with
a service provider does not provide for
a deferral of compensation for purposes
of this paragraph (b) to the extent that
the compensation under the arrangement
would have been excluded from gross in-
come for Federal income tax purposes un-
der the provisions of any bilateral income
tax convention or other bilateral or mul-
tilateral agreement to which the United
States is a party if the compensation had
been paid to the service provider at the
time that the legally binding right to the
compensation first arose or, if later, the
time that the legally binding right was no
longer subject to a substantial risk of for-
feiture.
(ii)Arrangements with respect to cer-
tain other compensation. An arrangement
with a service provider does not provide
for a deferral of compensation for pur-
poses of this paragraph (b) to the extent
that compensation under the arrangement
would not have been includible in gross
income for Federal tax purposes if it had
been paid to the service provider at the
time that the legally binding right to the
compensation first arose or, if later, the
time that the legally binding right was no
longer subject to a substantial risk of for-
feiture, due to one of the following—
(A) The service provider was a nonres-
ident alien at such time and the compen-
sation would not have been includible in
gross income under section 872;
(B) The service provider was a qualified
individual (as definedin section 911(d)(1))
at such time and the compensation would
have been foreign earned income within
the meaning of section 911(b)(1) if paid
at such time, and the compensation would
have been foreign earned income within
the meaning of section 911(b)(1) that is
less than the difference between the max-
imum exclusion amount under section
911(b)(2)(D) for such taxable year and the
amount of foreign earned income actually
excludible from gross income by such
qualified individual for such taxable year
under section 911(a)(1);
(C) The compensation would have been
excludible from gross income under sec-
tion 893; or
(D) The compensation would have been
excludible from gross income under sec-
tion 931 or section 933.
(iii)Tax equalization arrangements.
Compensation paid under a tax equaliza-
tion arrangement does not provide for a de-
ferral of compensation, provided that any
payment made under such arrangement is
paid no later than the end of the second
calendar year beginning after the calendar
year in which the service provider’s U.S.
Federal income tax return is required to
be filed (including extension) for the year
to which the tax equalization payment
relates. For purposes of this paragraph
(b)(8)(iii), the termtax equalization ar-
rangementrefers to an arrangement that
provides payments intended to compen-
sate the service provider for the excess
of the taxes actually imposed by a for-
October 24, 20058242005–43 I.R.B.

eign jurisdiction on the compensation paid
(other than the compensation under the
tax equalization agreement) by the service
recipient to the service provider over the
taxes that would be imposed if the com-
pensation were subject solely to United
States Federal income tax, and provided
that the payments made under such ar-
rangement may not exceed such excess
and the amount necessary to compensate
for the additional taxes on the amounts
paid under the arrangement.
(iv)Additional foreign arrangements.
An arrangement with a service provider
does not provide for a deferral of com-
pensation for purposes of this paragraph
(b) to the extent designated by the Com-
missioner in revenue procedures, notices,
or other guidance published in the Inter-
nal Revenue Bulletin (see §601.601(d)(2)
of this chapter).
(v)Earnings. Earnings on compen-
sation excluded from the definition of
deferral of compensation pursuant to
this paragraph (b)(8) are also not treated
as a deferred compensation. However,
amounts that would be recharacter-
ized as deferred compensation under
§31.3121(v)(2)–1(d)(2)(iii)(B) of this
chapter (nonaccount balance plans),
§31.3121(v)(2)–1(d)(2)(iii)(A) of this
chapter (account balance plans), or sim-
ilar principles with respect to plans that
are neither nonaccount balance plans nor
account balance plans, will not be treated
as earnings for purposes of this paragraph
(b)(8)(v).
(9)Separation pay arrangements—(i)
In general. An arrangement that other-
wise provides for a deferral of compen-
sation under this paragraph (b) does not
fail to provide a deferral of compensation
merely because the right to payment of the
compensation is conditioned upon a sep-
aration from service. However, see para-
graphs (b)(9)(ii), (iii) and (iv) of this sec-
tion for separation pay arrangements that
do not provide for the deferral of com-
pensation. Notwithstanding any other pro-
vision of this paragraph (b)(9), any pay-
ment or benefit, or entitlement to a pay-
ment or benefit, that acts as a substitute
for, or replacement of, amounts deferred
by the service recipient under a separate
nonqualified deferred compensation plan
constitutes a payment or a deferral of com-
pensation under the separate nonqualified
deferred compensation plan, and does not
constitute a payment or deferral of com-
pensation under a separation pay arrange-
ment.
(ii)Collectively bargained separation
pay arrangements. A separation pay ar-
rangement does not provide for a deferral
of compensation if the arrangement is
a collectively bargained separation pay
arrangement that provides for separation
pay upon an actual involuntary separation
from service or pursuant to a window pro-
gram. Only the portion of the separation
pay arrangement attributable to employees
covered by a collective bargaining agree-
ment is considered to be provided under
a collectively bargained separation pay
arrangement. A collectively bargained
separation pay arrangement is a separation
pay arrangement that meets the following
conditions:
(A) The separation pay arrangement
is contained within an agreement that the
Secretary of Labor determines to be a col-
lective bargaining agreement.
(B) The separation pay provided by the
collective bargaining agreement was the
subject of arms-length negotiations be-
tween employee representatives and one
or more employers, and the agreement
between employee representatives and
one or more employers satisfies section
7701(a)(46).
(C) The circumstances surrounding the
agreement evidence good faith bargaining
between adverse parties over the separa-
tion pay to be provided under the agree-
ment.
(iii)Separation pay plans due to invol-
untary separation from service or partici-
pation in a window program. A separation
pay plan that is not described in paragraph
(b)(9)(ii) of this section and that provides
for separation pay upon an actual involun-
tary separation from service or pursuant to
a window program does not provide for a
deferral of compensation if the plan pro-
vides that—
(A) The separation pay (other than
amounts described in paragraph (b)(9)(iv)
of this section) may not exceed two times
the lesser of—
(1) The sum of the service provider’s
annual compensation (as defined in
§1.415–2(d)) for services provided to
the service recipient as an employee and
the service provider’s net earnings from
self-employment (as defined in section
1402(a)) for services provided to the ser-
vice recipient as an independent contrac-
tor, each for the calendar year preceding
the calendar year in which the service
provider has a separation from service
from such service recipient; or
(2) The maximum amount that may be
taken into account under a qualified plan
pursuant to section 401(a)(17) for such
year; and
(B) The separation pay must be paid no
later than December 31 of the second cal-
endar year following the calendar year in
which occurs the separation from service.
(iv)Reimbursements and certain other
separation payments—(A)In general.To
the extent a separation pay arrangement
entitles a service provider to payment by
the service recipient for a limited period
of time of reimbursements that are oth-
erwise excludible from gross income, of
reimbursements for expenses that the ser-
vice provider can deduct under section 162
or section 167 as business expenses in-
curred in connection with the performance
of services (ignoring any applicable lim-
itation based on adjusted gross income),
or of reasonable outplacement expenses
and reasonable moving expenses actually
incurred by the service provider and di-
rectly related to the termination of ser-
vices for the service recipient, such ar-
rangement does not provide for a defer-
ral of compensation. To the extent a sep-
aration pay arrangement (including an ar-
rangement involving payments due to a
voluntary separation from service) entitles
a service provider to reimbursement by the
service recipient for a limited period of
time of payments of medical expenses in-
curred and paid by the service provider but
not reimbursed and allowable as a deduc-
tion under section 213 (disregarding the re-
quirement of section 213(a) that the deduc-
tion is available only to the extent that such
expenses exceed 7.5 percent of adjusted
gross income), such arrangement does not
provide for a deferral of compensation.
(B)In-kind benefits and direct service
recipient payments. A service provider’s
entitlement to in-kind benefits from the
service recipient, or a payment by the ser-
vice recipient directly to the person pro-
viding the goods or services to the service
provider, will also be treated as not pro-
viding for a deferral of compensation for
purposes of this paragraph (b), if a right to
reimbursement by the service recipient for
a payment for such benefits, goods or ser-
2005–43 I.R.B.825October 24, 2005

vices by the service provider would not be
treated as providing for a deferral of com-
pensation under this paragraph (b)(9)(iv).
(C)De minimis payments. In addition,
if not otherwise excluded, to the extent a
separation pay arrangement entitles a ser-
vice provider to reimbursements or other
payments or benefits that do not exceed
$5,000 in the aggregate, such arrangement
does not provide for a deferral of compen-
sation.
(D)Limitedperiodoftime. For pur-
poses of paragraphs (b)(9)(iv)(A) and (B),
a limited period of time refers to both the
period during which applicable expenses
may be incurred, and the period during
which reimbursements must be paid, and
may not extend beyond the December 31
of the second calendar year following the
calendar year in which the separation from
service occurred.
(v)Window programs — definition.
The termwindow programrefers to a pro-
gram established by the service recipient
to provide for separation pay in connec-
tion with a separation from service, for a
limited period of time (no greater than one
year), to service providers who separate
from service during that period or to ser-
vice providers who separate from service
during that period under specified circum-
stances. A program will not be considered
a window program if a service recipient es-
tablishes a pattern of repeatedly providing
for similar separation pay in similar situa-
tions for substantially consecutive, limited
periods of time. Whether the recurrence
of these programs constitutes a pattern
is determined based on the facts and cir-
cumstances. Although no one factor is
determinative, relevant factors include
whether the benefits are on account of a
specific business event or condition, the
degree to which the separation pay relates
to the event or condition, and whether the
event or condition is temporary or discrete
or is a permanent aspect of the employer’s
business.
(c)Plan—(1)In general.Theterm
planincludes any agreement, method or
arrangement, including an agreement,
method or arrangement that applies to
one person or individual. A plan may be
adopted unilaterally by the service recip-
ient or may be negotiated or agreed to
by the service recipient and one or more
service providers or service provider rep-
resentatives. An agreement, method or
arrangement may constitute a plan re-
gardless of whether it is an employee
benefit plan under section 3(3) of the Em-
ployee Retirement Income Security Act
of 1974 (ERISA), as amended (29 U.S.C.
1002(3)). The requirements of section
409A are applied as if a separate plan
or plans is maintained for each service
provider.
(2)Plan aggregation rules—(i)In gen-
eral. Except as provided in paragraph
(c)(2)(ii) of this section, with respect to
arrangements between a service provider
and a service recipient—
(A) All amounts deferred with respect
to that service provider under all account
balance plans of the service recipient (as
defined in §31.3121(v)(2)–1(c)(1)(ii)(A)
of this chapter) other than a separation
pay arrangement described in paragraph
(c)(2)(i)(C) of this section are treated as
deferred under a single plan;
(B) All amounts deferred with respect
to that service provider under all nonac-
count balance plans of the service recipient
(as defined in §31.3121(v)(2)–1(c)(2)(i)
of this chapter) other than a separation
pay arrangement described in paragraph
(c)(2)(i)(C) of this section are treated as
deferred under a separate single plan;
(C) All amounts deferred with respect
to that service provider under all separa-
tion pay arrangements (as defined in para-
graph (m) of this section) of the service re-
cipient due to an involuntary termination
or participation in a window program are
treated as deferred under a single plan; and
(D) All amounts deferred with respect
to that service provider under all plans of
the service recipient that are not described
in paragraph (c)(2)(i)(A), (B) or (C) of this
section (for example, discounted stock
options, stock appreciation rights or other
equity-based compensation described in
§31.3121(v)(2)–1(b)(4)(ii) of this chapter)
are treated as deferred under a separate
single plan.
(ii)Dual status. Arrangements in which
a service provider participates are not ag-
gregated to the extent the service provider
participates in one set of arrangements due
to status as an employee of the service re-
cipient (employee arrangements) and an-
other set of arrangements due to status as
an independent contractor of the service
recipient (independent contractor arrange-
ments). For example, where a service
provider deferred amounts under an ar-
rangement while providing services as an
independent contractor, and then becomes
eligible for and defers amounts under a
separate arrangement after being hired as
an employee, the two arrangements will
not be aggregated for purposes of this para-
graph (c)(2). Where an employee also
serves as a director of the service recipi-
ent (or a similar position with respect to
a non-corporate service recipient), the ar-
rangements under which the employee par-
ticipates as a directorof the service recip-
ient (director arrangements) are not aggre-
gated with employee arrangements, pro-
vided that the director arrangements are
substantially similar to arrangements pro-
vided to service providers providing ser-
vices only as directors (or similar positions
with respect to non-corporate service re-
cipients). For example, an employee di-
rector who participates in an employee ar-
rangement and a director arrangement gen-
erally may treat the two arrangements as
separate plans, provided that the director
arrangement is substantially similar to an
arrangement providing benefits to a non-
employee director. Director arrangements
and independent contractor arrangements
are aggregated for purposes of this para-
graph (c)(2).
(3)Establishment of arrangement—(i)
In general. To satisfy the requirements
of section 409A, an arrangement must be
established and maintained by a service
recipient, in both form and operation,
in accordance with the requirements of
section 409A and these regulations. For
purposes of this paragraph (c)(3), an ar-
rangement is established on the latest of
the date on which it is adopted, the date
on which it is effective, and the date on
which the material terms of the plan are
set forth in writing. For purposes of this
paragraph (c)(3)(i), an arrangement will
be deemed to be set forth in writing if it is
set forth in any other form that is approved
by the Commissioner. The material terms
of the arrangement include the amount (or
the method or formula for determining the
amount) of deferred compensation to be
provided under the arrangement and the
time when it will be paid. Notwithstand-
ing the foregoing, anarrangement will be
deemed to be established as of the date the
participant obtains a legally binding right
to deferred compensation, provided that
the arrangement is otherwise established
under the rules of this paragraph (c)(3)(i)
October 24, 20058262005–43 I.R.B.

by the end of the calendar year in which
the legally binding right arises, or with
respect to an amount not payable in the
year immediately following the year in
which the legally binding right arises (the
subsequent year), the 15
th
day of the third
month of the subsequent year.
(ii)Amendments to the arrangement.In
the case of an amendment that increases
the amount deferred under an arrangement
providing for the deferral of compensa-
tion, the arrangement is not considered
established with respect to the additional
amount deferred until the arrangement, as
amended, is established in accordance with
paragraph (c)(3)(i) of this section.
(iii)Transition rule for written plan re-
quirement. For purposes of this section,
an unwritten arrangement that was adopted
and effective before December 31, 2006,
is treated as established under this section
as of the later of the date on which it was
adopted or became effective, provided that
the material terms of the arrangement are
set forth in writing on or before December
31, 2006.
(iv)Plan aggregation rules.Theplan
aggregation rules of paragraph (c)(2)(i) of
this section do not apply to the require-
ments of paragraphs (c)(3)(i) and (ii) of
this section. Accordingly, an arrangement
that fails to meet the requirements of sec-
tion 409A solely due to a failure to meet
the requirements of paragraph (c)(3)(i) or
(ii) is not aggregated with other arrange-
ments that meet such requirements.
(d)Substantial risk of forfeiture—(1)In
general. Compensation is subject to a sub-
stantial risk of forfeiture if entitlement to
the amount is conditioned on the perfor-
mance of substantial future services by any
person or the occurrence of a condition re-
lated to a purpose of the compensation, and
the possibility of forfeiture is substantial.
For purposes of this paragraph (d), a con-
dition related to a purpose of the compen-
sation must relate to the service provider’s
performance for the service recipient or
the service recipient’s business activities
or organizational goals (for example, the
attainment of a prescribed level of earn-
ings, equity value or an initial public of-
fering). Any addition of a substantial risk
of forfeiture after the legally binding right
to the compensation arises, or any exten-
sion of a period during which compensa-
tion is subject to a substantial risk of forfei-
ture, in either case whether elected by the
service provider, service recipient or other
person (or by agreement of two or more
of such persons), is disregarded for pur-
poses of determining whether such com-
pensation is subject to a substantial risk
of forfeiture. An amount is not subject
to a substantial risk of forfeiture merely
because the right to the amount is condi-
tioned, directly or indirectly, upon the re-
fraining from performance of services. For
purposes of section 409A, an amount will
not be considered subject to a substantial
risk of forfeiture beyond the date or time at
which the recipient otherwise could have
elected to receive the amount of compen-
sation, unless the amount subject to a sub-
stantial risk of forfeiture (ignoring earn-
ings) is materially greater than the amount
the recipient otherwise could have elected
to receive. For example, a salary defer-
ral generally may not be made subject to
a substantial risk offorfeiture. But, for
example, where a bonus arrangement pro-
vides an election between a cash payment
of a certain amount or restricted stock units
with a materially greater value that will be
forfeited absent continued services for a
period of years, the right to the restricted
stock units generally will be treated as sub-
ject to a substantial risk of forfeiture.
(2)Stock rights. A stock right will be
treated as not subjectto a substantial risk
of forfeiture at the earlier of the first date
the holder may exercise the stock right and
receive cash or property that is substan-
tially vested (as defined in §1.83–3(b)) or
the first date that the stock right is not sub-
ject to a forfeiture condition that would
constitute a substantial risk of forfeiture.
Accordingly, a stock option that the ser-
vice provider may exercise immediately
and receive substantially vested stock will
be treated as not subject to a substantial
risk of forfeiture, even if the stock option
automatically terminates upon the service
provider’s separation from service.
(3)Enforcement of forfeiture con-
dition—(i)In general. In determining
whether the possibility of forfeiture is
substantial in the case of rights to com-
pensation granted by a service recipient
to a service provider that owns a signifi-
cant amount of the total combined voting
power or value of all classes of equity of
the service recipient or of its parent, all
relevant facts and circumstances will be
taken into account in determining whether
the probability of the service recipient
enforcing such condition is substantial,
including—
(A) The service provider’s relationship
to other equity holders and the extent of
their control, potential control and possible
loss of control of the service recipient;
(B) The position of the service provider
in the service recipient and the extent to
which the service provider is subordinate
to other service providers;
(C) The service provider’s relationship
to the officers and directors of the service
recipient (or similar positions with respect
to a noncorporate service recipient);
(D) The person or persons who must
approve the service provider’s discharge;
and
(E) Past actions of the service recipient
in enforcing the restrictions.
(ii)Examples. The following examples
illustrate the rules of paragraph (d)(3)(i) of
this section:
Example 1. A service provider would be con-
sidered as having deferred compensation subject to
a substantial risk of forfeiture, but for the fact that the
service provider owns 20 percent of the single class of
stockinthetransferorcorporation. If the remaining
80 percent of the class of stock is owned by an unre-
lated individual (or members of such an individual’s
family) so that the possibility of the corporation en-
forcing a restriction on such rights is substantial, then
such rights are subject to a substantial risk of forfei-
ture.
Example 2. A service provider would be con-
sidered as having deferred compensation subject to
a substantial risk of forfeiture, but for the fact that
the service provider who is president of the corpora-
tion, also owns 4 percent of the voting power of all
the stock of a corporation. If the remaining stock is
so diversely held by the public that the president, in
effect, controls the corporation, then the possibility
of the corporation enforcing a restriction on the right
to deferred compensation of the president is not sub-
stantial, and such rights are not subject to a substantial
risk of forfeiture.
(e)Performance-based compensa-
tion—(1)In general.Thetermperfor-
mance-based compensationmeans com-
pensation where the amount of, or entitle-
ment to, the compensation is contingent
on the satisfaction of preestablished or-
ganizational or individual performance
criteria relating to a performance period
of at least 12 consecutive months in which
the service provider performs services.
Organizational or individual performance
criteria are considered preestablished if
established in writing by not later than 90
days after the commencement of the pe-
riod of service to which the criteria relates,
provided that the outcome is substantially
2005–43 I.R.B.827October 24, 2005

