Internal Revenue Bulletin 2012-27 (PDF rendition): IRS Announcements

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Bulletin No. 201
2-27
July 2, 2012
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2012–20, page 1.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for July 2012.
REG–134042–07, page 5.
Proposed regulations under section 1366 of the Code relate to
basis of indebtedness of S corporations to their shareholders.
The proposed regulations provide that S corporation sharehold-
ers increase their basis of indebtedness of the S corporation
to the shareholder only if the indebtedness isbona fide.The
proposed regulations affect shareholders of S corporations. A
public hearing is scheduled for October 9, 2012.
Rev. Proc. 2012–28, page 4.
This procedure provides a safe harbor for determining whether
a publicly traded partnership’s (PTP’s) income from discharge
of indebtedness (COD income) is qualifying income under sec-
tion 7704(d) of the Code for the purpose of meeting the qual-
ifying income exception in section 7704(c). The safe harbor
treats COD income attributable to debt incurred in direct con-
nection with the PTP’s activities that generate qualifying income
(qualifying activities) as qualifying income.
Announcement 2012–27, page 10.
This announcement withdraws (REG–100276–97) relating to fi-
nancial asset securitization trusts (FASITs) under sections 860H
through 860L of the Code. The FASIT provisions were repealed
by PL 108-357, effective January 1, 2005, with limited excep-
tion for existing FASITs.
TAX CONVENTIONS
Announcement 2012–26, page 8.
The following is a copy of the Competent Authority Agreement
(“the Agreement”) entered into on May 21, 2012, by the Com-
petent Authorities of the UnitedStates and the Netherlands re-
garding the eligibility of a besloten fonds voor gemene rekening
(limited fund for mutual account) (“LFMA”) and its participants
for treaty-reduced rates of withholding on U.S. source dividends
and interest under the Convention between the Kingdom of the
Netherlands and the United States of America for the Avoid-
ance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income and Capital Gains, signed on
December 18, 1992, and amended by Protocols signed on Oc-
tober 13, 1993 and March 8, 2004.
Announcements of Disbarments and Suspensions begin on page 10.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
July 2, 20122012–27 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
The adjusted a
pplicable federal short-term, mid-
term, and long
-term rates are set forth for the month
of July 2012. S
ee Rev. Rul. 2012-20, page 1.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of July 2012. See Rev.
Rul. 2012-20, page 1.
Section 382.—Limitation
on Net Operating Loss
Carryforwa
rds and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of July 2012. See Rev. Rul.
2012-20, page 1.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 468.—Special
Rules for Mining and Solid
Waste
Reclamation and
Closi
ng Costs
The ad
justed applicable federal short-term, mid-
term,
and long-term rates are set forth for the month
of Jul
y 2012. See Rev. Rul. 2012-20, page 1.
Section 482.—
Allocation
of Income and D
eductions
Among Taxpaye
rs
Federal short
-term, mid-term, and long-term rates
are set forth f
or the month of July 2012. See Rev.
Rul. 2012-20
,page1.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of July 2012. See Rev.
Rul. 2012-20, page 1.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382,
642, 1274, 1288, and other
sections of th
e Code, tables set forth the
rates for July
2012.
Rev. Rul. 2012
–20
This revenue
ruling provides various
prescribed r
ates for federal income tax pur-
poses for Jul
y 2012 (the current month).
Table 1 conta
ins the short-term, mid-term,
and long-ter
m applicable federal rates
(AFR) for th
e current month for purposes
of section 1
274(d) of the Internal Revenue
Code. Table
2 contains the short-term,
mid-term, a
nd long-term adjusted appli-
cable fede
ral rates (adjusted AFR) for
the curren
t month for purposes of section
1288(b). T
able 3 sets forth the adjusted
federal lo
ng-term rate and the long-term
tax-exem
pt rate described in section
382(f). T
able 4 contains the appropriate
percenta
ges for determining the low-in-
come hous
ing credit described in section
42(b)(1)
for buildings placed in service
during t
he current month. However, under
section
42(b)(2), the applicable percentage
for non-
federally subsidized new build-
ings pla
ced in service after July 30, 2008,
and befo
re December 31, 2013, shall not
be less
than 9%. Table 5 contains the
federa
l rate for determining the present
value o
f an annuity, an interest for life
or for a
term of years, or a remainder or
a rever
sionary interest for purposes of
secti
on 7520. Finally, Table 6 contains the
blend
ed annual rate for 2012 for purposes
of sec
tion 7872.
2012–27 I.R.B.1July 2, 2012

REV. RUL. 2012–20 TABLE 1
Applicable Federal Rates (AFR) for July 2012
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR.24%.24%.24%.24%
110% AFR.26%.26%.26%.26%
120% AFR.29%.29%.29%.29%
130% AFR.31%.31%.31%.31%
Mid-term
AFR.92%.92%.92%.92%
110% AFR1.01%1.01%1.01%1.01%
120% AFR1.10%1.10%1.10%1.10%
130% AFR1.20%1.20%1.20%1.20%
150% AFR
1.38%1.38%1.38%1.38%
175% AFR
1.62%1.61%1.61%1.60%
Long-term
AFR2.30%2.29%2.28%2.28%
110% AFR
2.54%2.52%2.51%2.51%
120% AFR2.77%
2.75%
2.74%2.73%
130% AFR3.00%2.98%2.97%2.96%
REV. RUL. 2012–20 TABLE 2
Adjusted AFR for July 2012
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
.27%.27%.27%.27%
Mid-term adjusted AFR
1.05%1.05%1.05%1.05%
Long-term adjusted
AFR
3.02%3.00%2.99%2.98%
REV. RUL. 2012–20 TABLE 3
Rates Under Section 382 for July 2012
Adjusted federal long-term rate for the current month3.02%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)3.26%
REV. RUL. 2012–20 TABLE 4
Appropriate Percentages UnderSection 42(b)(1) for July 2012
Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, and before December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.37%
Appropriate percentage for the 30% present value low-income housing credit3.16%
July 2, 201222012–27 I.R.B.

REV. RUL. 2012–20 TABLE 5
Rate Under Section 7520 for July 2012
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest1.2%
REV. RUL. 2012–20 TABLE 6
Blended Annual Rate for 2012
Section 7872(e)(2) blended annual rate for 2012.22%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2012. See Rev. Rul. 2012-20, page 1.
2012–27 I.R.B.3July 2, 2012

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(Also: Part 1, § 7704.)
Rev. Proc. 2012–28
SECTION 1. PURPOSE
This revenue procedure provides a safe
harbor under which the Internal Revenue
Service (IRS) will not challenge a deter-
mination by a publicly traded partnership
(PTP) that income from discharge of in-
debtedness (COD income) is qualifying in-
come under section 7704(d) of the Internal
Revenue Code.
SECTION 2. BACKGROUND
.01 Section 61(a) provides gener-
ally that gross income means all income
from whatever sourcederived. Section
61(a)(12) provides that gross income in-
cludes COD income.
.02 Section 7704(a) provides generally
that, except as provided in section 7704(c),
a PTP is treated as a corporation.
.03 Section 7704(b) provides that the
term “publicly traded partnership” means
any partnership if either (1) interests in
such partnership are traded on an estab-
lished securities market, or (2) interests
in such partnership are readily tradable
on a secondary market (or the substantial
equivalent thereof).
.04 Section 7704(c)(1) provides that
section 7704(a) shall not apply to any PTP
for any taxable year if such partnership
met the gross income requirements of sec-
tion 7704(c)(2) for such taxable year and
each preceding taxable year beginning af-
ter December 31, 1987, during which the
partnership (or any predecessor) was in
existence (qualifying income exception).
Section 7704(c)(2) provides that a partner-
ship meets the gross income requirements
of section 7704(c) for any taxable year if
90 percent or more of the gross income
of such partnership for such taxable year
consists of qualifying income. Section
7704(c)(3) providesthat section 7704(c)
does not apply to any partnership that
would be described in section 851(a) if
such partnership were a domestic corpo-
ration.
.05 Section 7704(d)(1) provides in gen-
eral that the term “qualifying income”
means: (A) interest, (B) dividends, (C)
real property rents, (D) gain from the
sale or other disposition of real property
(including property described in section
1221(a)(1)), (E) income and gains derived
from the exploration, development, min-
ing or production, processing, refining,
transportation (including pipelines trans-
porting gas, oil, or products thereof), or
the marketing of any mineral or natural
resource (including fertilizer, geothermal
energy, and timber), or industrial source
carbon dioxide, or the transportation or
storage of any fuel described in subsec-
tion (b), (c), (d), or (e) of section 6426,
or any alcohol fuel defined in section
6426(b)(4)(A) or any biodiesel fuel as
definedinsection40A(d)(1),(F)anygain
from the sale or disposition of a capital
asset (or property described in section
1231(b)) held for the production of in-
come described in any of the foregoing
subparagraphs, and (G) in the case of a
partnership described in the second sen-
tence of section 7704(c)(3), income and
gains from commodities (not described in
section 1221(a)(1)) or futures, forwards,
and options with respect to commodities.