uncertain at the time the criteria are estab-
lished. Performance-based compensation
may include payments based on perfor-
mance criteria that are not approved by a
compensation committee of the board of
directors (or similar entity in the case of a
non-corporate servicerecipient) or by the
stockholders or members of the service
recipient. Notwithstanding the foregoing,
performance-based compensation does
not include any amount or portion of any
amount that will be paid either regardless
of performance, or based upon a level of
performance that is substantially certain
to be met at the time the criteria is estab-
lished. Except as provided in paragraph
(e)(3) of this section, compensation is not
performance-based compensation merely
because the amount of such compensation
is based on the value of, or increase in the
value of, the service recipient or the stock
of the service recipient.
(2)Payments based upon subjective
performance criteria.Thetermperfor-
mance-based compensationmay include
payments based upon subjective perfor-
mance criteria, provided that—
(i) The subjective performance criteria
relate to the performance of the partici-
pant service provider, a group of service
providers that includes the participant ser-
vice provider, or a business unit for which
the participant service provider provides
services (which may include the entire or-
ganization); and
(ii) The determination that any sub-
jective performancecriteria have been
met is not made by the participant ser-
vice provider or a family member of the
participant service provider (as defined in
section 267(c)(4) applied as if the family
of an individual includes the spouse of
any member of the family), or a person
under the supervision of the participant
service provider or such a family member,
or where any amount of the compensation
of the person making such determination
is controlled in whole or in part by the
service provider or such a family member.
(3)Equity-based compensation.Com-
pensation is performance-based compen-
sation if it is based solely on an increase in
the value of the service recipient, or stock
of the service recipient, after the date of
a grant or award. If the amount of com-
pensation the service provider will receive
under a grant or award is not based solely
on an increase in the value of the service
recipient, or stock of the service recipient,
after the date of the grant or award (for ex-
ample, a stock appreciation right granted
with an exercise price that is less than the
fair market value of the stock as of the date
of grant), and that other amount would not
otherwise qualify as performance-based
compensation, the compensation attrib-
utable to the grant or award does not
qualify as performance-based compensa-
tion. Notwithstanding the foregoing, an
award of equity-based compensation may
constitute performance-based compensa-
tion if entitlement to the compensation is
subject to a condition that would cause
the award to otherwise qualify as per-
formance-based compensation, such as a
performance-based vesting condition. The
eligibility to defer compensation under an
equity-based compensation award consti-
tutes an additional deferral feature with
respect to the award for purposes of the
definition of a deferral of compensation
under paragraph (b)(5) of this section.
(f)Service provider—(1)In general.
The termservice providerincludes—
(i) An individual, corporation, subchap-
ter S corporation or partnership;
(ii) A personal service corporation (as
defined in section 269A(b)(1)), or a non-
corporate entity that would be a personal
service corporation if it were a corpora-
tion; or
(iii) A qualified personal service corpo-
ration (as defined in section 448(d)(2)), or
a noncorporate entity that would be a qual-
ified personal service corporation if it were
a corporation.
(2)Service providers using an accrual
method of accounting. Section 409A does
not apply to a deferral under an arrange-
ment between taxpayers if, for the taxable
year in which the service provider taxpayer
obtains a legally binding right to the com-
pensation, the service provider uses an ac-
crual method of accounting for Federal tax
purposes.
(3)Independent contractors—(i)In
general. Except as otherwise provided in
paragraph (f)(3)(iv) of this section, sec-
tion 409A does not apply to an amount
deferred under an arrangement between a
service provider and service recipient with
respect to a particular trade or business in
which the service provider participates, if
during the service provider’s taxable year
in which the service provider obtains a
legally binding right to the payment of the
amount deferred—
(A) The service provider is actively en-
gaged in the trade or business of providing
services, other than as an employee or as a
director of a corporation;
(B) The service provider provides sig-
nificant services to two or more service re-
cipients to which the service provider is
not related and that are not related to one
another (as defined in paragraph (f)(3)(ii)
of this section); and
(C) The service provider is not related
to the service recipient, applying the defi-
nition of related person contained in para-
graph (f)(3)(ii) of this section subject to
the modification that the language “50 per-
cent” is used instead of “20 percent” each
place it appears in sections 267(b) and
707(b)(1).
(ii)Related person. For purposes of
this paragraph (f)(3), a person is related
to another person if the persons bear a re-
lationship to each other that is specified
in section 267(b) or 707(b)(1), subject to
the modifications that the language “20
percent” is used instead of “50 percent”
each place it appears in sections 267(b) and
707(b)(1), and section 267(c)(4) is applied
as if the family of an individual includes
the spouse of any member of the family; or
the persons are engaged in trades or busi-
nesses under common control (within the
meaning of section 52(a) and (b)). In addi-
tion, an individual is related to an entity if
the individual is an officer of an entity that
is a corporation, or holds a position sub-
stantially similar to an officer of a corpora-
tion with an entity that is not a corporation.
(iii)Significant services. Whether a ser-
vice provider is providing significant ser-
vices depends on the facts and circum-
stances of each case. However, for pur-
poses of paragraph (f)(3)(i) of this section,
a service provider who provides services
to two or more service recipients to which
the service provider is not related and that
are not related to one another is deemed
to be providing significant services to two
or more of such service recipients for a
given taxable year, if the revenues gen-
erated from the services provided to any
service recipient or group of related ser-
vice recipients during such taxable year do
not exceed 70 percent of the total revenue
generated by the service provider from the
trade or business of providing such ser-
vices.
October 24, 20058282005–43 I.R.B.

(iv)Management services.Aservice
provider is treated as related to a service re-
cipient for purposes of paragraph (f)(3)(i)
of this section if the service provider pro-
vides management services to the service
recipient. For purposes of this paragraph
(f)(3)(iv), the termmanagement services
means services that involve the actual or de
facto direction or control of the financial
or operational aspects of a trade or busi-
ness of the service recipient, or investment
advisory services provided to a service re-
cipient whose primary trade or business in-
cludes the management of financial assets
(including investments in real estate) for
its own account, such as a hedge fund or
a real estate investment trust.
(g)Service recipient. Except as other-
wise specifically provided in these regu-
lations, the termservice recipientmeans
the person for whom the services are per-
formed and with respect to whom the
legally binding right to compensation
arises, and all persons with whom such
person would be considered a single em-
ployer under section 414(b) (employees
of a controlled group of corporations),
and all persons with whom such person
would be considered a single employer
under section 414(c) (employees of part-
nerships, proprietorships, etc., under com-
mon control). For example, where the
service provider is an employee, the ser-
vice recipient generally is the employer.
Notwithstanding the foregoing, section
409A applies to a plan that provides for
the deferral of compensation, even though
the payment of the compensation is not
made by the person for whom services are
performed.
(h)Separation from service—(1)Em-
ployees—(i)In general.Anemployeesep-
arates from service with the service recip-
ient if the employee dies, retires, or oth-
erwise has a termination of employment
with the employer. However, for purposes
of this paragraph (h)(1), the employment
relationship is treatedas continuing intact
while the individual is on military leave,
sick leave, or otherbona fideleave of ab-
sence (such as temporary employment by
the government) if the period of such leave
does not exceed six months, or if longer, so
long as the individual’s right to reemploy-
ment with the service recipient is provided
either by statute or by contract. If the pe-
riod of leave exceeds six months and the
individual’s right to reemployment is not
provided either by statute or by contract,
the employment relationship is deemed to
terminate on the first date immediately fol-
lowing such six-month period.
(ii)Termination of employment.
Whether a termination of employment has
occurred is determined based on the facts
and circumstances. Where an employee
either actually or purportedly continues
in the capacity as an employee, such as
through the execution of an employment
agreement under which the employee
agrees to be available to perform services
if requested, but the facts and circum-
stances indicate that the employer and the
employee did not intend for the employee
to provide more than insignificant services
for the employer, an employee will be
treated as having a separation from service
for purposes of this paragraph (h)(1). For
purposes of the preceding sentence, an
employer and employee will not be treated
as having intended for the employee to
provide insignificant services where the
employee continues to provide services as
an employee at an annual rate that is at
least equal to 20 percent of the services
rendered, on average, during the immedi-
ately preceding three full calendar years
of employment (or, if employed less than
three years, such lesser period) and the
annual remuneration for such services is at
least equal to 20 percent of the average an-
nual remuneration earned during the final
three full calendar years of employment
(or, if less, such lesser period). Where
an employee continues to provide ser-
vices to a previous employer in a capacity
other than as an employee, a separation
from service will not be deemed to have
occurred for purposes of this paragraph
(h)(1) if the former employee is providing
services at an annual rate that is 50 percent
or more of the services rendered, on av-
erage, during the immediately preceding
three full calendar years of employment
(or if employed less than three years, such
lesser period) and the annual remuneration
for such services is 50 percent or more of
the annual remuneration earned during the
final three full calendar years of employ-
ment(orifless,suchlesserperiod). For
purposes of this paragraph (h)(1)(ii), the
annual rate of providing services is deter-
mined based upon the measurement used
to determine the service provider’s base
compensation (for example, amounts of
time required to earn salary, hourly wages,
or payments for specific projects).
(2)Independent contractors—(i)In
general. An independent contractor is
considered to have a separation from ser-
vice with the service recipient upon the
expiration of the contract (or in the case
of more than one contract, all contracts)
under which servicesare performed for
the service recipient if the expiration
constitutes a good-faith and complete ter-
mination of the contractual relationship.
An expiration does not constitute a good
faith and complete termination of the con-
tractual relationship if the service recipient
anticipates a renewal of a contractual re-
lationship or the independent contractor
becoming an employee. For this pur-
pose, a service recipient is considered to
anticipate the renewal of the contractual
relationship with an independent contrac-
tor if it intends to contract again for the
services provided under the expired con-
tract, and neither the service recipient nor
the independent contractor has eliminated
the independent contractor as a possible
provider of services under any such new
contract. Further, a service recipient is
considered to intend to contract again for
the services provided under an expired
contract if the servicerecipient’s doing so
is conditioned only upon incurring a need
for the services, the availability of funds,
or both.
(ii)Special rule. Notwithstanding para-
graph (h)(2)(i) of this section, the plan is
considered to satisfy the requirement de-
scribed in §1.409A–3(a)(1) that amounts
deferred under the plan may be paid or
made available to the participant upon a
separation from service with the service re-
cipient if, with respect to amounts payable
to a participant who is an independent con-
tractor, a plan provides that—
(A) No amount will be paid to the par-
ticipant before a date at least 12 months af-
ter the day on which the contract expires
under which services are performed for the
service recipient (or, in the case of more
than one contract, all such contracts ex-
pire); and
(B) No amount payable to the partici-
pant on that date will be paid to the partic-
ipant if, after the expiration of the contract
(or contracts) and before that date, the par-
ticipant performs services for the service
recipient as an independent contractor or
an employee.
2005–43 I.R.B.829October 24, 2005

(i)Specified employee—(1)In general.
The termspecified employeemeans a key
employee (as defined in section 416(i)
without regard to section 416(i)(5)) of a
service recipient any stock of which is
publicly traded on an established securi-
ties market or otherwise. For purposes
of this paragraph (i)(1), an employee is a
key employee if the employee meets the
requirements of section 416(i)(1)(A)(i),
(ii) or (iii) (applied in accordance with the
regulations thereunder and disregarding
section 416(i)(5)) at any time during the
12-month period ending on an identifica-
tion date. If a person is a key employee
as of an identification date, the person
is treated as a specified employee for the
12-month period beginning on the first day
of the fourth month following the iden-
tification date. A service recipient may
designate any date in a calendar year as the
identification date provided that a service
recipient must use the same identification
date with respect to all arrangements, and
any change to the identification date may
not be effective for a period of 12 months.
If no identification date is designated, the
identification date is December 31. The
service recipient may designate an iden-
tification date through inclusion in each
plan document or through a separate doc-
ument, provided that the service recipient
will not be treated as having designated
an identification date on any date before
the execution of the document contain-
ing the designation. Notwithstanding the
foregoing, any designation of an identifi-
cation date made on or before December
31, 2006, may be applied to any separa-
tion from service occurring on or after
January 1, 2005. Whether any stock of a
service recipient is publicly traded on an
established securities market or otherwise
must be determined as of the date of the
employee’s separation from service.
(2)Spinoffs and mergers.Whereanew
corporation or entity (new corporation) is
established as part of a corporate division
governed by section 355 from a corpora-
tion that is publicly traded on an estab-
lished securities market or otherwise (old
corporation), any employee of the new cor-
poration who was a key employee of the
old corporation immediately prior to the
spinoff is a key employee of the new cor-
poration until the end of the 12-month pe-
riod beginning on the first day of the fourth
month following the old corporation’s last
identification date preceding the spinoff
transaction. Where twocorporations (pre-
merger corporations) are merged or be-
come part of the same controlled group of
corporations so as to be treated as a sin-
gle service recipientunder paragraph (g) of
this section, any employee of the merged
corporation who was a key employee of
either of the pre-merger corporations im-
mediately before the merger is a key em-
ployee of the merged corporation until the
first day of the fourth month after the iden-
tification date of the merged corporation
next following the merger.
(3)Nonresident alien employees.For
purposes of determining key employees, a
service recipient generally must include all
employees, including employees who are
nonresident aliens. However, a plan may
provide without causing an amount to be
treated as an additional deferral as to any
affected participant that for purposes of
applying the six-month delay to specified
employees, all employees that are nonresi-
dent aliens during the entire 12-month pe-
riod ending with the relevant identifica-
tion date are excluded for purposes of de-
termining which employees meet the re-
quirements of section 416(i)(1)(A)(i), (ii)
or (iii) (applied in accordance with the reg-
ulations thereunder and disregarding sec-
tion 416(i)(5)); provided that a service re-
cipient must apply such exclusion with re-
spect to all arrangements of the service re-
cipient, and any change to include such
nonresident alien employees may not be
effective for a period of 12 months.
(j)Nonresident alien—(1) Except as
provided in paragraph (j)(2) of this sec-
tion, for purposes of this section the term
nonresident alienmeans an individual
who is—
(i) A nonresident alien within the mean-
ing of section 7701(b)(1)(B); or
(ii) A dual resident taxpayer within the
meaning of §301.7701(b)–7(a)(1) of this
chapter with respect to any taxable year in
which such individual is treated as a non-
resident alien for purposes of computing
the individual’s U.S. income tax liability.
(2) The termnonresident aliendoes not
include—
(i) A nonresident alien with respect
to whom an election is in effect for the
taxable year under section 6013(g) to be
treated as a resident of the United States;
(ii) A former citizen or long-term
resident (within the meaning of section
877(e)(2)) who expatriated after June 3,
2004, and has not complied with the re-
quirements of section 7701(n); or
(iii) An individual who is treated as a
citizen or resident of the United States for
the taxable year under section 877(g).
(k)Established securities market.For
purposes of section 409A and the regu-
lations thereunder, the termestablished
securities marketmeans an established
securities market within the meaning of
§1.897–1(m).
(l)Stock right. For purposes of section
409A and these regulations, the termstock
rightmeans a stock option (other than an
incentive stock option described in section
422oranoptiongrantedpursuanttoan
employee stock purchase plan described in
section 423) or a stock appreciation right.
(m)Separation pay arrangement.For
purposes of section 409A and the regula-
tions thereunder, the termseparation pay
arrangementmeans any arrangement that
provides separation pay or, where an ar-
rangement provides both amounts that are
separation pay and that are not separation
pay, that portion of the arrangement that
provides separation pay. For purposes of
this paragraph (m), the termseparation
paymeans any amount of compensation
where one of the conditions to the right to
the payment is a separation from service,
whether voluntary or involuntary, includ-
ing payments in the form of reimburse-
ments of expenses incurred, and the provi-
sion of other taxable benefits. Separation
pay includes amounts payable due to a sep-
aration from service, regardless of whether
payment is conditioned upon the execu-
tion of a release of claims, noncompeti-
tion or nondisclosure provisions, or other
similar requirement. Notwithstanding the
foregoing, any amount, or entitlement to
any amount, that acts as a substitute for,
or replacement of, amounts deferred by the
service recipient under a separate nonqual-
ified deferred compensation plan consti-
tutes a payment of compensation or de-
ferral of compensation under the separate
nonqualified deferred compensation plan,
and does not constitute separation pay.
§1.409A–2 Deferral elections.
(a)Initial elections as to the time and
form of payment—(1)In general.An
arrangement that is, or constitutes part
of, a nonqualified deferred compensation
October 24, 20058302005–43 I.R.B.