Section 7704(d)(4) provides that “qualify-
ing income” also includes any income that
would qualify under section 851(b)(2)(A)
or section 856(c)(2).
.06 The legislative history to section
7704 provides that the purpose of the sec-
tion 7704(c) exception for PTPs with qual-
ifying income is to except from entity level
tax those partnerships that engage in ac-
tivities that are commonly considered as
essentially no more than investing or that
have traditionally been conducted in part-
nership form. See H.R. Rep. No. 391
(Part 2), 100th Cong., 1st Sess. 1066–69.
.07 Section 1.163–8T of the temporary
Income Tax Regulations prescribes rules
for allocating interest expense for purposes
of applying the passive loss limitation of
section 469 and the nonbusiness interest
limitations of section 163(d) and (h). Un-
der these rules, interest expense is gener-
ally allocated in the same manner as the
debt to which the interest expense relates.
Debt is allocated by tracing disbursements
of the debt proceeds to specific expendi-
tures.
SECTION 3. SCOPE
This revenue procedure applies to PTPs
with COD income that use the qualify-
ing income exception in section 7704(c)
to avoid corporate treatment under section
7704(a).
SECTION 4. SAFE HARBOR
TheIRSwillnotchallengeaPTP’s
determination that COD income is qual-
ifying income under section 7704(d) if
COD income is attributable to debt in-
curred in direct connection with activities
of the PTP that generate qualifying in-
come (qualifying activities). The PTP may
demonstrate that COD income is attribut-
able to debt incurred in direct connection
with the PTP’s qualifying activities by
any reasonable method. One reasonable
method for demonstrating that COD in-
come is attributable to debt incurred in
direct connection with the PTP’s qualify-
ing activities is to trace the proceeds of the
debt generating COD income to qualifying
activities under an approach similar to the
one used in section 1.163–8T. Ordinar-
ily, a method that allocates COD income
based solely on the ratio of qualifying
gross income to total gross income will
not be considered reasonable. The IRS
may consider a request for a private letter
ruling on whether a method is reasonable.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
for COD income of a PTP attributable to
debt discharged on or after June 15, 2012.
PTPs may apply this revenue procedure
for COD income attributable to debt dis-
charged in any taxable year for which the
statute of limitations has not expired.
SECTION 6. DRAFTING
INFORMATION
The principal author of this rev-
enue procedure is Wendy L. Kribell of
the Office of Associate Chief Counsel
(Passthroughs & Special Industries). For
further information regarding this revenue
procedure, contact Wendy L. Kribell at
(202) 622–3050 (not a toll-free call).
July 2, 201242012–27 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking an
dNoticeof
Public Hearin
g
Basis of Indeb
tedness of
SCorporatio
ns to their
Shareholder
s
REG–134042–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to basis of
indebtedness of S corporations to their
shareholders. These proposed regulations
provide that S corporation shareholders
increase their basis of indebtedness of
the S corporation to the shareholder only
if the indebtedness isbona fide.The
proposed regulations affect shareholders
of S corporations. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by September 10, 2012.
Requests to speak and outlines of topics to
be discussed at the public hearing sched-
uled forOctober 9, 2012, must be received
by September 10, 2010.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–134042–07),
room 5203, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, 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–134042–07),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–134042–07). The public hearing
will be held in the auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC.
FOR
FURTHER INFORMATION
CON
TACT: Concerning the pro-
posed regulat
ions, Caroline E. Hay
at (202) 622–3
070; concerning the
submissions o
f comments, the hearing,
and/or to be pl
aced on the building
access list to
attend the hearing,
Oluwafunmil
ayo (Funmi) P. Taylor at
(202) 622–71
80 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This docume
nt proposes amendments
to §1.1366–
2 of the Income Tax Regula-
tions. In a
ddition, this document proposes
conformin
g changes to the effective date
rules prov
ided in §1.1366–5.
Under sect
ion 1366(d)(1) of the Inter-
nal Revenu
e Code (Code), the aggregate
amount of l
osses and deductions that a
sharehol
der takes into account for any
taxable y
ear cannot exceed the sum of
that shar
eholder’s adjusted basis in stock
and adjus
ted basis of any indebtedness of
the S corp
oration to that shareholder. The
Senate R
eport discussing section 1374
(the pre
decessor statute to section 1366)
illustr
ates Congress’s intent to limit the
loss tha
t a shareholder takes into account
to that
shareholder’s investment in the
corpor
ation; that is, to the adjusted basis
of the s
tock in the corporation owned by
the sha
reholder and the adjusted basis of
any ind
ebtedness of the corporation to the
share
holder. S. Rept. 1983, 85th Cong.,
2d Ses
s. 219–220 (1958) (1958–3 C.B.