plan meets the requirements of section
409A(a)(4)(B) only if the arrangement
provides that compensation for services
performed during a service provider’s
taxable year (the service year) may be
deferred at the service provider’s election
only if the election to defer such compen-
sation is made and becomes irrevocable
not later than the end of such period as
may be permitted in this paragraph (a).
An election will not be considered to
be revocable merely because the service
provider may make an election to change
the time and form of payment pursuant to
paragraph (b) of this section. Whether an
arrangement provides a service provider
an opportunity to elect the time or form of
payment of compensation is determined
based upon all the facts and circumstances
surrounding the determination of the time
and form of payment of the compensation.
For purposes of this section, an election to
defer includes an election as to the time
ofthepayment,anelectionastotheform
of the payment or an election as to both
the time and the form of the payment,
but does not include an election as to
the medium of payment (for example, an
election between a payment of cash or a
payment of property). Except as otherwise
provided in these regulations, an election
will not be considered made until such
election becomes irrevocable under the
terms of the relevant arrangement. Thus,
a plan may provide that an election to
defer may be changed at any time prior
to the last permissible date for making
such an election. Where an arrangement
provides the service provider a right to
make an initial deferral election, and fur-
ther provides that the election remains
in effect until terminated or modified by
the service provider, the election will be
treated as made as of the date such election
becomes irrevocable as to compensation
for services performed during the rele-
vant service year. For example, where
an arrangement provides that a service
provider’s election to defer a set percent-
age will remain in effect until changed
or revoked, but that as of each December
31 the election becomes irrevocable with
respect to salary payable with respect to
services performed in the immediately
following year, the initial deferral election
with respect to salary payable with respect
to services performed in the immediately
following year will be deemed to have
been made as of the December 31 upon
which the election became irrevocable.
(2)General rule. An arrangement that
is, or constitutes part of, a nonqualified
deferred compensation plan meets the
requirements of section 409A(a)(4)(B)
if the plan provides that compensation
for services performed during a service
provider’s taxable year (the service year)
may be deferred at the service provider’s
election only if the election to defer such
compensation is made not later than the
close of the service provider’s taxable year
next preceding the service year.
(3)Initial deferral election with respect
to short-term deferrals. With respect to a
legally binding right to a payment of com-
pensation in a subsequent taxable year that,
absent a deferral election, would not be
treated as a deferral of compensation pur-
suant to §1.409A–1(b)(4), an election to
defer such compensation may be made in
accordance with the requirements of para-
graph (b) of this section, applied as if the
amount were a deferral of compensation
and the scheduled payment date for the
amount were the date the substantial risk
of forfeiture lapses. Notwithstanding the
requirements of paragraph (b) of this sec-
tion, such a deferral election may provide
that the deferred amounts will be payable
upon a change in control event (as defined
in §1.409A–3(g)(5)) without regard to the
5-year additional deferral requirement.
(4)Initial deferral election with respect
to certain forfeitable rights. With respect
to a legally binding right to a payment
in a subsequent year that is subject to a
forfeiture condition requiring the service
provider’s continued services for a period
of at least 12 months from the date the ser-
vice provider obtains the legally binding
right, an election to defer such compen-
sation may be made on or before the 30
th
day after the serviceprovider obtains the
legally binding right to the compensation,
provided that the election is made at least
12 months in advance of the earliest date at
which the forfeiture condition could lapse.
(5)Initial deferral election with respect
to a service recipient with a fiscal year
other than the calendar year. In the case of
a service recipient with a fiscal year other
than the calendar year, a plan may pro-
vide that fiscal year compensation may be
deferred at the service provider’s election
only if the election to defer such compen-
sation is made not later than the close of
the service recipient’s fiscal year next pre-
ceding the first fiscal year in which are per-
formed any services for which such com-
pensation is payable. For purposes of this
paragraph (a)(5), the termfiscal year com-
pensationmeans compensation relating to
a period of service coextensive with one
or more consecutive fiscal years of the ser-
vice recipient, of which no amount is paid
or payable during the service period. For
example, fiscal year compensation gener-
ally would include a bonus based on a ser-
vice period of the two consecutive fiscal
years ending September 30, 2009, where
the amount will be paid after the comple-
tion of the service period, but would not
include either a bonus based on a calen-
dar year service period or salary that would
otherwise be paid during the service recip-
ient’s fiscal year.
(6)First year of eligibility. In the case
of the first year in which a service provider
becomes eligible to participate in a plan
(as defined in §1.409A–1(c)), the service
provider may make an initial deferral elec-
tion within 30 days after the date the ser-
vice provider becomes eligible to partici-
pate in such plan, with respect to compen-
sation paid for services to be performed
subsequent to the election. In the case of
a plan that does not provide for service
provider elections with respect to the time
or form of a payment, the time and form of
the payment must be specified on or before
the date that is 30 days after the date the
service provider becomes eligible to par-
ticipate in such plan. For compensation
that is earned based upon a specified per-
formance period (for example, an annual
bonus), where a deferral election is made
in the first year of eligibility but after the
beginning of the service period, the elec-
tion will be deemed to apply to compen-
sation paid for services performed subse-
quent to the election if the election applies
to the portion of the compensation equal to
the total amount of the compensation for
the service period multiplied by the ratio
of the number of days remaining in the per-
formance period after the election over the
total number of days in the performance
period.
(7)Performance-based compensation.
In the case of any performance-based com-
pensation based upon a performance pe-
riod of at least 12 months, provided that the
service provider performed services con-
tinuously from a date no later than the date
2005–43 I.R.B.831October 24, 2005

upon which the performance criteria are
established through a date no earlier than
the date upon which the service provider
makes an initial deferral election, an initial
deferral election may be made with respect
to such performance-based compensation
no later than the date that is six months
before the end of the performance period,
provided that in no event may an election
to defer performance-based compensation
be made after such compensation has be-
come both substantially certain to be paid
and readily ascertainable.
(8)Nonqualified deferred compen-
sation arrangements linked to qualified
plans. With respect to an amount de-
ferred under an arrangement that is, or
constitutes part of, a nonqualified deferred
compensation plan, where under the terms
of the nonqualified deferred compensation
arrangement the amount deferred under
the plan is the amount determined under
the formula under which benefits are de-
termined under a qualified employer plan
(as defined in §1.409A–1(a)(2)) applied
without respect to one or more limita-
tions applicable to qualified employer
plans under the Internal Revenue Code
or other applicable law, or is determined
as an amount offset by some or all of the
benefits provided under the qualified em-
ployer plan, the operation of the qualified
employer plan with respect to changes
in benefit limitations applicable to qual-
ified employer plans under the Internal
Revenue Code or other applicable law
does not constitute a deferral election even
if such operation results in an increase
of amounts deferred under the nonquali-
fied deferred compensation arrangement,
provided that such operation does not oth-
erwise result in a change in the time or
form of a payment under the nonqualified
deferred compensation plan. In addi-
tion, with respect to such a nonqualified
deferred compensation arrangement, the
following actions or failures to act will
not constitute a deferral election under
the nonqualified deferred compensation
arrangement even if in accordance with
the terms of the nonqualified deferred
compensation arrangement, the actions
or inactions result in an increase in the
amounts deferred under the arrangement,
provided that such actions or inactions do
not otherwise affect the time or form of
payment under the nonqualified deferred
compensation plan:
(i) A service provider’s action or inac-
tion under the qualified plan with respect
to whether to elect to receive a subsidized
benefit or an ancillary benefit under the
qualified plan.
(ii) The amendment of a qualified plan
to add or remove a subsidized benefit or
an ancillary benefit, or to freeze or limit
future accruals of benefits under the qual-
ified plan.
(iii) A service provider’s action or in-
action under a qualified plan subject to
section 402(g), including an adjustment
to a deferral election under the qualified
plan subject to section 402(g), provided
that for any given calendar year, the ser-
vice provider’s action or inaction does
not result in an increase in the amounts
deferred under all nonqualified deferred
compensation arrangements in which the
service provider participates in excess of
the limit with respect to elective deferrals
under section 402(g) in effect for the tax-
able year in which such action or inaction
occurs.
(iv) A service provider’s action or in-
action under a qualified plan with respect
to elective deferrals or after-tax contri-
butions by the service provider to the
qualified plan that affects the amounts that
are credited under a nonqualified deferred
compensation arrangement as matching
amounts or other amounts contingent on
service provider elective deferrals or af-
ter-tax contributions, provided that such
matching or contingent amounts, as appli-
cable, are either forfeited or never credited
under the nonqualified deferred compen-
sation arrangement in the absence of such
service provider’s elective deferral or af-
ter-tax contribution, and provided further
that all of the service provider’s actions
or inactions do not result in an increase
during such taxable year in the amounts
deferred under all nonqualified deferred
compensation arrangements in which the
service provider participates in excess of
the limit with respect to elective deferrals
under section 402(g) in effect for the tax-
able year in which such action or inaction
occurs. See paragraph (b)(6) of this sec-
tion,Example 12andExample 13.
(9)Separation pay. In the case of sep-
aration pay (as defined in §1.409A–1(m)
due to an actual involuntary separation
from service, where such separation pay is
the subject ofbona fide, arm’s length nego-
tiations, the initial deferral election may be
made at any time up to the time the service
provider obtains a legally binding right to
the payment. In the case of separation pay
due to participation in a window program
(as defined in §1.409A–1(b)(9)(v)), the
initial deferral election may be made at
anytimeuptothetimetheelectiontopar-
ticipate in the window program becomes
irrevocable.
(10)Commissions. For purposes of this
paragraph (a), in the case of commission
compensation, a service provider earning
such compensation is treated as providing
the services to which such compensation
relates only in the year in which the cus-
tomer remits payment to the service recipi-
ent. For purposes of this paragraph (a)(10),
the termcommission compensationmeans
compensation or portions of compensation
earned by a service provider if a substan-
tial portion of the services provided by
such service provider to a service recipi-
ent consist of the direct sale of a product
or service to a customer, the compensation
paid by the service recipient to the service
provider consists of either a portion of the
purchase price for the product or service
or an amount calculated solely by refer-
ence to the volume of sales, and payment
of the compensation is contingent upon the
service recipient receiving payment from
an unrelated customer for the product or
services. For this purpose, a customer is
treated as an unrelated customer only if the
customer is not related to either the service
provider or the servicerecipient. A person
is treated as related to another person if the
person would be treated as related to the
other person under §1.409A–1(f)(3)(ii) or
the person would be treated as providing
management services to the other person
under §1.409A–1(f)(3)(iv).
(11)Initial deferral elections with
respect to compensation paid for final
payroll period—(i)In general.Unless
an arrangement provides otherwise, com-
pensation payable after the last day of the
service provider’s taxable year solely for
services performed during the final pay-
roll period described in section 3401(b)
containing the last day of the service
provider’s taxable year or, with respect
to a non-employee service provider, a
period not longer than the payroll period
described in section 3401(b), where such
amount is payable pursuant to the tim-
ing arrangement under which the service
recipient normally compensates service
October 24, 20058322005–43 I.R.B.

providers for services performed dur-
ing a payroll period described in section
3401(b), or with respect to a non-employee
service provider, a period not longer than
the payroll period described in section
3401(b), is treatedas compensation for
services performed in the subsequent tax-
able year. The preceding sentence does
not apply to any compensation paid during
such period for services performed during
any period other than such final payroll
period, such as a payment of an annual
bonus. Any amendment of an arrange-
ment after December 31, 2006, to add a
provision providing for a differing treat-
ment of such compensation may not be
effective for 12 months from the date the
amendment is executed and enacted.
(ii)Transition rule. For purposes of this
paragraph (a)(11), an arrangement that was
adopted and effective before December 31,
2006, whether written or unwritten, will be
treated as designating such compensation
for service performed in the taxable year in
which the payroll period ends, unless oth-
erwise set forth in writing before Decem-
ber 31, 2006.
(12)Designation of time and form of
payment with respect to a nonelective ar-
rangement. An arrangement that provides
for a deferral of compensation for services
performed during a service provider’s tax-
able year that does not provide the ser-
vice provider with an opportunity to elect
the time of payment of such compensa-
tion must specify the time of payment no
later than the time the service provider first
has a legally binding right to the com-
pensation. Similarly, an arrangement that
provides for a deferral of compensation
for services performed during a service
provider’s taxable year that does not pro-
vide the service provider with an opportu-
nity to elect the form of payment of such
compensation must specify the form of
payment no later than the time the service
provider first has a legally binding right to
the compensation. Such designation shall
be treated as an initial deferral election for
purposes of this section.
(13)Designation of time and form
of payment with respect to earnings.An
arrangement that provides for actual or no-
tional earnings to be credited on amounts
of deferred compensation may specify, in
accordance with the requirements of this
paragraph (a), that such earnings will be
paid by a date not later than the 15
th
day
of the third month following the calendar
year for which the earnings are credited.
To satisfy the requirements of this para-
graph (a)(13), actual or notional earnings
must be credited at least annually and
the measure for such earnings must be
either a specified, nondiscretionary inter-
est rate (or a specified, nondiscretionary
formula describing an interest rate such
as, for example, the interest on a Trea-
sury bond + 2 percent) or a predetermined
actual investment within the meaning of
§31.3121(v)(2)–1(d)(2) of this chapter.
For these purposes, a right to dividend
equivalents with respect to a specified
number of shares of service recipient
stock (as defined in §1.409A–1(b)(5)(iii))
may be treated as a right to actual or no-
tional earnings on an amount of deferred
compensation.
(b)Subsequent changes in time and
form of payment—(1)In general.The
requirements of section 409A(a)(4)(C) are
met if, in the case of a plan that permits
a subsequent election to delay a payment
or to change the form of payment of an
amount of deferred compensation, the fol-
lowing conditions are met:
(i) The plan requires that such elec-
tion may not take effect until at least 12
months after the date on which the election
is made.
(ii) In the case of an election re-
lated to a payment not described in
§1.409A–3(a)(2) (payment on account
of disability), §1.409A–3(a)(3) (payment
on account of death) or §1.409A–3(a)(6)
(payment on account of the occurrence
of an unforeseeable emergency), the plan
requires that the payment with respect to
which such election is made be deferred
for a period of not less than 5 years from
the date such payment would otherwise
have been paid (or in the case of a life
annuity or installment payments treated as
a single payment, 5 years from the date the
first amount was scheduled to be paid).
(iii) The plan requires that any elec-
tion related to a payment described in
§1.409A–3(a)(4) (payment at a specified
time or pursuant to a fixed schedule) may
notbemadelessthan12monthspriorto
the date the payment is scheduled to be
paid (or in the case of a life annuity or
installment payments treated as a single
payment, 12 months prior to the date the
first amount was scheduled to be paid).
(2)Definition of payments for purposes
of subsequent changes in the time or form
of payment—(i)In general. Except as pro-
vided in paragraphs (b)(2)(ii) and (iii) of
this section, the termpaymentrefers to
each separately identified amount to which
a service provider is entitled to payment
under a plan on a determinable date, and
includes amounts applied for the benefit
of the service provider. An amount is
separately identified only if the amount
may be objectively determined. For ex-
ample, an amount identified as 10 percent
of the account balance as of a specified
payment date would be a separately iden-
tified amount. A payment includes the
provision of any taxable benefit, includ-
ing payment in cash or in kind. In addi-
tion, a payment includes, but is not limited
to, the transfer, cancellation or reduction of
an amount of deferredcompensation in ex-
change for benefits under a welfare benefit
plan, fringe benefit excludible under sec-
tion 119 or section 132, or any other bene-
fit that is excluded from gross income.
(ii)Life annuities. The entitlement to
a life annuity is treated as the entitlement
to a single payment. For purposes of this
paragraph (b)(2)(ii), the termlife annu-
itymeans a series of substantially equal
periodic payments, payable not less fre-
quently than annually, for the life (or life
expectancy) of the service provider or the
joint lives (or life expectancies) of the ser-
vice provider and the service provider’s
designated beneficiary. A change in the
form of a payment from one type of life
annuity to another type of life annuity be-
fore any annuity payment has been made
is not considered a change in the time and
form of a payment, provided that the an-
nuities are actuariallyequivalent applying
reasonable actuarial assumptions.
(iii)Installment payments. The entitle-
ment to a series of installment payments
that is not a life annuity is treated as the
entitlement to a single payment, unless the
arrangement provides at all times with re-
spect to the amount deferred that the right
to the series of installment payments is to
be treated as a right to a series of separate
payments. For purposes of this paragraph
(b)(2)(iii), a series ofinstallment payments
refers to an entitlement to the payment
of a series of substantially equal periodic
amounts to be paid over a predetermined
period of years, except to the extent any
increase in the amount reflects reasonable
2005–43 I.R.B.833October 24, 2005

earnings through the date the amount is
paid.
(iv)Transition rule. For purposes of
this section, an arrangement that was
adopted and effective before December
31, 2006, whether written or unwritten,
that fails to make a designation as to
whether the entitlement to a series of pay-
ments is to be treated as an entitlement to
a series of separate payments under para-
graph (b)(2)(iii) of this section is treated
as having made such designation as of the
later of the date on which the arrangement
was adopted or became effective, provided
that such designation is set forth in writing
before December 31, 2006.
(3)Coordination with prohibition
against acceleration of payments. For pur-
poses of applying the prohibition against
the acceleration of payments contained in
§1.409A–3(h), the definition of payment
is the same as the definition provided in
paragraph (b)(2) of this section. However,
even though a change in the form of a pay-
ment that results in a more rapid schedule
for payments generally may not constitute
an acceleration of a payment, the change
in the form of payment must comply with
the subsequent deferral rules. For exam-
ple, although a change in form from a
10-year installment payment treated as a
single payment to a lump-sum payment
would not constitutean acceleration, the
change in the form of the payment must
still comply with the requirements of
paragraph (b)(1) of this section, generally
meaning that the election to change to a
lump-sum payment could not be effective
for 12 months and the lump-sum payment
could not be made until at least 5 years
after the date the installment payments
were scheduled to commence.
(4)Application to multiple payment
events. In the case of a plan that permits
a payment upon each of a number of po-
tential permissible payment events, such
as the earlier of a fixed date or separation
from service, the requirements of para-
graph (b)(1) of this section are applied
separately to each payment (as defined in
paragraph (b)(2) of this section) due upon
each payment event. Notwithstanding
the foregoing, the addition of a permissi-
ble payment event to amounts previously
deferred is subject to the rules of this
paragraph (b) where the addition of the
permissible payment event may result in
a change in the time or form of payment
of the amount deferred. For application
of the rules governing accelerations of
payments to the addition of a permissible
payment event to amounts deferred, see
§1.409A–3.
(5)Delay of payments under certain
circumstances. A plan may provide, or be
amended to provide, that a payment will be
delayed to a date after the designated pay-
ment date under any of the following cir-
cumstances, and the provision will not fail
to meet the requirements of establishing a
permissible payment event and the delay
in the payment will not constitute a subse-
quent deferral election, provided that once
such a provision is applicable to an amount
of deferred compensation, any failure to
apply such a provision or modification of
the plan to remove such a provision will
constitute an acceleration of any payment
to which such provision applied:
(i)Payments subject to section 162(m).
A plan may provide that a payment will
be delayed where the service recipient rea-
sonably anticipates that the service recip-
ient’s deduction with respect to such pay-
ment otherwise would be limited or elim-
inated by application of section 162(m);
provided that the terms of the arrangement
require the payment to be made either at
the earliest date at which the service re-
cipient reasonably anticipates that the de-
duction of the payment of the amount will
not be limited or eliminated by application
of section 162(m) or the calendar year in
which the service provider separates from
service.
(ii)Payments that would violate a loan
covenant or similar contractual require-
ment. A plan may provide that a payment
will be delayed where the service recipient
reasonably anticipates that the making of
the payment will violate a term of a loan
agreement to which the service recipient is
a party, or other similar contract to which
the service recipient isaparty,andsuchvi-
olation will cause material harm to the ser-
vice recipient; provided that the terms of
the arrangement require the payment to be
made at the earliest date at which the ser-
vice recipient reasonably anticipates that
the making of the payment will not cause
such violation, or such violation will not
cause material harm to the service recipi-
ent, and provided that the facts and circum-
stances indicate that the service recipient
entered into such loan agreement (includ-
ing such covenant) or other similar con-
tract for legitimate business reasons, and
not to avoid the restrictions on deferral
elections and subsequent deferral elections
under section 409A.
(iii)Payments that would violate Fed-
eral securities laws or other applicable
law. A plan may provide that a payment
will be delayed where the service recip-
ient reasonably anticipates that the mak-
ing of the payment will violate Federal se-
curities laws or other applicable law; pro-
vided that the terms of the arrangement re-
quire the payment to be made at the earli-
est date at which the service recipient rea-
sonably anticipates that the making of the
payment will not cause such violation. For
purposes of this paragraph (b)(5)(iii), the
making of a payment that would cause in-
clusion in gross income or the application
of any penalty provision or other provision
of the Internal Revenue Code is not treated
as a violation of applicable law.
(iv)Other events and conditions.Aser-
vice recipient may delay a payment upon
such other events and conditions as the
Commissioner may prescribe in generally
applicable guidance published in the Inter-
nal Revenue Bulletin.
(6)Examples. The following examples
illustrate the application of the provisions
of this section:
Example 1.Initial election to defer salary.Em-
ployee A is an individual employed by Employer X.
Employer X sponsors an arrangement under which
Employee A may elect to defer a percentage of Em-
ployee A’s salary. Employee A has participated in
the arrangement in prior years. To satisfy the require-
ments of this section with respect to salary earned in
calendar year 2008, if Employee A elects to defer any
amount of such salary, the deferral election (includ-
ing an election as to the time and form of payment)
must be made no later than December 31, 2007.
Example 2.Designation of time and form of pay-
ment where an initial deferral election is not pro-
vided. Employee A is an individual employed by
Employer X. Employer X has a fiscal year ending
September 30. On July 1, 2007, Employer X enters
into a legally binding obligation to pay Employee A
a $10,000 bonus. The amount is not subject to a sub-
stantial risk of forfeiture. Employer X does not pro-
vide Employee A an election as to the time and form
of payment. Unless the amount is paid in accordance
with the short-term deferral rule of §1.409A–1(b)(4),
to satisfy the requirements of this section, Employer
X must specify the time and form of payment on or
before July 1, 2007.
Example 3.Initial election to defer bonus payable
based on services during calendar year. Employee A
is an individual employed by Employer X. Employer
X has a fiscal year ending September 30. Employee
A participates in a bonus plan under which Employee
A is entitled to a bonus for services performed dur-
ing the calendar year that, absent an election by Em-
October 24, 20058342005–43 I.R.B.

ployee A, will be paid on March 15 of the follow-
ing year. The amount is not subject to a substantial
risk of forfeiture and does not qualify as performance
based compensation. If Employee A elects to defer
the payment of the bonus with respect to calendar
year 2008, to satisfy the requirements of this para-
graph, Employee A must elect the time and form of
payment not later than December 31, 2007.
Example 4.Initial election to defer bonus payable
based on services during fiscal year other than cal-
endar year. Employee A is an individual employed
by Employer X. Employer X has a fiscal year ending
September 30. Employee A participates in a bonus
plan under which Employee A is entitled to a bonus
for services performed during Employer X’s fiscal
year that, absent an election by Employee A, will be
paid on December 15 of the calendar year in which
the fiscal year ends. The amount is not subject to
a substantial risk of forfeiture and does not qualify
as performance based compensation as described in
§1.409A–1(e). The amount qualifies as fiscal year
compensation. If Employee A elects to defer the pay-
ment of the amount related to the fiscal year ending
September 30, 2008, to satisfy the requirements of
this section Employee A must elect the time and form
of payment not later than September 30, 2007.
Example 5.Initial election to defer bonus
payable only if service provider completes at least 12
months of services after the election. Employee A is
an individual employed by Employer X. Employer
X has a calendar year fiscal year. On March 1, 2006,
Employer X grants Employee A a $10,000 bonus,
payable on March 1, 2008, provided that Employee
A continues performing services as an employee of
Employer X through March 1, 2008. The amount
does not qualify as performance-based compensa-
tion as described in §1.409A–1(e), and Employee
A already participates in another account balance
nonqualified deferred compensation plan. Employee
A may make an initial deferral election on or before
March 31, 2006 (within 30 days after obtaining a
legally binding right), because at least 12 months
of additional services are required after the date of
election for the risk of forfeiture to lapse.
Example 6.Initial election to defer bonus that
would otherwise constitute a short-term deferral.
The same facts asExample 5,exceptthatEmployee
A does not make an initial deferral election on or
before March 31, 2006. Because the right to the
compensation would not be treated as a deferral of
compensation pursuant to §1.409A–1(b)(4) absent a
deferral election (because the arrangement would be
treated as a short-term deferral), Employee A may
make an initial deferral election provided that the
election may not become effective for 12 months and
must defer the payment at least 5 years from March
1, 2008 (the first date the payment could become
substantially vested). Accordingly, Employee A may
make an election before March 1, 2007, provided that
the election defers the payment to a date on or after
March 1, 2013 (other than a payment due to death,
disability, unforeseeable emergency, or a change in
control event).
Example 7.Initial election to defer commissions.
Employee A is an individual employed by Employer
X. Employer X has a calendar year fiscal year. As
part of Employee A’s services for Employer X, Em-
ployee A sells refrigerators. Under the employment
arrangement, Employee A is entitled to 10 percent
of the sales price of any refrigerator Employee A
sells, payable only upon the receipt of payment from
the customer who purchased the refrigerator. For
purposes of the initial deferral rule, Employee A is
treated as performing the services related to each re-
frigerator sale in the taxable year in which each cus-
tomer pays for the refrigerator.
Example 8.Initial election to defer renewal com-
missions. The same facts asExample 7, except that
Employee A also sells warranties related to the re-
frigerators sold. Under the warranty arrangement, re-
frigerator warranty customers are entitled in a future
year to extend the warranty for an additional cost to
be paid at the time of the extension. Under Employee
A’s arrangement with Employer X, Employee A is
entitled to 10 percent of the amount paid for an ex-
tension of any warranty, payable upon the receipt of
payment from the customer extending the warranty.
For purposes of the initial deferral rule, Employee
A is treated as performing the services related to the
amount paid for the extension of the warranty in the
taxable year in which the customer pays for the war-
ranty extension.
Example 9.Initial election to defer negotiated
separation pay. Employee A is an individual em-
ployed by Employer X. Under the terms of a sepa-
ration pay arrangement, Employee A is entitled upon
an involuntary separation from service to an amount
equal to two weeks of pay for every year of service at
Employer X. Employer X decides to terminate Em-
ployee A’s employment involuntarily. As part of the
process of terminating Employee A, Employer X en-
ters intobona fide, arm’s length negotiations with re-
spect to the terms of Employee A’s termination of em-
ployment. As part of the process, Employer X of-
fers Employee A an amount that is in addition to any
amounts to which Employee A is otherwise entitled,
payable either as a lump sum payment at the end of
three years or in three annual payments starting at the
date of termination of employment. The election of
the time and form of payment by Employee A may
be made at any time before Employee A accepts the
offer and obtains a legally binding right to the addi-
tional amount.
Example 10.Election of time and form of pay-
ments under a window program. Employee A is
an individual employed by Employer X. Employer
X establishes a window program, as defined in
§1.409A–1(b)(9)(v). Individuals who elect to ter-
minate employment under the window program are
entitled to receive an amount equal to two weeks pay
multiplied by every year of service with Employer X.
The individuals participating in the window program
may elect to receive the payment as either a lump
sum payment payable on the first day of the month
after making the election to participate in the win-
dow program, or as a payment of two equal annual
installments on each January 1 of the first two years
following the election to participate in the window
program. Employee A is eligible to participate in
the window program. Employee A may make the
election as to the time and form of payment on or
before the date Employee A’s election to participate
in the window program becomes irrevocable.
Example 11.Initial election to defer salary
earned during final payroll period beginning in one
calendar year and ending in the subsequent calendar
year. Employee A performs services as an employee
of Employer X. Employer X pays the salary of its
employees, including Employee A, on a bi-weekly
basis. One bi-weekly payroll period runs from De-
cember 24, 2006, through January 6, 2007, with a
scheduled payment date of January 13, 2001. Em-
ployer X sponsors, and Employee A participates in,
a nonqualified deferred compensation arrangement
under which Employee A may defer a specified per-
centage of his annual salary. The arrangement does
not specify that any salary compensation paid for the
payroll period in which falls January 1 is to be treated
as compensation for services performed during the
year preceding the year in which falls that January 1.
For purposes of applying the initial deferral election
rules, Employee A is deemed to have performed the
services for the payroll period December 24, 2006,
through January 6, 2007, during the calendar year
2007.
Example 12.Application of deferral election
rules and anti-acceleration rules to a section 401(k)
wrap plan. Employee A participates in a qualified
retirement plan under section 401(a) with a qualified
cash or deferred arrangement under section 401(k).
Employee A also participates in a nonqualified de-
ferred compensation arrangement. Under the terms
of the nonqualified deferred compensation arrange-
ment, Employee A elects, on or before December
31, to defer a specified percentage of his salary for
the subsequent calendar year. Under the terms of
the nonqualified deferred compensation arrangement
and the qualified plan, as of the earliest date adminis-
tratively practicable following the end of the year in
which the salary is earned, the maximum amount that
may be deferred under the qualified cash or deferred
arrangement (not in excess of the amount specified
under section 402(g) for the plan year) is credited
to Employee A’s account under the qualified plan,
and Employee A’s deferral under the nonqualified
deferred compensation arrangement is reduced by a
corresponding amount. Thereduction has no effect
on any other nonqualified deferred compensation
arrangement in which Employee A participates.
The reduction of Employee A’s account under the
nonqualified deferred compensation arrangement is
not treated as an accelerated payment of deferred
compensation for purposes of section 409A.
Example 13.Application of deferral election
rules and anti-acceleration rules to a nonqualified
deferred compensation arrangement linked to a qual-
ified defined benefit plan. Employee A participates
in a qualified retirement plan that is a defined benefit
plan. Employee A also participates in a nonqualified
deferred compensation arrangement, under which
the benefit payable is calculated under a formula,
with that benefit then reduced by any benefit which
Employee A has accrued under the qualified re-
tirement plan. In 2007, Employee A fails to elect
a subsidized benefit under the qualified retirement
plan, with the effect that the amounts payable under
the nonqualified deferred compensation arrangement
are increased relative to the lesser benefit payable
under the qualified plan. Also, in 2007, Employer X
amends the qualified retirement plan to increase ben-
efits under the plan, resulting in a relative decrease in
the amounts payable under the nonqualified deferred
compensation arrangement relative to the greater
benefit payable under the qualified plan. Neither
of these actions constitute a deferral election or an
acceleration of a payment under the nonqualified
deferred compensation arrangement.
2005–43 I.R.B.835October 24, 2005

Example 14.Subsequent deferral election.Em-
ployee A participates in a nonqualified deferred com-
pensation arrangement. Employee A elects to be paid
in a lump sum payment at the earlier of age 65 or sep-
aration from service. Employee A anticipates that he
will work after age 65, and wishes to defer payment to
a later date. Provided that Employee A continues in
employment and makes the election by his 64
th
birth-
day, Employee A may elect to receive a lump sum
payment at the earlier of age 70 or separation from
service.
Example 15.Grant of right to current payment of
dividends paid with respect to restricted stock.Em-
ployer X grants Employee A stock that is not sub-
stantially vested for purposes of section 83, and Em-
ployee A does not make an election under section
83(b). As part of the restricted stock grant, Employee
A receives the right to payments in an amount equal
to the dividends payable with respect to the restricted
stock. At the time Employer B grants Employee A the
right to the dividend payments, the grant also speci-
fies that each dividend payment will be made no later
than the end of the calendar year in which the divi-
dends are paid to shareholders of that class of stock
or, if later, the 15
th
day of the third month following
the date the dividends are paid to shareholders of that
class of stock. The grant of the rights to dividend pay-
ments satisfies the requirement that deferred amounts
be paid at a specified time or pursuant to a specified
schedule.
Example 16.Subsequent deferral election rule —
change in form of payment from lump sum payment to
life annuity. Employee A participates in a nonquali-
fied deferred compensation arrangement. Employee
A elects to be paid in a lump sum payment at age 65.
Employee A wishes to change the payment form to
a life annuity. Provided that Employee A makes the
election on or before his 64
th
birthday, Employee A
may elect to receive a life annuity commencing at age
70.
Example 17.Subsequent deferral election rule —
change in form of payment from life annuity to lump
sum payment. Employee A participates in a non-
qualified deferred compensation arrangement. Em-
ployee A elects to be paid in a life annuity at age
65. Employee A wishes to change the payment form
to a lump sum payment. Provided that Employee A
makes the election on or before his 64
th
birthday, Em-
ployee A may elect to receive a lump sum payment at
age 70.
Example 18.Subsequent deferral election rule
— installment payments designated as separate pay-
ments. Employee A participates in a nonqualified
deferred compensation arrangement that provides for
payment in a series of 5 equal annual amounts, each
designated as a separate payment. The first payment
is scheduled to be made on January 1, 2008. Provided
that Employee A makes the election on or before Jan-
uary 1, 2007, Employee A may elect for the first pay-
ment to be made on January 1, 2013. If Employee
A makes that election, the remaining payments may
continue to be due upon January 1 of the four calen-
dar years commencing on January 1, 2009.
Example 19.Subsequent deferral election rule
— change in form of payment from installment pay-
ments to lump sum payment. Employee A participates
in a nonqualified deferred compensation arrangement
that provides for payment in a series of 5 equal an-
nual amounts that are not designated as a series of
5 separate payments. The first amount is scheduled
to be paid on January 1, 2008. Employee A wishes
to receive the entire amount equal to the sum of all
five of the amounts to be paid as a lump sum pay-
ment. Provided that Employee A makes the election
on or before January 1, 2007, Employee A may elect
to receive a lump sum payment on or after January 1,
2013.
Example 20.Subsequent deferral election rule —
change in time of payment from payment at specified
age to payment at later of specified age or separation
from service. Employee A participates in a nonqual-
ified deferred compensation arrangement that pro-
vides for a lump sum payment at age 65. Employee A
wishes to add a payment provision such that the pay-
ment is payable upon the later of a predetermined age
or separation from service. Provided that Employee
A makes such election on or before his 64
th
birthday,
Employee A may elect to receive a lump sum pay-
ment upon the later of age 70 or separation from ser-
vice.
(c)Special rules for certain resident
aliens. For the first calendar year in which
an individual is classified as a resident
alien, a nonqualified deferred compensa-
tion arrangement is deemed to meet the re-
quirements of paragraph (a) of this section
if, with respect to compensation payable
for services performed during that first cal-
endar year or with respect to compensation
the right to which is subject to a substantial
risk of forfeiture as of January 1 of that first
calendar year, an initial deferral election
is made by the end of such first calendar
year, provided that the initial deferral elec-
tion may not apply to amounts paid or first
payable on or before the date of such ini-
tial deferral election. For any year subse-
quent to the first calendar year in which an
individual is classified as a resident alien,
this paragraph (c) does not apply, provided
that a calendar year may again be treated
as the first calendar year in which an in-
dividual is classified as a resident alien if
such individual has not been classified as a
resident alien for at least five consecutive
calendar years immediately preceding the
year in which the individual is again clas-
sified as a resident alien.
§1.409A–3 Permissible payments.
(a)In general. The requirements of this
section are met only if the arrangement
provides that an amount of deferred com-
pensation may be paid only on account of
one or more of the following:
(1) The service provider’s separation
from service (as defined in §1.409A–1(h)).
(2) The service provider becoming dis-
abled (in accordance with paragraph (g)(4)
of this section).
(3) The service provider’s death.
(4) A time (or pursuant to a fixed sched-
ule) specified under the plan (in accor-
dance with paragraph (g)(1) of this sec-
tion).
(5) A change in the ownership or effec-
tive control of the corporation, or in the
ownership of a substantial portion of the
assets of the corporation (in accordance
with paragraph (g)(5) of this section).
(6) The occurrence of an unforeseeable
emergency (in accordance with paragraph
(g)(3) of this section).
(b)Designation of payment upon a per-
missible payment event. Except as other-
wise specified in this section, an arrange-
ment provides for the payment upon an
event described in paragraph (a)(1), (2),
(3), (5) or (6) of this section if the arrange-
ment provides for a payment date that is
objectively determinable at the time the
event occurs (for example, 3 months fol-
lowing the date of initial disability or De-
cember 31 of the calendar year in which
the disability first occurs). In addition,
an arrangement may provide that a pay-
ment is to be made during an objectively
determinable calendar year following the
year in which the event occurs (for exam-
ple, the calendar year following the year in
which the service provider dies), provided
that where no specific date within such
calendar year is objectively determinable,
the payment date is deemed to be Jan-
uary 1 of such calendar year for purposes
of applying the subsequent deferral elec-
tion rules of §1.409A–2(b). An arrange-
ment may provide for payment upon the
earliest or latest of more than one event,
provided that each event is described in
paragraphs (a)(1) through (6) of this sec-
tion. An arrangement may also provide
that a payment upon an event described
in paragraph (a)(1), (2), (3), (5) or (6)
of this section is to be made in accor-
dance with a fixed schedule that is ob-
jectively determinable based on the date
of the event, provided that the schedule
must be fixed at the time the permissi-
ble payment event is designated, and any
change in the fixed schedule will consti-
tute a change in the time and form of pay-
ment. For example, an arrangement may
provide that a service provider is entitled to
three substantially equal payments payable
October 24, 20058362005–43 I.R.B.