922, 1
141).
Secti
on 1.1366–2 provides rules re-
latin
g to limitations on deduction of
passt
hrough items of an S corporation to
its sh
areholder. Under §1.1366–2(a)(1), a
shar
eholder’s aggregate amount of losses
and d
eductions taken into account un-
der §
1.1366–1(a)(2), (3), and (4) for any
taxa
ble year of the S corporation cannot
exce
ed that shareholder’s adjusted basis in
stoc
k in the corporation and adjusted basis
of a
ny indebtedness of the corporation to
tha
t shareholder. These proposed amend-
men
ts to the regulations provide that, in
ord
er to increase a shareholder’s basis of
ind
ebtedness, a loan must representbona
fi
deindebtedness of the S corporation that
ru
ns directly to the shareholder. These
pr
oposed regulations also reaffirm that a
sh
areholder acting as guarantor of S cor-
poration inde
btedness does not create or
increase basi
s of indebtedness simply by
becoming a gua
rantor.
Explanation o
fProvisions
Section 1366(
d)(1) provides that a
shareholder c
an take into account losses
and deductio
ns to the extent of the adjusted
basis of the s
hareholder’s stock and the
adjusted bas
is of any indebtedness of the
S corporatio
n to the shareholder (basis of
indebtednes
s). The Code does not define
basis of ind
ebtedness, but several court
cases invol
ving passthrough losses from
an S corpora
tion interpret section 1366 to
require an i
nvestment in the S corporation
that const
itutes “an actual economic out-
lay” by the
shareholder to create basis of
indebtedn
ess. See, for example,Maloof
v. Comm’r,
456 F.3d 645, 649–650 (6th
Cir. 2006
);Spencer v. Comm’r,110T.C.
62, 78–79
(1998), aff’d without published
opinion,
194 F.3d 1324 (11th Cir. 1999);
Hitchins
v. Comm’r, 103 T.C. 711, 715
(1994);P
erry v. Comm’r, 54 T.C. 1293,
1296 (197
0). Often, the cases involve at-
tempts b
y an S corporation shareholder to
obtain b
asis of indebtedness by borrowing
from ano
ther person—typically, a related
entity—
and then lending the proceeds to
the S co
rporation (a back-to-back loan
transa
ction). Alternatively, an S corpora-
tion sh
areholder might seek to restructure
an exis
ting loan of the S corporation
into a b
ack-to-back loan by assuming
the S c
orporation’s liability on the loan
and cr
eating a commensurate obligation
from t
he S corporation to the shareholder.
Dispu
tes continue to arise concerning
when a
back-to-back loan gives rise to
an ac
tual economic outlay, in particular
whet
her a shareholder has been made
“poo
rer in a material sense” as a result
of th
e loan. See, for example,Oren v.
Comm
’r, 357 F.3d 854, 857–859 (8th Cir.
2004
);Bergman v. U.S., 174 F.3d 928, 932
(8t
h Cir. 1999).
The f
requency of disputes between
Sco
rporation shareholders and the
gov
ernment regarding whether certain
loa
n transactions involving multiple
par
ties, including back-to-back loan
tra
nsactions, create shareholder basis of
in
debtedness demonstrates the complexity
of
and uncertainty about this issue for
2012–27 I.R.B.5July 2, 2012

both shareholders and the government.
The Treasury Department and the IRS
propose these regulations to clarify the
requirements for increasing basis of
indebtedness and to assist S corporation
shareholders in determining with
greater certainty whether their particular
arrangement creates basis of indebtedness.
These proposed regulations require that
loan transactions representbona fide
indebtedness of the S corporation to the
shareholder in order to increase basis of
indebtedness; therefore, an S corporation
shareholder need not otherwise satisfy
the “actual economic outlay” doctrine for
purposes of section 1366(d)(1)(B).
The key requirement of these proposed
regulations is that purported indebtedness
of the S corporation to a shareholder must
bebona fideindebtedness to the share-
holder. These proposed regulations do not
attempt to provide a different standard for
purposes of section 1366 as to what con-
stitutesbona fideindebtedness. Rather,
general Federal tax principles—many of
which have developed outside of section
1366—determine whether indebtedness is
bona fide. See, for example,Knetsch v.
U.S., 364 U.S. 361 (1960) (disallowing in-
terest deductions for lack of actual indebt-
edness);Geftman v. Comm’r, 154 F.3d 61,
68–75 (3d Cir. 1998) (based on the objec-
tive attributes and the economic realities of
the transaction, holding that the transaction
at issue was not abona fidedebt);Estate
of Mixon v. U.S., 464 F.2d 394, 402 (5th
Cir. 1972) (discussion of factors indicative
that debt isbona fide);Litton Business Sys-
tems,Inc.v.Comm’r, 61 T.C. 367, 376–77
(1973).