on each of the first three anniversaries of
the date of the service provider’s separa-
tion from service. In addition, an arrange-
ment may provide that payments are to be
made pursuant to a schedule of payments
based upon objectively determinable cal-
endar years following the year in which
the event occurs, (for example, three sub-
stantially equal payments to be made dur-
ing the three calendar years following the
year in which the service provider dies),
provided that where payment dates within
such calendar years are not specified un-
der the terms of the arrangement, the pay-
ment dates are deemed to be January 1 of
such calendar years for purposes of apply-
ing the subsequent deferral election rules
of §1.409A–2(b).
(c)Designation of alternative specified
dates or payment schedules based upon
date of permissible event. In general, in
the case of an arrangement that provides
that a payment upon an event described in
paragraph (a)(1), (2), (3), (5) or (6) of this
section is to be made on an objectively de-
terminable date or year in accordance with
paragraph (b) of this section, or in accor-
dance with a fixed schedule that is objec-
tively determinable based on the date of
the event in accordance with paragraph (b)
of this section, the objectively determined
date or fixed schedule must apply consis-
tently regardless of the date on which the
specified event occurs. However, an ar-
rangement may allow for an alternative
payment schedule if the event occurs on or
before one (but not more than one) spec-
ified date. For example, an arrangement
may provide that a service provider will re-
ceive a lump sum payment of the service
provider’s entire benefit under the arrange-
ment on the first day of the month follow-
ing a separation from service before age
55, but will receive 5 substantially equal
annual payments commencing on the first
day of the month following a separation
from service on or after age 55.
(d)Whenapaymentistreatedasmade
upon the designated payment date.Ex-
cept as otherwise specified in this section,
a payment is treated as made upon the date
specified under the arrangement (includ-
ing a date specified under paragraph (a)(4)
of this section) if the payment is made at
such date or a later date within the same
calendar year or, if later, by the 15
th
day
of the third calendar month following the
date specified under the arrangement. If
calculation of the amount of the payment
is not administratively practicable due to
events beyond the control of the service
provider (or service provider’s estate), the
payment will be treated as made upon the
date specified under the arrangement if the
payment is made during the first calendar
year in which the payment is administra-
tively practicable. Similarly, if the funds
of the service recipient are not sufficient to
make the payment at the date specified un-
der the plan without jeopardizing the sol-
vency of the service recipient, the payment
will be treated as made upon the date spec-
ified under the arrangement if the payment
is made during the first calendar year in
which the funds of the service recipient
are sufficient to make the payment without
jeopardizing the solvency of the service re-
cipient.
(e)Disputed payments and refusals to
pay. If a payment is not made, in whole or
in part, as of the date specified under the
arrangement because the service recipient
refuses to make such payment, the pay-
ment will be treated as made upon the date
specified under the arrangement if the ser-
vice provider accepts the portion (if any)
of the payment that the service recipient
is willing to make (unless such acceptance
will result in a forfeiture of the claim to
the remaining amount), makes prompt and
reasonable, good faith efforts to collect the
payment, and the payment is made dur-
ing the first calendar year in which the ser-
vice recipient and the service provider en-
ter into a legally binding settlement of such
dispute, the service recipient concedes that
the amount is payable, or the service re-
cipient is required to make such payment
pursuant to a final and nonappealable judg-
ment or other binding decision. For pur-
poses of this paragraph (e), a service re-
cipient is not treated as having refused to
make a payment where pursuant to the
terms of the plan the service provider is
required to request payment, or otherwise
provide information or take any other ac-
tion, and the service provider has failed to
take such action. In addition, for purposes
of this paragraph (e), the service provider
is deemed to have requested that a pay-
ment not be made, rather than the service
recipient having refused to make such pay-
ment, where the service recipient’s deci-
sion to refuse to make the payment is made
by the service provider or a member of
the service provider’s family (as defined
in section 267(c)(4) applied as if the fam-
ily of an individual includes the spouse of
any member of the family), or any person
or group of persons over whom the ser-
vice provider or service provider’s family
member has effective control, or any per-
son any portion of whose compensation is
controlled by the service provider or ser-
vice provider’s family member.
(f)Special rule for certain resident
aliens. An arrangement that is, or con-
stitutes part of, a nonqualified deferred
compensation plan is deemed to meet the
requirements of this section with respect
to any amount payable in the first cal-
endar year in which a service provider
is classified as a resident alien, and with
respect to any amount payable in a sub-
sequent calendar year if no later than the
December 31 of the first calendar year in
which the service provider is classified
as a resident alien, the plan is amended
as necessary so that the times and forms
of payment of amounts payable in a sub-
sequent year comply with the provisions
of this section. For any year subsequent
to the first calendar year in which an in-
dividual is classified as a resident alien,
this paragraph (f) does not apply, provided
that a calendar year may again be treated
as the first calendar year in which an in-
dividual is classified as a resident alien if
such individual has not been classified as a
resident alien for at least five consecutive
calendar years immediately preceding the
year in which the service provider is again
classified as a resident alien.
(g)Definitions and special rules—(1)
Specified time or fixed schedule. Amounts
are payable at a specified time or pursuant
to a fixed schedule if objectively deter-
minable amounts are payable at a date
or dates that are objectively determinable
at the time the amount is deferred. An
amount is objectively determinable for
this purpose if the amount is specifically
identified or if the amount may be de-
termined pursuant to a nondiscretionary
formula (for example, 50 percent of an ac-
count balance). A specified time or fixed
schedule also includes the designation of a
calendar year or years that are objectively
determinable at the time the amount is
deferred, provided that for purposes of
the application of the subsequent deferral
rules contained in §1.409A–2(b), the spec-
ified time or fixed schedule of payments is
deemed to refer to January 1 of the relevant
2005–43 I.R.B.837October 24, 2005

calendar year or years. An arrangement
may provide that a payment upon the lapse
of a substantial risk of forfeiture is to be
made in accordance with a fixed schedule
that is objectively determinable based on
the date the substantial risk of forfeiture
lapses (disregarding any acceleration of
the lapsing of the substantial risk of for-
feiture other than due to the occurrence
of a condition applicable as of the date
the legally binding right to the payment
arose that itself would constitute a sub-
stantial risk of forfeiture), provided that
theschedulemustbefixedatthetimethe
time and form of payment are designated,
and any change in the fixed schedule will
constitute a change in the time and form
of payment. For example, an arrangement
that provides for a bonus payment subject
to the condition that the service provider
complete three years of service, but pro-
vided further that such requirement of
continued services would lapse upon the
occurrence of an initial public offering that
if applied alone would subject the right to
the payment to a substantial risk of forfei-
ture, may provide that a service provider
is entitled to substantially equal payments
on each of the first three anniversaries of
the date the substantial risk of forfeiture
lapses (the earlier of three years of service
or the date of an initial public offering).
(2)Required delay in payment to a
specified employeepursuant to a sep-
aration from service. In the case of
any specified employee (as defined in
§1.409A–1(i)), the requirements of para-
graph (a)(1) of this section permitting a
payment upon a separation from service
are satisfied only if payments may not be
made before the date that is six months af-
ter the date of separation from service (or,
if earlier, the date of death of the specified
employee). The arrangement must pro-
vide the manner in which the six-month
delay will be implemented in the case of
a service provider who is a specified em-
ployee. For example, an arrangement may
provide that payments to which a speci-
fied employee would otherwise be entitled
during the first six months following the
date of separation from service are accu-
mulated and paid at another specified date
or specified schedule, such as the first date
of the seventh month following the date of
separation from service. The arrangement
may also provide that each installment
payment to which a specified employee is
entitled upon a separation from service is
delayed by six months. A service recipient
mayamendaplanatanytimetochange
the method for applying the six-month
delay, provided that the amendment may
not be effective for a period of 12 months.
Notwithstanding the foregoing, an amend-
ment to a plan may be effective imme-
diately in the case of a service recipient
that amends the arrangement prior to the
date upon which the service recipient’s
stock first becomes readily tradable on an
established securities market. Notwith-
standing the foregoing, this paragraph
(g)(2) also does not apply to a payment
made under the circumstances described
in paragraph (h)(2)(i) (domestic relations
order), (h)(2)(ii) (conflicts of interest), or
(h)(2)(v) (payment of employment taxes)
of this section.
(3)Unforeseeable Emergency—(i)
Definition. For purposes of paragraph
(a)(6) of this section, an unforeseeable
emergency is a severe financial hardship
of the service provider or beneficiary re-
sulting from an illness or accident of the
service provider or beneficiary, the service
provider’s or beneficiary’s spouse, or the
service provider’s or beneficiary’s depen-
dent (as defined in section 152(a)); loss
of the service provider’s or beneficiary’s
property due to casualty (including the
need to rebuild a home following damage
to a home not otherwise covered by insur-
ance, for example, as a result of a natural
disaster); or other similar extraordinary
and unforeseeable circumstances arising
as a result of events beyond the control
of the service provider or beneficiary.
For example, the imminent foreclosure
of or eviction from the service provider’s
or beneficiary’s primary residence may
constitute an unforeseeable emergency.
In addition, the need to pay for medi-
cal expenses, including non-refundable
deductibles, as well as for the costs of
prescription drug medication, may consti-
tute an unforeseeable emergency. Finally,
the need to pay for the funeral expenses
of a spouse or a dependent (as defined
in section 152(a)) may also constitute an
unforeseeable emergency. Except as oth-
erwise provided in this paragraph (g)(3)(i),
the purchase of a home and the payment
of college tuition are not unforeseeable
emergencies. Whether a service provider
or beneficiary is faced with an unforesee-
able emergency permitting a distribution
under this paragraph is to be determined
based on the relevant facts and circum-
stances of each case, but, in any case, a
distribution on account of unforeseeable
emergency may not be made to the extent
that such emergency is or may be relieved
through reimbursement or compensation
from insurance or otherwise, by liquida-
tion of the service provider’s assets, to the
extent the liquidation of such assets would
not cause severe financial hardship, or by
cessation of deferrals under the arrange-
ment. An arrangement may provide for
a payment upon any unforeseeable emer-
gency, but does not have to provide for a
payment upon all unforeseeable emergen-
cies, provided that any event upon which
apaymentmaybemadequalifiesasan
unforeseeable emergency.
(ii)Amount of payment permitted upon
an unforeseeable emergency. Distribu-
tions because of an unforeseeable emer-
gency must be limited to the amount
reasonably necessary to satisfy the emer-
gency need (which may include amounts
necessary to pay any Federal, state, or
local income taxes or penalties reasonably
anticipated to result from the distribution).
Determinations of amounts reasonably
necessary to satisfy the emergency need
must take into account any additional
compensation that is available if the plan
provides for cancellation of a deferral
election upon a payment due to an un-
foreseeable emergency. See paragraph
(h)(2)(vii) of this section. The payment
may be made from any arrangement in
which the service provider participates
that provides for payment upon an un-
foreseeable emergency, provided that the
arrangement under which the payment
was made must be designated at the time
of payment.
(4)Disability—(i)In general.Forpur-
poses of this section, a service provider is
considered disabled if the service provider
meets one of the following requirements:
(A) The service provider is unable to
engage in any substantial gainful activity
by reason of any medically determinable
physical or mental impairment that can be
expected to result in death or can be ex-
pected to last for a continuous period of not
less than 12 months.
(B) The service provider is, by rea-
son of any medically determinable physi-
cal or mental impairment that can be ex-
pected to result in death or can be ex-
October 24, 20058382005–43 I.R.B.

pected to last for a continuous period of
not less than 12 months, receiving income
replacement benefits for a period of not
less than 3 months under an accident and
health plan covering employees of the ser-
vice provider’s employer.
(ii)Limited plan definition of disabil-
ity. An arrangement may provide for a
payment upon any disability, and need not
provide for a payment upon all disabilities,
provided that any disability upon which a
payment may be made under the arrange-
ment complies with the provisions of this
paragraph (g)(4).
(iii)Determination of disability.An
arrangement may provide that a service
provider will be deemed disabled if deter-
mined to be totally disabled by the Social
Security Administration. An arrangement
may also provide that a service provider
will be deemed disabled if determined to
be disabled in accordance with a disability
insurance program, provided that the defi-
nition of disability applied under such dis-
ability insurance program complies with
the requirements of this paragraph (g)(4).
(5)Change in the ownership or ef-
fective control of a corporation, or a
change in the ownership of a substan-
tial portion of the assets of a corpora-
tion—(i)In general. Pursuant to section
409A(a)(2)(A)(v), an arrangement may
permit a payment upon the occurrence of a
change in the ownership of the corporation
(as defined in paragraph (g)(5)(v) of this
section), a change in effective control of
the corporation (as defined in paragraph
(g)(5)(vi) of this section), or a change in
the ownership of a substantial portion of
the assets of the corporation (as defined
in paragraph (g)(5)(vii) of this section)
(collectively referred to as a change in
control event). To qualify as a change in
control event, the occurrence of the event
must be objectively determinable and any
requirement that any other person, such as
a plan administrator or board of directors
compensation committee, certify the oc-
currence of a change in control event must
be strictly ministerial and not involve any
discretionary authority. The arrangement
may provide for a payment on any change
in control event, and need not provide for
a payment on all such events, provided
that each event upon which a payment is
provided qualifies as a change in control
event. For rules regarding the ability of
the service recipient to terminate the ar-
rangement and pay amounts of deferred
compensation upon a change in control
event, see paragraph (h)(2)(viii)(B) of this
section.
(ii)Identification of relevant corpo-
ration—(A)In general. To constitute a
change in control event as to the service
provider, the change in control event must
relate to—
(1) The corporation for whom the ser-
vice provider is performing services at the
time of the change in control event;
(2) The corporation that is liable for the
payment of the deferred compensation (or
all corporations liable for the payment if
more than one corporation is liable); or
(3) A corporation that is a majority
shareholder of a corporation identified in
paragraph (g)(5)(ii)(A)(1)or(2)ofthis
section, or any corporation in a chain of
corporations in which each corporation is
a majority shareholder of another corpora-
tion in the chain, ending in a corporation
identified in paragraph (g)(5)(ii)(A)(1)or
(2)ofthissection.
(B)Majority shareholder. For pur-
poses of this paragraph (g)(5)(ii), a ma-
jority shareholder is a shareholder owning
more than 50 percent of the total fair mar-
ket value and total voting power of such
corporation.
(C)Example. The following exam-
ple illustrates the rules of this paragraph
(g)(5)(ii):
Example. Corporation A is a majority share-
holder of Corporation B, which is a majority share-
holder of Corporation C. A change in ownership of
Corporation B constitutes a change in control event
to service providers performing services for Corpo-
ration B or Corporation C, and to service providers
for which Corporation B or Corporation C is solely
liable for payments under the plan (for example,
former employees), but is not a change in control
event as to Corporation A or any other corporation
of which Corporation A is a majority shareholder.
Notwithstanding the foregoing, a sale of Corporation
B may constitute an independent change in control
event for Corporation A, Corporation B and Cor-
poration C if the sale constitutes a change in the
ownership of a substantial portion of Corporation A’s
assets (see paragraph (g)(5)(vii) of this section).
(iii)Attribution of stock ownership.
For purposes of paragraph (g)(5) of this
section, section 318(a) applies to deter-
mine stock ownership. Stock underlying
a vested option is considered owned by
the individual who holds the vested op-
tion (and the stock underlying an unvested
option is not considered owned by the in-
dividual who holds the unvested option).
For purposes of the preceding sentence,
however, if a vested option is exercisable
for stock that is not substantially vested
(as defined by §1.83–3(b) and (j)), the
stock underlying the option is not treated
as owned by the individual who holds the
option.
(iv)Special rule for certain delayed
payments pursuant to a change in control
event. Compensation payable pursuant
to the purchase by the service recipient
of service recipient stock or a stock right
held by a service provider, or payment of
amounts of deferred compensation calcu-
lated by reference to the value of service
recipient stock, may be treated as paid
at a specified time or pursuant to a fixed
schedule in conformity with the require-
ments of section 409A if paid on the same
schedule and under the same terms and
conditions as payments to shareholders
generally pursuant to a change in control
event described in paragraph (g)(5)(v) of
this section (change in the ownership of a
corporation) or as payments to the service
recipient pursuant to a change in control
event described in paragraph (g)(5)(vii)
of this section (change in the ownership
of a substantial portion of a corporation’s
assets), and any amounts paid pursuant
to such a schedule and such terms and
conditions will not be treated as violating
the initial or subsequent deferral elections
rules, to the extent that such amounts are
paid not later than five years after the
change in control event.
(v)Change in the ownership of a cor-
poration—(A)In general. For purposes of
section 409A, a change in the ownership
of a corporation occurs on the date that
any one person, or more than one person
acting as a group (as defined in paragraph
(g)(5)(v)(B) of this section), acquires own-
ership of stock of the corporation that, to-
gether with stock held by such person or
group, constitutes more than 50 percent
of the total fair market value or total vot-
ing power of the stock of such corpora-
tion. However, if any one person, or more
than one person acting as a group, is con-
sidered to own more than 50 percent of
the total fair market value or total vot-
ing power of the stock of a corporation,
the acquisition of additional stock by the
same person or persons is not considered
to cause a change in the ownership of the
corporation (or to cause a change in the ef-
fective control of the corporation (within
the meaning of paragraph (g)(5)(vi) of this
2005–43 I.R.B.839October 24, 2005

section)). An increase in the percentage of
stock owned by any one person, or persons
acting as a group, as a result of a trans-
action in which the corporation acquires
its stock in exchange for property will be
treated as an acquisition of stock for pur-
poses of this section. This section applies
only when there is a transfer of stock of
a corporation (or issuance of stock of a
corporation) and stockin such corporation
remains outstanding after the transaction
(see paragraph (g)(5)(vii) of this section
for rules regarding the transfer of assets of
a corporation).
(B)Persons acting as a group. For pur-
poses of paragraph (g)(5)(v)(A) of this sec-
tion, persons will not be considered to be
acting as a group solely because they pur-
chase or own stock of the same corpora-
tion at the same time, or as a result of
thesamepublicoffering. However,per-
sons will be considered to be acting as a
group if they are owners of a corporation
that enters into a merger, consolidation,
purchase or acquisition of stock, or simi-
lar business transaction with the corpora-
tion. If a person, including an entity, owns
stock in both corporations that enter into a
merger, consolidation, purchase or acqui-
sition of stock, or similar transaction, such
shareholder is considered to be acting as a
group with other shareholders in a corpo-
ration prior to the transaction giving rise
to the change and not with respect to the
ownership interest in the other corporation.
See §1.280G–1, Q&A–27(d),Example 4.
(vi)Change in the effective control
of a corporation—(A)In general.For
purposes of section 409A, notwithstand-
ing that a corporation has not undergone
a change in ownership under paragraph
(g)(5)(v) of this section, a change in the
effective control of a corporation occurs
only on the date that either—
(1) Any one person, or more than one
person acting as a group (as determined
under paragraph (g)(5)(v)(B) of this sec-
tion), acquires (or has acquired during the
12-month period ending on the date of the
most recent acquisition by such person or
persons) ownership of stock of the corpo-
ration possessing 35 percent or more of the
total voting power of the stock of such cor-
poration; or
(2) A majority of members of the cor-
poration’s board of directors is replaced
during any 12-month period by directors
whose appointment or election is not en-
dorsed by a majority of the members of
the corporation’s board of directors prior
to the date of the appointment or elec-
tion, provided that for purposes of this
paragraph (g)(5)(vi)(A) the term corpora-
tion refers solely to the relevant corpora-
tion identified in paragraph (g)(5)(ii) of
this section, for which no other corpora-
tion is a majority shareholder for purposes
of that paragraph (for example, if Corpora-
tion A is a publicly held corporation with
no majority shareholder, and Corporation
A is the majority shareholder of Corpora-
tion B, which is the majority shareholder
of Corporation C, the term corporation for
purposes of this paragraph (g)(5)(vi)(A)(2)
would refer solely to Corporation A).
(B)Multiple change in control events.
A change in effective control also may oc-
cur in any transaction in which either of
the two corporations involved in the trans-
action has a change in control event un-
der paragraphs (g)(5)(v) or (g)(5)(vii) of
this section. Thus, for example, assume
Corporation P transfersmorethan40per-
cent of the total gross fair market value
of its assets to Corporation O in exchange
for 35 percent of O’s stock. P has un-
dergone a change in ownership of a sub-
stantial portion of its assets under para-
graph (g)(5)(vii) of this section and O has a
change in effective control under this para-
graph (g)(5)(vi) of this section.
(C)Acquisition of additional control.
If any one person, or more than one per-
son acting as a group, is considered to ef-
fectively control a corporation (within the
meaning of this paragraph (g)(5)(vi)), the
acquisition of additional control of the cor-
poration by the same person or persons is
not considered to cause a change in the
effective control of the corporation (or to
cause a change in the ownership of the cor-
poration within the meaning of paragraph
(g)(5)(v) of this section).
(D)Persons acting as a group.Per-
sons will not be considered to be acting
as a group solely because they purchase or
own stock of the same corporation at the
same time, or as a result of the same pub-
lic offering. However, persons will be con-
sideredtobeactingasagroupiftheyare
owners of a corporation that enters into a
merger, consolidation, purchase or acqui-
sition of stock, or similar business transac-
tion with the corporation. If a person, in-
cluding an entity, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of stock,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in a corporation only
with respect to the ownership in that cor-
poration prior to the transaction giving rise
to the change and not with respect to the
ownership interest in the other corporation.
See §1.280G–1, Q&A–27(d),Example 4.
(vii)Change in the ownership of a
substantial portion of a corporation’s
assets—(A)In general. Change in the
ownership of a substantial portion of a
corporation’s assets. For purposes of sec-
tion 409A, a change in the ownership of a
substantial portion of a corporation’s as-
sets occurs on the date that any one person,
or more than one person acting as a group
(as determined in paragraph (g)(5)(v)(B)
of this section), acquires (or has acquired
during the 12-month period ending on the
date of the most recent acquisition by such
person or persons) assets from the corpo-
ration that have a total gross fair market
value equal to or more than 40 percent of
the total gross fair market value of all of
the assets of the corporation immediately
prior to such acquisition or acquisitions.
For this purpose, gross fair market value
means the value of the assets of the cor-
poration, or the value of the assets being
disposed of, determined without regard to
any liabilities associated with such assets.
(B)Transfers to a related person—(1)
There is no change in control event un-
der this paragraph (g)(5)(vii) when there
is a transfer to an entity that is controlled
by the shareholders of the transferring cor-
poration immediately after the transfer, as
provided in this paragraph (g)(5)(vii)(B).
A transfer of assets by a corporation is not
treated as a change in the ownership of
such assets if the assets are transferred to—
(i) A shareholder of the corporation
(immediately before the asset transfer) in
exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of
the total value or voting power of which
is owned, directly or indirectly, by the cor-
poration;
(iii) A person, or more than one person
acting as a group, that owns, directly or
indirectly, 50 percent or more of the total
value or voting power of all the outstand-
ing stock of the corporation; or
(iv) An entity, at least 50 percent
of the total value or voting power of
which is owned, directly or indirectly,
October 24, 20058402005–43 I.R.B.

by a person described in paragraph
(g)(5)(vii)(B)(1)(iii)ofthissection.
(2) For purposes of this paragraph
(g)(5)(vii)(B) and except as otherwise
provided, a person’s status is determined
immediately after the transfer of the assets.
For example, a transfer to a corporation
in which the transferor corporation has no
ownership interest before the transaction,
but which is a majority-owned subsidiary
of the transferor corporation after the
transaction is not treated as a change in the
ownership of the assets of the transferor
corporation.
(C)Persons acting as a group. Persons
will not be considered to be acting as a
group solely because they purchase assets
of the same corporation at the same time.
However, persons will be considered to be
acting as a group if they are owners of a
corporation that enters into a merger, con-
solidation, purchase or acquisition of as-
sets, or similar business transaction with
the corporation. If a person, including an
entity shareholder, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of assets,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in a corporation only to
the extent of the ownership in that corpo-
ration prior to the transaction giving rise
to the change and not with respect to the
ownership interest in the other corporation.
See 1.280G–1, Q&A–27(d),Example 4.
(6)Certain back-to-back arrange-
ments—(i)In general. Notwithstanding
the generally applicable limitations on
payments described under paragraph (a)
of this section, an arrangement between
a service recipient and a service provider
that is also a service recipient (a service
provider/service recipient) may provide
for payment upon the occurrence of a pay-
ment event described in paragraph (a)(1),
(2), (3), (5) or (6) of this section, where the
time and form of payment is defined as the
same time and form of payment provided
under an arrangement subject to section
409A between the service provider/service
recipient and a specified service provider
to the service provider/service recipient,
if the arrangement between the service
provider/service recipient and the service
recipient expressly provides for such time
and form of payment and otherwise satis-
fies the requirements of section 409A.
(ii)Example. The provisions of this
paragraph (g)(6) are illustrated by the fol-
lowing example:
Example. Company B (service provider/service
recipient) provides services to Company C (service
recipient). Employee A (service provider) provides
services to Company B. Pursuant to a nonqualified
deferred compensation plan meeting the require-
ments of section 409A, Employee A is entitled to
a payment of deferred compensation upon a sep-
aration from service from Company B. Under an
arrangement between Company B and Company C,
Company C agrees to pay an amount of deferred
compensation to Company B upon Employee A’s
separation from servicefrom Company B, in accor-
dance with the time and form of payment provided
in the nonqualified deferred compensation plan be-
tween Employee A and Company B. Provided that
the arrangement between Company B and Company
C and the arrangement between Employee A and
Company B otherwise comply with the requirements
of section 409A, Company C’s payment to Company
B of the amount due upon the separation from service
of Employee A from Company B may constitute a
permissible payment event for purposes of paragraph
(a)ofthissection.
(h)Prohibition on acceleration of pay-
ments—(1)In general. Except as pro-
vided in paragraph (h)(2) of this section,
an arrangement that is, or constitutes part
of, a nonqualified deferred compensation
plan may not permit the acceleration of the
time or schedule of any payment or amount
scheduledtobepaidpursuanttoapayment
under the arrangement. For purposes of
this paragraph (h), an impermissible accel-
eration does not occur if payment is made
in accordance with plan provisions or an
election as to the time and form of payment
in effect at the time of initial deferral (or
added in accordance with the rules appli-
cable to subsequent deferral elections un-
der §1.409A–2(b)) pursuant to which pay-
ment is required to be made on an accel-
erated schedule as a result of an interven-
ing event that is an event described in para-
graph (a)(1), (2), (3), (5) or (6) of this sec-
tion. For example, a plan may provide
that a participant will receive six install-
ment payments commencing at separation
from service, and also provide that if the
participant dies after such payments com-
mence but before all payments have been
made, all remaining amounts will be paid
in a lump sum payment. Additionally, it
is not an acceleration of the time or sched-
ule of payment of a deferral of compensa-
tion if a service recipient waives or accel-
erates the satisfaction of a condition con-
stituting a substantial risk of forfeiture ap-
plicable to such deferral of compensation,
provided that the requirements of section
409A (including the requirement that the
payment be made upon a permissible pay-
ment event) are otherwise satisfied with
respect to such deferral of compensation.
For example, if a nonqualified deferred
compensation arrangement provides for a
lump sum payment of the vested benefit
upon separation from service, and the ben-
efit vests under the plan only after 10 years
of service, it is not a violation of the re-
quirements of section 409A if the service
recipient reduces the vesting requirement
to 5 years of service, even if a service
provider becomes vested as a result and
receives a payment in connection with a
separation from service before the service
provider would have completed 10 years
of service.
(2)Exceptions—(i)Domestic relations
order. An arrangement may permit such
acceleration of the time or schedule of a
payment under the arrangement to an in-
dividual other than the service provider
as may be necessary to fulfill a domes-
tic relations order (as defined in section
414(p)(1)(B)).
(ii)Conflicts of interest. An arrange-
ment may permit such acceleration of the
time or schedule of a payment under the ar-
rangement as may be necessary to comply
with a certificate of divestiture (as defined
in section 1043(b)(2)).
(iii)Section 457 plans. An arrangement
subject to section 457(f) may permit an
acceleration of the time or schedule of a
payment to a service provider to pay Fed-
eral, state, local and foreign income taxes
due upon a vesting event, provided that the
amount of such payment is not more than
an amount equal to the Federal, state, local
and foreign income tax withholding that
would have been remitted by the employer
if there had been a payment of wages equal
to the income includible by the service
provider under section 457(f) at the time
of the vesting.
(iv)De minimis and specified amounts
—(A)In general. An arrangement that
does not otherwise provide for mandatory
lump sum payments of benefits that do
not exceed a specified amount may be
amended to permit the acceleration of the
time or schedule of a payment to a service
provider under the arrangement, provided
that—
(1) The payment accompanies the ter-
mination of the entirety of the service
provider’s interest in the arrangement, and
2005–43 I.R.B.841October 24, 2005

all similar arrangements that would consti-
tute a nonqualified deferred compensation
plan under §1.409A–1(c);
(2) The payment is made on or before
the later of December 31 of the calendar
year in which occurs the service provider’s
separation from service from the service
recipient, or the 15
th
day of the third month
following the service provider’s separation
from service from the service recipient;
(3) The payment is not greater than
$10,000; and
(4) The participant is provided no elec-
tion with respect to receipt of the lump sum
payment.
(B)Prospective deferrals.Anamend-
ment described in paragraph (h)(2)(iv)(A)
of this section may be made with respect
to previously deferred amounts under the
arrangement as well as amounts to be de-
ferred in the future. In addition, a nonqual-
ified deferred compensation arrangement
that otherwise complies with section 409A
may provide, or be amended with regard
to future deferrals to provide, that, if a ser-
vice provider’s interest under the arrange-
ment has a value below an amount speci-
fied by the plan at the time that amounts
are payable under the plan, then the ser-
vice provider’s entire interest under the
plan must be distributed as a lump sum
payment. However, once such a payment
feature applies to an amount deferred, any
change or elimination of such feature is
subject to the rules governing changes in
the time and form of payment.
(v)Payment of employment taxes.An
arrangement may permit the acceleration
of the time or schedule of a payment to pay
the Federal Insurance Contributions Act
(FICA) tax imposed under section 3101,
section 3121(a) and section 3121(v)(2),
where applicable, on compensation de-
ferred under the arrangement (the FICA
Amount). Additionally, an arrangement
may permit the acceleration of the time
or schedule of a payment to pay the in-
come tax at source on wages imposed
under section 3401 or the corresponding
withholding provisions of applicable state,
local, or foreign tax laws as a result of
the payment of the FICA Amount, and to
pay the additional income tax at source
on wages attributable to the pyramiding
section 3401 wages and taxes. However,
the total payment under this acceleration
provision must not exceed the aggregate
of the FICA Amount, and the income tax
withholding related to such FICA Amount.
(vi)Payments upon income inclusion
under section 409A. An arrangement
may permit the acceleration of the time or
schedule of a payment to a service provider
under the plan at any time the arrangement
fails to meet the requirements of section
409A and these regulations. Such pay-
ment may not exceed the amount required
to be included in income as a result of the
failure to comply with the requirements of
section 409A and the regulations.
(vii)Cancellation of deferrals fol-
lowing an unforeseeable emergency or
hardship distribution. An arrangement
may permit a cancellation of a service
provider’s deferral election due to an un-
foreseeable emergency or a hardship dis-
tribution pursuant to §1.401(k)–1(d)(3).
The deferral election must be cancelled,
and not postponed or otherwise delayed,
such that any later deferral election will be
subject to the provisions governing initial
deferral elections. See §1.409A–2(a).
(viii)Arrangement terminations.An
arrangement may permit an acceleration of
the time and form of a payment where the
right to the payment arises due to a ter-
mination of the arrangement in accordance
with one of the following:
(A) The service recipient’s discretion
under the terms of the arrangement to ter-
minate the arrangement within 12 months
of a corporate dissolution taxed under
section 331, or with the approval of a
bankruptcy court pursuant to 11 U.S.C.
§503(b)(1)(A), provided that the amounts
deferred under the plan are included in the
participants’ gross incomes in the latest
of—
(1) The calendar year in which the plan
termination occurs;
(2) The calendar year in which the
amount is no longer subject to a substan-
tial risk of forfeiture; or
(3) The first calendar year in which the
payment is administratively practicable.
(B) The service recipient’s discretion
under the terms of the arrangement to
terminate the arrangement within the 30
days preceding or the 12 months following
a change in control event (as defined in
§1.409A–3(g)(5)(i)). For purposes of this
paragraph (h)(2)(viii), an arrangement will
be treated as terminated only if all sub-
stantially similar arrangements sponsored
by the service recipient are terminated, so
that the participant inthe arrangement and
all participants under substantially similar
arrangements are required to receive all
amounts of compensation deferred under
the terminated arrangements within 12
months of the date of termination of the
arrangements.
(C) The service recipient’s discretion
under the terms of the arrangement to ter-
minate the arrangement, provided that—
(1) All arrangements sponsored by the
service recipient that would be aggregated
with any terminated arrangement under
§1.409A–1(c) if the same service provider
participated in all of the arrangements are
terminated;
(2) No payments other than payments
that would be payable under the terms of
the arrangements if the termination had not
occurred are made within 12 months of the
termination of the arrangements;
(3) All payments are made within 24
months of the termination of the arrange-
ments; and
(4) The service recipient does not
adopt a new arrangement that would be
aggregated with any terminated arrange-
ment under §1.409A–1(c) if the same
service provider participated in both ar-
rangements, at any time within five years
following the date of termination of the
arrangement.
(D) Such other events and conditions
as the Commissioner may prescribe in
generally applicable guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2) of this chapter).
(ix)Certain distributions to avoid a
nonallocation year under section 409(p).
An arrangement may provide for an ac-
celeration of payment to prevent the oc-
currence of a nonallocation year (within
the meaning of section 409(p)(3)) in the
plan year of the employee stock owner-
ship plan next following the current plan
year, provided that the amount distributed
may not exceed 125 percent of the mini-
mum amount of distribution necessary to
avoid the occurrenceof a nonallocation
year. Solely for purposes of determining
permissible distributions under this para-
graph (h)(2)(ix), synthetic equity (within
the meaning of section 409(p)(6)(C))
granted during the current employee stock
ownership plan plan year is disregarded
for purposes of determining whether the
subsequent plan year would result in a
nonallocation year.
October 24, 20058422005–43 I.R.B.

(3)Nonqualified deferred compen-
sation arrangements linked to qualified
plans. With respect to amounts deferred
under an arrangement that is, or con-
stitutes part of, a nonqualified deferred
compensation plan, where under the terms
of the nonqualified deferred compensation
arrangement the amount deferred under
the plan is the amount determined under
the formula determining benefits under
a qualified employer plan (as defined in
§1.409A–1(a)(2)) applied without respect
to one or more limitations applicable to
qualified employer plans under the In-
ternal Revenue Code or other applicable
law, or is determined as an amount offset
by some or all of the benefits provided
under the qualified employer plan, the
operation of the qualified employer plan
with respect to changes in benefit limi-
tations applicable to qualified employer
plans under the Internal Revenue Code
or other applicable law, does not consti-
tute an acceleration of a payment under
the nonqualified deferred compensation
arrangement regardless of whether such
operation results in a decrease of amounts
deferred under the nonqualified deferred
compensation arrangement. In addition,
with respect to such nonqualified deferred
compensation arrangements, the following
actions or failures to act will not consti-
tute an acceleration of a payment under
the nonqualified deferred compensation
arrangement regardless of whether in
accordance with the terms of the nonqual-
ified deferred compensation arrangement,
the actions or inactions result in a decrease
in the amounts deferred under the arrange-
ment:
(i) A service provider’s action or in-
action under the qualified employer plan
with respect to whether to elect to receive
a subsidized benefit or an ancillary benefit
under the qualified employer plan.
(ii) The amendment of a qualified em-
ployer plan to increase benefits provided
under the qualified plan, or to add or re-
move a subsidized benefit or an ancillary
benefit.
(iii) A service provider’s action or
inaction with respect to an elective de-
ferral election under a qualified employer
plan subject to section 402(g), includ-
ing an adjustment to a deferral election
made during a calendar year, provided that
for any given calendar year, the service
provider’s actions or inactions do not re-
sult in a decrease in the amounts deferred
under all nonqualified deferred compen-
sation plans in which the service provider
participates in excess of an amount equal
to the limit with respect to elective de-
ferrals under section 402(g) in effect for
the taxable year in which such action or
inaction occurs.
(iv) A service provider’s action or inac-
tion under a qualified employer plan with
respect to elective deferrals or after-tax
contributions by the service provider to
the qualified employer plan that affects the
amounts that are credited under a nonqual-
ified deferred compensation arrangement
as matching amounts or other amounts
contingent on service provider elective
deferrals or after-taxcontributions, pro-
vided that such matching or contingent
amounts, as applicable, are either forfeited
or never credited under the nonqualified
deferred compensation arrangement in the
absence of such service provider’s elec-
tive deferral or after-tax contribution, and
provided further that for any given cal-
endar year, the service provider’s actions
and inactions do not result in a decrease
in the amounts deferred under all non-
qualified deferred compensation plans in
which the service provider participates in
excess of an amount equal to the limit with
respect to elective deferrals under section
402(g) in effect for the taxable year in
which such action or inaction occurs. See
§1.409A–2(b)(6),Example 12andExam-
ple 13.
§1.409A–4 Calculation of income
inclusion. [Reserved].
§1.409A–5 Funding. [Reserved].
§1.409A–6 Statutory effective dates.
(a)Statutory effective dates—(1)In
general. Except as otherwise provided
in this section, section 409A is effective
with respect to amounts deferred in tax-
able years beginning after December 31,
2004, and amounts deferred in taxable
years beginning before January 1, 2005, if
the plan under which the deferral is made
is materially modified after October 3,
2004. Section 409A is effective with re-
spect to earnings on amounts deferred only
to the extent that section 409A is effec-
tive with respect to the amounts deferred.
Accordingly, section 409A is not effec-
tive with respect to earnings on amounts
deferred before January 1, 2005, unless
section 409A is effective with respect to
the amounts deferred.
(2)Identification ofdate of deferral
for statutory effective date purposes.For
purposes of determining whether section
409A is applicable with respect to an
amount, the amount is considered deferred
before January 1, 2005, if before January
1, 2005, the service provider had a legally
binding right to be paid the amount, and
the right to the amount was earned and
vested. For purposes of this paragraph
(a)(2), a right to an amount was earned
and vested only if the amount was not sub-
ject to a substantial risk of forfeiture (as
defined in §1.83–3(c)) or a requirement
to perform further services. Amounts to
which the service provider did not have
a legally binding right before January 1,
2005 (for example because the service
recipient retained discretion to reduce
the amount), will not be considered de-
ferred before January 1, 2005. In addition,
amounts to which the service provider had
a legally binding right before January 1,
2005, but the right to which was subject
to a substantial risk of forfeiture or a re-
quirement to perform further services after
December 31, 2004, are not considered de-
ferred before January 1, 2005, for purposes
of the effective date. Notwithstanding the
foregoing, an amount to which the ser-
vice provider had a legally binding right
before January 1, 2005, but for which the
service provider was required to continue
performing services to retain the right
only through the completion of the payroll
period (as defined in §1.409A–1(b)(3))
that includes December 31, 2004, is not
treated as subject to a requirement to per-
form further services (or a substantial risk
of forfeiture) for purposes of the effec-
tive date. For purposes of this paragraph
(a)(2), a stock option, stock appreciation
right or similar compensation that on or
before December 31, 2004, was immedi-
ately exercisable for cash or substantially
vested property (as defined in §1.83–3(b))
is treated as earned and vested, regardless
of whether the right would terminate if the
service provider ceased providing services
for the service recipient.
(3)Calculation of amount of compen-
sation deferred for statutory effective date
purposes—(i)Nonaccount balance plans.
The amount of compensation deferred
before January 1, 2005, under a nonqual-
2005–43 I.R.B.843October 24, 2005

ified deferred compensation plan that is
a nonaccount balance plan (as defined in
§31.3121(v)(2)–1(c)(2)(i) of this chapter)
equals the present value as of December
31, 2004, of the amount to which the ser-
vice provider would be entitled under the
plan if the service provider voluntarily
terminated services without cause on De-
cember 31, 2004, and received a payment
of the benefits with the maximum value
available from the plan on the earliest
possible date allowed under the plan to re-
ceive a payment of benefits following the
termination of services. Notwithstanding
the foregoing, for any subsequent calen-
dar year, the grandfathered amount may
increase to equal the present value of the
benefit the service provider actually be-
comes entitled to, determined under the
terms of the plan (including applicable
limits under the Internal Revenue Code),
as in effect on October 3, 2004, without
regard to any further services rendered by
the service provider after December 31,
2004, or any other events affecting the
amount of or the entitlement to benefits
(other than a participant election with re-
spect to the time or form of an available
benefit).
(ii)Account balance plans.The
amount of compensation deferred be-
fore January 1, 2005, under a nonqual-
ified deferred compensation plan that is
an account balance plan (as defined in
§31.3121(v)(2)–1(c)(1)(ii) of this chapter)
equals the portion of the service provider’s
account balance as of December 31, 2004,
the right to which is earned and vested (as
defined in paragraph (a)(2) of this section)
as of December 31, 2004.
(iii)Equity-based compensation plans.
For purposes of determining the amounts
deferred before January 1, 2005, under an
equity-based compensation plan, the rules
of paragraph (a)(3)(ii) of this section gov-
erning account balance plans are applied
except that the account balance is deemed
to be the amount of the payment available
to the service provider on December 31,
2004 (or that would be available to the ser-
vice provider if the right were immediately
exercisable) the right to which is earned
and vested (as defined in paragraph (a)(2)
of this section) as of December 31, 2004.
For this purpose, the payment available to
the service provider excludes any exercise
price or other amount that must be paid by
the service provider.
(iv)Earnings. Earnings on amounts de-
ferred under a plan before January 1, 2005,
include only income (whether actual or no-
tional) attributable to the amounts deferred
under a plan as of December 31, 2004, or
such income. For example, notional inter-
est earned under the plan on amounts de-
ferred in an account balance plan as of De-
cember 31, 2004, generally will be treated
as earnings on amounts deferred under the
plan before January 1, 2005. Similarly, an
increase in the amount of payment avail-
able pursuant to a stock option, stock ap-
preciation right or other equity-based com-
pensation above the amount of payment
available as of December 31, 2004, due
to appreciation in the underlying stock af-
ter December 31, 2004, or accrual of other
earnings such as dividends, is treated as
earnings on the amount deferred. In the
case of a nonaccount balance plan, earn-
ings include the increase, due solely to
the passage of time, in the present value
of the future payments to which the ser-
vice provider has obtained a legally bind-
ing right, the present value of which consti-
tuted the amounts deferred under the plan
before January 1, 2005. Thus, for each
year, there will be an increase (determined
using the same interest rate used to deter-
mine the amounts deferred under the plan
before January 1, 2005) resulting from the
shortening of the discount period before
thefuturepaymentsaremade,plus,ifap-
plicable, an increase in the present value
resulting from the service provider’s sur-
vivorship during the year. However, an
increase in the potential benefits under a
nonaccount balance plan due to, for exam-
ple, an application of an increase in com-
pensation after December 31, 2004, to a fi-
nal average pay plan or subsequent eligi-
bility for an early retirement subsidy, does
not constitute earnings on the amounts de-
ferred under the plan before January 1,
2005.
(v)Definition of plan. For purposes of
this paragraph (a), the termplanhas the
same meaning provided in §1.409A–1(c),
except that the provisions treating all
nonaccount balance plans under which
compensation is deferred as a single plan
does not apply for purposes of the actuarial
assumptions used in paragraph (a)(3)(ii)
of this section. Accordingly, different
reasonable actuarial assumptions may be
used to calculate the amounts deferred
by a service provider in two different ar-
rangements each of which constitutes a
nonaccount balance plan.
(4)Material modifications—(i)In gen-
eral. Except as otherwise provided, a mod-
ification of a plan is a material modifica-
tion if a benefit or right existing as of Oc-
tober 3, 2004, is materially enhanced or
a new material benefit or right is added,
and such material enhancement or addition
affects amounts earned and vested before
January 1, 2005. Such material benefit en-
hancement or addition is a material mod-
ification whether it occurs pursuant to an
amendment or the service recipient’s ex-
ercise of discretion under the terms of the
plan. For example, an amendment to a
plan to add a provision that payments of
deferred amounts earned and vested before
January 1, 2005, may be allowed upon re-
quest if service providers are required to
forfeit 20 percent of the amount of the pay-
ment (a haircut) would be a material mod-
ification to the plan. Similarly, a material
modification would occur if a service re-
cipient exercised discretion to accelerate
vesting of a benefit under the plan to a date
on or before December 31, 2004. How-
ever, it is not a material modification for
a service recipient to exercise discretion
over the time and manner of payment of a
benefit to the extent such discretion is pro-
vided under the terms of the plan as of Oc-
tober 3, 2004. It is not a material modi-
fication for a service provider to exercise
a right permitted under the plan as in ef-
fect on October 3, 2004. The amendment
of a plan to bring the plan into compliance
with the provisions of section 409A will
not be treated as a material modification.
However, a plan amendment or the exer-
cise of discretion under the terms of the
plan that materiallyenhances an existing
benefit or right or adds a new material ben-
efit or right will be considered a material
modification even if the enhanced or added
benefit would be permitted under section
409A. For example, the addition of a right
to a payment upon an unforeseeable emer-
gency of an amount earned and vested be-
fore January 1, 2005, would be considered
a material modification. The reduction of
an existing benefit is not a material mod-
ification. For example, the removal of a
haircut provision generally would not con-
stitute a material modification. The estab-
lishment of or contributions to a trust or
other arrangement from which benefits un-
der the plan are to be paid is not a material
October 24, 20058442005–43 I.R.B.

modification of the plan, provided that the
contribution to the trust or other arrange-
ment would not otherwise cause an amount
to be includible in the service provider’s
gross income.
(ii)Adoptions of new arrangements.It
is presumed that the adoption of a new
arrangement or the grant of an additional
benefit under an existing arrangement af-
ter October 3, 2004, and before January
1, 2005, constitutes a material modifica-
tion of a plan. However, the presumption
mayberebuttedbydemonstratingthatthe
adoption of the arrangement or grant of
the additional benefit is consistent with the
service recipient’s historical compensation
practices. For example, the presumption
that the grant of a discounted stock op-
tion on November 1, 2004, is a material
modification of a plan may be rebutted by
demonstrating that the grant was consis-
tent with the historic practice of granting
substantially similar discounted stock
options (both as to terms and amounts)
each November for a significant num-
ber of years. Notwithstanding paragraph
(a)(4)(i) and this paragraph (a)(4)(ii), the
grant of an additional benefit under an
existing arrangement that consists of a
deferral of additional compensation not
otherwise provided under the plan as of
October 3, 2004, will be treated as a mate-
rial modification of the plan only as to the
additional deferral of compensation, if the
plan explicitly identifies the additional de-
ferral of compensation and provides that
the additional deferral of compensation
is subject to section 409A. Accordingly,
amendments to conform a plan to the re-
quirements of section 409A with respect
to deferrals under a plan occurring after
December 31, 2004, will not constitute a
material modification of the plan with re-
spect to amounts deferred that are earned
and vested on or before December 31,
2004, provided that there is no concurrent
material modification with respect to the
amount of, or rights to, amounts deferred
that were earned and vested on or before
December 31, 2004. Similarly, a grant
of an additional benefit under a new ar-
rangement adopted after October 3, 2004,
and before January 1, 2005, will not be
treated as a material modification of an
existing plan to the extent that the new ar-
rangement explicitly identifies additional
deferrals of compensation and provides
that the additional deferrals of compensa-
tion are subject to section 409A.
(iii)Suspension or termination of a
plan. A cessation of deferrals under, or
termination of, a plan, pursuant to the
provisions of such plan, is not a material
modification. Amending an arrangement
to stop future deferrals thereunder is not a
material modification of the arrangement
or the plan. Amending an arrangement to
provide participants an election whether
to terminate participation in a plan consti-
tutes a material modification of the plan.
(iv)Changes to investment mea-
sures—account balance plans.With
respect to an account balance plan (as de-
fined in §31.3121(v)(2)–1(c)(1)(ii) of this
chapter), it is not a material modification to
change a notional investment measure to,
or to add to existing investment measures,
an investment measure that qualifies as a
predetermined actual investment within
the meaning of §31.3121(v)(2)–1(d)(2)
of this chapter or, for any given tax-
able year, reflects a reasonable rate of
interest (determined in accordance with
§31.3121(v)(2)–1(d)(2)(i)(C) of this chap-
ter). For this purpose, if with respect to
an amount deferred for a period, a plan
provides for a fixed rate of interest to be
credited, and the rate is to be reset under
the plan at a specified future date that is
not later than the end of the fifth calendar
year that begins after the beginning of
the period, the rate is reasonable at the
beginning of the period, and the rate is not
changed before the reset date, then the rate
will be treated as reasonable in all future
periods before the reset date.
(v)Rescission of modifications.Any
modification to the terms of a plan that
would inadvertently result in treatment as
a material modification under this section
is not considered a material modification
of the plan to the extent the modification
in the terms of the plan is rescinded by the
earlier of a date before the right is exer-
cised (if the change grants a discretionary
right) or the last day of the calendar year
during which such change occurred. Thus,
for example, if a service recipient mod-
ifies the terms of a plan on March 1 to
allow an election of a new change in the
time or form of payment without realizing
that such a change constituted a material
modification that would subject the plan
to the requirements of section 409A, and
the modification is rescinded on Novem-
ber 1, then if no change in the time or form
of payment has been made pursuant to the
modification before November 1, the plan
is not considered materially modified un-
der this section.
(vi)Definition of plan. For purposes of
this paragraph (a)(4), the termplanhas the
same meaning provided in §1.409A–1(c),
except that the provision treating all ac-
count balance plans under which com-
pensation is deferred as a single plan, all
nonaccount balance plans under which
compensation is deferred as a separate sin-
gle plan, all separation pay arrangements
due to an actual involuntary separation
from service or participation in a window
program as a separate single plan, and all
other nonqualified deferred compensation
plans as a separate single plan, does not
apply.
(b) [Reserved].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September
29, 2005, 8:45 a.m., and published in the issue of the Federal
Register for October 4, 2005, 70 F.R. 57929)
2005–43 I.R.B.845October 24, 2005

Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2005-76
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Reagan, JohnCortland, NYCPAIndefinite
from
June 24, 2005
Harris, Alexander W.Chicago, ILAttorneyJuly 1, 2005
to
December 31, 2005
Belush, Glen J.Monroe, CTCPAIndefinite
from
July 15, 2005
Lamont, AliceAtlanta, GACPAIndefinite
from
July 15, 2005
Morse, Kyle K.Bedford, TXCPAIndefinite
from
July 22, 2005
Duggan Jr., Joseph A.Jacksonville, OREnrolled AgentIndefinite
from
August 1, 2005
October 24, 20058462005–43 I.R.B.

NameAddressDesignationDate of Suspension
Harper, IvanBrooklyn, NYCPAIndefinite
from
August 15, 2005
Bandy, Robert M.Tyler, TXAttorneyIndefinite
from
August 24, 2005
Peterson, StanleySpringfield, PACPAIndefinite
from
August 26, 2005
Shorten, JudyVacaville, CAEnrolled AgentIndefinite
from
September 1, 2005
Watkins, David E.Shelbyville, INEnrolled AgentIndefinite
from
September 1, 2005
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Leong, Thomas S.Honolulu, HIAttorneyIndefinite
from
July 11, 2005
Clark, Mark S.Tucson, AZAttorneyIndefinite
from
July 11, 2005
Hudspeth, George E.St. Louis, MOAttorneyIndefinite
from
July 11, 2005
Dodd, Alan F.Westborough, MAAttorneyIndefinite
from
July 11, 2005
Crews, James F.Tipton, MOAttorneyIndefinite
from
July 11, 2005
Luparella, JosephHoboken, NJCPAIndefinite
from
July 13, 2005
2005–43 I.R.B.847October 24, 2005

NameAddressDesignationDate of Suspension
Deutchman, MurrayBarnesville, MDAttorneyIndefinite
from
July 13, 2005
Cozier, Clifford G.Englewood, COAttorneyIndefinite
from
July 13, 2005
Segall, Steven M.Denver, COAttorneyIndefinite
from
July 14, 2005
Richardson, BruceReisterstown, MDAttorneyIndefinite
from
July 15, 2005
Parsley, Jeffrey A.Englewood, COAttorneyIndefinite
from
July 15, 2005
Wyrick, Richard L.Hanford, CAAttorneyIndefinite
from
July 15, 2005
Coates, Marsden S.Baltimore, MDAttorneyIndefinite
from
July 15, 2005
McCampbell, DanielChico, CAAttorneyIndefinite
from
July 15, 2005
Ralston, Ronald G.Fairmount, GACPAIndefinite
from
July 18, 2005
Friemann, Robert F.Huntington Bay, NYCPAIndefinite
from
July 18, 2005
Friedman, Milton G.Ft. Lauderdale, FLCPAJuly 25, 2005
to
January 24, 2007
Acheampong, RobertColumbus, OHCPAIndefinite
from
July 26, 2005
Elias, Robert F.Canfield, OHAttorneyIndefinite
from
July 27, 2005
Stover, Kathy A.Topeka, KSAttorneyIndefinite
from
July 29, 2005
Leffler, Fredric D.Columbia, MDAttorneyIndefinite
from
July 29, 2005
October 24, 20058482005–43 I.R.B.

NameAddressDesignationDate of Suspension
Harmon, Anthony N.Batavia, ILAttorneyIndefinite
from
July 29, 2005
Hames, David H.Dallas, TXCPAIndefinite
from
August 2, 2005
Au, Ronald G.S.Honolulu, HIAttorneyIndefinite
from
August 9, 2005
Tilton Jr., George H.Denver, COAttorneyIndefinite
from
August 12, 2005
Spalsbury Jr., ClarkEstes Park, COAttorneyIndefinite
from
August 12, 2005
Brockman, Louis R.Dallas, TXCPAIndefinite
from
August 12, 2005
Hill, Richard B.Kernersville, NCCPAIndefinite
from
August 12, 2005
Rosenberg, Jeffrey P.Morgan Hill, CAAttorneyIndefinite
from
August 12, 2005
Link, Robert A.Waupaca, WICPAIndefinite
from
August 15, 2005
Halcrow, David S.Taft, CACPAIndefinite
from
September 9, 2005
Lieber, Daniel M.Edna, MOAttorneyIndefinite
from
September 9, 2005
Kirchoff, William W.Jefferson City, MOAttorneyIndefinite
from
September 9, 2005
Lauby, Gregory C.Lexington, NEAttorneyIndefinite
from
September 9, 2005
Early, Michael J.Newburyport, MAAttorneyIndefinite
from
September 9, 2005
Mickiewicz, RobertDorchester, MAAttorneyIndefinite
from
September 9, 2005
Conant, Jon F.Gloucester, MAAttorneyIndefinite
from
September 9, 2005
2005–43 I.R.B.849October 24, 2005

NameAddressDesignationDate of Suspension
Pennington, JillChevy Chase, MDAttorneyIndefinite
from
September 9, 2005
Randolph, Robert E.Denham Springs, LAAttorneyIndefinite
from
September 9, 2005
Carillo, DonaldChicago, ILAttorneyIndefinite
from
September 9, 2005
Sloan Jr., DeweySioux City, IAAttorneyIndefinite
from
September 9, 2005
Vogel, GarrettDallas, TXCPAIndefinite
from
September 13, 2005
Becker, JosephHouston, TXCPAIndefinite
from
September 13, 2005
Winick, Robert M.Sarasota, FLAttorneyIndefinite
from
September 19, 2005
Hunsaker Jr., WilliamGolden, COAttorneyIndefinite
from
September 19, 2005
Wheatley, Jay D.Boca Raton,FLAttorneyIndefinite
from
September 19, 2005
Clark, Carroll A.Mesa, AZAttorneyIndefinite
from
September 19, 2005
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Sobel, Herbert L.Elkins Park, PACPAMay 4, 2005
to
February 3, 2007
Rubesh, LelandGillette, WYCPAAugust 1, 2005
to
January 31, 2007
October 24, 20058502005–43 I.R.B.

NameAddressDesignationEffective Date
Gregory, Carolyn S.Cathedral City, CAEnrolled AgentAugust 12, 2005
to
November 11, 2007
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Pugno, ThomasRockwood, MIEnrolled AgentJune 29, 2005
Barrett, RichardTyler, TXCPAAugust 1, 2005
Kelly, Michael G.Odessa, TXAttorneyAugust 1, 2005
Volstad, Paul S.Plymouth, MNCPAAugust 18, 2005
Quackenbush, Gary A.San Diego, CAAttorneySeptember 2, 2005
Flores, Fred A.Laredo, TXCPASeptember 2, 2005
Velasquez, FelixLaredo, TXCPASeptember 2, 2005
2005–43 I.R.B.851October 24, 2005

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 rul-
ings 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.
October 24, 2005i2005–43 I.R.B.

Numerical Finding List
1
Bulletins 2005–27 through 2005–43
Announcements:
2005-46, 2005-27 I.R.B.63
2005-47, 2005-28 I.R.B.71
2005-48, 2005-29 I.R.B.111
2005-49, 2005-29 I.R.B.119
2005-50, 2005-30 I.R.B.152
2005-51, 2005-32 I.R.B.283
2005-52, 2005-31 I.R.B.257
2005-53, 2005-31 I.R.B.258
2005-54, 2005-32 I.R.B.283
2005-55, 2005-33 I.R.B.317
2005-56, 2005-33 I.R.B.318
2005-57, 2005-33 I.R.B.318
2005-58, 2005-33 I.R.B.319
2005-59, 2005-37 I.R.B.524
2005-60, 2005-35 I.R.B.455
2005-61, 2005-36 I.R.B.495
2005-62, 2005-36 I.R.B.495
2005-63, 2005-36 I.R.B.496
2005-64, 2005-37 I.R.B.537
2005-65, 2005-38 I.R.B.587
2005-66, 2005-39 I.R.B.613
2005-67, 2005-40 I.R.B.678
2005-68, 2005-39 I.R.B.613
2005-69, 2005-40 I.R.B.681
2005-70, 2005-40 I.R.B.682
2005-71, 2005-41 I.R.B.714
2005-72, 2005-41 I.R.B.692
2005-73, 2005-41 I.R.B.715
2005-74, 2005-42 I.R.B.764
2005-75, 2005-42 I.R.B.764
2005-76, 2005-42 I.R.B.765
Notices:
2005-48, 2005-27 I.R.B.9
2005-49, 2005-27 I.R.B.14
2005-50, 2005-27 I.R.B.14
2005-51, 2005-28 I.R.B.74
2005-52, 2005-28 I.R.B.75
2005-53, 2005-32 I.R.B.263
2005-54, 2005-30 I.R.B.127
2005-55, 2005-32 I.R.B.265
2005-56, 2005-32 I.R.B.266
2005-57, 2005-32 I.R.B.267
2005-58, 2005-33 I.R.B.295
2005-59, 2005-35 I.R.B.443
2005-60, 2005-39 I.R.B.606
2005-61, 2005-39 I.R.B.607
2005-62, 2005-35 I.R.B.443
2005-63, 2005-35 I.R.B.448
2005-64, 2005-36 I.R.B.471
2005-65, 2005-39 I.R.B.607
Notices— Continued:
2005-66, 2005-40 I.R.B.620
2005-67, 2005-40 I.R.B.621
2005-68, 2005-40 I.R.B.622
2005-69, 2005-40 I.R.B.622
2005-70, 2005-41 I.R.B.694
2005-73, 2005-42 I.R.B.723
2005-74, 2005-42 I.R.B.726
Proposed Regulations:
REG-106030-98, 2005-42 I.R.B.739
REG-144615-02, 2005-40 I.R.B.625
REG-150088-02, 2005-43 I.R.B.774
REG-150091-02, 2005-43 I.R.B.780
REG-131739-03, 2005-36 I.R.B.494
REG-130241-04, 2005-27 I.R.B.18
REG-138362-04, 2005-33 I.R.B.299
REG-138647-04, 2005-41 I.R.B.697
REG-149436-04, 2005-35 I.R.B.454
REG-156518-04, 2005-38 I.R.B.582
REG-158080-04, 2005-43 I.R.B.786
REG-104143-05, 2005-41 I.R.B.708
REG-111257-05, 2005-42 I.R.B.759
REG-121584-05, 2005-37 I.R.B.523
REG-122857-05, 2005-39 I.R.B.609
REG-129782-05, 2005-40 I.R.B.675
REG-133578-05, 2005-39 I.R.B.610
Revenue Procedures:
2005-35, 2005-28 I.R.B.76
2005-36, 2005-28 I.R.B.78
2005-37, 2005-28 I.R.B.79
2005-38, 2005-28 I.R.B.81
2005-39, 2005-28 I.R.B.82
2005-40, 2005-28 I.R.B.83
2005-41, 2005-29 I.R.B.90
2005-42, 2005-30 I.R.B.128
2005-43, 2005-29 I.R.B.107
2005-44, 2005-29 I.R.B.110
2005-45, 2005-30 I.R.B.141
2005-46, 2005-30 I.R.B.142
2005-47, 2005-32 I.R.B.269
2005-48, 2005-32 I.R.B.271
2005-49, 2005-31 I.R.B.165
2005-50, 2005-32 I.R.B.272
2005-51, 2005-33 I.R.B.296
2005-52, 2005-34 I.R.B.326
2005-53, 2005-34 I.R.B.339
2005-54, 2005-34 I.R.B.353
2005-55, 2005-34 I.R.B.367
2005-56, 2005-34 I.R.B.383
2005-57, 2005-34 I.R.B.392
2005-58, 2005-34 I.R.B.402
2005-59, 2005-34 I.R.B.412
2005-60, 2005-35 I.R.B.449
2005-61, 2005-37 I.R.B.507
Revenue Procedures— Continued:
2005-62, 2005-37 I.R.B.507
2005-63, 2005-36 I.R.B.491
2005-64, 2005-36 I.R.B.492
2005-65, 2005-38 I.R.B.564
2005-66, 2005-37 I.R.B.509
2005-67, 2005-42 I.R.B.729
2005-68, 2005-41 I.R.B.694
Revenue Rulings:
2005-38, 2005-27 I.R.B.6
2005-39, 2005-27 I.R.B.1
2005-40, 2005-27 I.R.B.4
2005-41, 2005-28 I.R.B.69
2005-42, 2005-28 I.R.B.67
2005-43, 2005-29 I.R.B.88
2005-44, 2005-29 I.R.B.87
2005-45, 2005-30 I.R.B.123
2005-46, 2005-30 I.R.B.120
2005-47, 2005-32 I.R.B.261
2005-48, 2005-32 I.R.B.259
2005-49, 2005-30 I.R.B.125
2005-50, 2005-30 I.R.B.124
2005-51, 2005-31 I.R.B.163
2005-52, 2005-35 I.R.B.423
2005-53, 2005-35 I.R.B.425
2005-54, 2005-33 I.R.B.289
2005-55, 2005-33 I.R.B.284
2005-56, 2005-35 I.R.B.427
2005-57, 2005-36 I.R.B.466
2005-58, 2005-36 I.R.B.465
2005-59, 2005-37 I.R.B.505
2005-60, 2005-37 I.R.B.502
2005-61, 2005-38 I.R.B.538
2005-62, 2005-38 I.R.B.557
2005-63, 2005-39 I.R.B.603
2005-64, 2005-39 I.R.B.600
2005-65, 2005-41 I.R.B.684
2005-66, 2005-41 I.R.B.686
2005-67, 2005-43 I.R.B.771
Tax Conventions:
2005-47, 2005-28 I.R.B.71
2005-72, 2005-41 I.R.B.692
Treasury Decisions:
9208, 2005-31 I.R.B.157
9209, 2005-31 I.R.B.153
9210, 2005-33 I.R.B.290
9211, 2005-33 I.R.B.287
9212, 2005-35 I.R.B.429
9213, 2005-35 I.R.B.440
9214, 2005-35 I.R.B.435
9215, 2005-36 I.R.B.468
9216, 2005-36 I.R.B.461
9217, 2005-37 I.R.B.498
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin
2005–26, dated June 27, 2005.
2005–43 I.R.B.iiOctober 24, 2005

Treasury Decisions— Continued:
9218, 2005-37 I.R.B.503
9219, 2005-38 I.R.B.538
9220, 2005-39 I.R.B.596
9221, 2005-39 I.R.B.604
9222, 2005-40 I.R.B.614
9223, 2005-39 I.R.B.591
9224, 2005-41 I.R.B.688
9225, 2005-42 I.R.B.716
9226, 2005-43 I.R.B.772
October 24, 2005iii2005–43 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–27 through 2005–43
Announcements:
84-26
Obsoleted by
REG-149436-04, 2005-35 I.R.B.454
2004-72
Updated and superseded by
Ann. 2005-59, 2005-37 I.R.B.524
2005-36
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2005-53
Corrected by
Ann. 2005-61, 2005-36 I.R.B.495
Notices:
89-111
Amplified by
Notice 2005-61, 2005-39 I.R.B.607
2001-42
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2005-4
Modified by
Notice 2005-62, 2005-35 I.R.B.443
2005-10
Clarified by
Notice 2005-64, 2005-36 I.R.B.471
2005-38
Modified by
Notice 2005-64, 2005-36 I.R.B.471
2005-51
Modified and superseded by
Notice 2005-57, 2005-32 I.R.B.267
Proposed Regulations:
REG-108524-00
Corrected by
Ann. 2005-68, 2005-39 I.R.B.613
REG-142686-01
Withdrawn by
Ann. 2005-55, 2005-33 I.R.B.317
REG-100420-03
Corrected by
Ann. 2005-57, 2005-33 I.R.B.318
REG-102144-04
Corrected by
Ann. 2005-56, 2005-33 I.R.B.318
Revenue Procedures:
64-54
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
66-33
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
69-13
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
70-8
Modified by
Rev. Proc. 2005-46, 2005-30 I.R.B.142
71-1
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
72-22
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
83-77
Superseded by
Rev. Proc. 2005-63, 2005-36 I.R.B.491
87-8
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
87-9
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
89-20
Superseded by
Rev. Proc. 2005-52, 2005-34 I.R.B.326
90–11
Modified by
Rev. Proc. 2005-40, 2005-28 I.R.B.83
90-30
Section4supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section5supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Section6supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section7supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section8supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
90-31
Section4supersededby
Rev. Proc. 2005-52, 2005-34 I.R.B.326
Section5supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section6supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Revenue Procedures— Continued:
Section7supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section8supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section9supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
93-22
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
98-18
Obsoleted by
Rev. Proc. 2005-45, 2005-30 I.R.B.141
99-39
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-27
Modified and superseded by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2000-31
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-49
Superseded by
Rev. Proc. 2005-41, 2005-29 I.R.B.90
2001-9
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2001-16
Superseded by
Rev. Proc. 2005-42, 2005-30 I.R.B.128
2002-9
Modified and amplified by
Rev. Rul. 2005-42, 2005-28 I.R.B.67
Rev. Proc. 2005-35, 2005-28 I.R.B.76
Rev. Proc. 2005-43, 2005-29 I.R.B.107
Rev. Proc. 2005-47, 2005-32 I.R.B.269
2002-49
Modified, amplified, and superseded by
Rev. Proc. 2005-62, 2005-37 I.R.B.507
2004-50
Superseded by
Rev. Proc. 2005-49, 2005-31 I.R.B.165
2004-54
Superseded by
Rev. Proc. 2005-65, 2005-38 I.R.B.564
2004-64
Modified by
Ann. 2005-71, 2005-41 I.R.B.714
2005-1
Amplified by
Rev. Proc. 2005-68, 2005-41 I.R.B.694
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin 2005–26, dated June 27, 2005.
2005–43 I.R.B.ivOctober 24, 2005

Revenue Procedures— Continued:
2005-3
Amplified by
Rev. Proc. 2005-61, 2005-37 I.R.B.507
Rev. Proc. 2005-68, 2005-41 I.R.B.694
2005-6
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2005-10
Superseded by
Rev. Proc. 2005-67, 2005-42 I.R.B.729
2005-16
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
Revenue Rulings:
65-109
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
68-549
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
74-203
Revoked by
Rev. Rul. 2005-59, 2005-37 I.R.B.505
82-29
Modified and clarified by
Rev. Proc. 2005-39, 2005-28 I.R.B.82
2005-41
Corrected by
Ann. 2005-50, 2005-30 I.R.B.152
Treasury Decisions:
9149
Removed by
T.D. 9221, 2005-39 I.R.B.604
9186
Corrected by
Ann. 2005-53, 2005-31 I.R.B.258
9193
Corrected by
Ann. 2005-62, 2005-36 I.R.B.495
9205
Corrected by
Ann. 2005-63, 2005-36 I.R.B.496
9206
Corrected by
Ann. 2005-49, 2005-29 I.R.B.119
9207
Corrected by
Ann. 2005-52, 2005-31 I.R.B.257
9210
Corrected by
Ann. 2005-64, 2005-37 I.R.B.537
October 24, 2005v2005–43 I.R.B.
U.S. GPO: 2005—320–797/20028