By contrast, shareholder guarantees of
S corporation debt do not result in basis of
indebtedness. An overwhelming majority
of courts considering whether sharehold-
ers may increase basis of indebtedness
from their guarantees of S corporation debt
determined that the shareholders’ guaran-
tees did not create basis of indebtedness.
Where an S corporation shareholder acts
merely as a guarantor of a loan made by
another party directlyto the S corporation,
or acts in a capacity similar to a guarantor
(for example, as a surety or accommoda-
tion party), then the courts have held that
the shareholder adjusts basis of indebt-
edness only to the extent the shareholder
actually performs under the guarantee.
See, for example,Estate of Leavitt v.
Comm’r, 875 F.2d 420 (4th Cir. 1989);
Frankel v. Comm’r, 61 T.C. 343 (1973),
aff’d without published opinion, 506 F.2d
1051 (3d Cir. 1974);Raynor v. Comm’r,
50 T.C. 762 (1968);Weisberg v. Comm’r,
T.C. Memo. 2010–55;Maloof v. Comm’r,
T.C. Memo. 2005–75, aff’d, 456 F.3d 645
(6th Cir. 2006);Wise v. Comm’r,T.C.
Memo. 1997–135. But seeSelfe v. U.S.,
778 F.2d 769 (11th Cir. 1985) (holding that
under unique and limited circumstances,
a shareholder who guarantees a loan to
an S corporation may increase basis of
indebtedness where, in substance, that
shareholder has borrowed funds and
subsequently advanced them to the S
corporation). These proposed regulations
provide that an S corporation shareholder
who merely acts as a guarantor or in a
similar capacity has not created basis
of indebtedness unless the shareholder
actually makes a payment, and then only
to the extent of such payment. See also
Rev. Rul. 70–50, 1970–1 C.B. 178, (see
§601.601(d)(2)).
Additionally, some taxpayers have re-
lied on an “incorporated pocketbook” the-
ory to claim an increase in basis of in-
debtedness in circumstances that involve a
loan directly to the S corporation from an
entity related to the Scorporation share-
holder. In these transactions, an S cor-
poration shareholder claims that a transfer
from the related entity directly to the share-
holder’s S corporation was made on the
shareholder’s behalf and is, in substance,
a loan from the related entity to the share-
holder, followed by a loan from the share-
holder to the S corporation. A limited
number of court decisions have allowed
shareholders to increase basis of indebted-
ness as a result of incorporated pocketbook
transactions. SeeYates v. Comm’r,T.C.
Memo. 2001–280;Culnen v. Comm’r,
T.C. Memo. 2000–139. Under these pro-
posed regulations, an incorporated pocket-
book transaction increases basis of indebt-
edness only where the transaction creates a
bona fidecreditor-debtor relationship be-
tween the shareholder and the borrowing
S corporation.
These proposed regulations only ad-
dress whether a shareholder has basis
of indebtedness for purposes of section
1366(d)(1)(B) and do not address how to
determine the basis of the shareholder’s
stock in the S corporation for purposes of
section 1366(d)(1)(A). Therefore, these
proposed regulations leave unchanged the
conclusion found in published guidance
that a shareholder of an S corporation does
not increase basis in stock for purposes of
section 1366(d)(1)(A) upon the contribu-
tion of the shareholder’s own unsecured
demand promissory note to the corpora-
tion. Rev. Rul. 81–187, 1981–2 C.B.
167. This conclusion is consistent with
published guidance and case law in the
partnership context that the contribution
of the partner’s own note will not increase
such partner’s basis in its partnership inter-
est under section 722. Rev. Rul. 80–235,
1980–2 C.B. 229;Oden v. Comm’r,T.C.
Memo. 1981–184, aff’d without published
opinion, 679 F.2d 885 (4th Cir. 1982)
(because the partner incurred no cost in
making the note, the partner’s basis in the
note to him was zero). In developing this
project, the Treasury Department and the
IRS have considered whether the principal
holding of Rev. Rul. 81–187, and the
holding of Rev. Rul. 80–235 as it relates
to a partner’s basis in its partnership inter-
est upon the contribution of the partner’s
own note, should be promulgated as regu-
lations. The Treasury Department and the
IRS have considered alternatives to the
discussion of the applicable law in those
revenue rulings. As one model, the Trea-
sury Department and the IRS have, with
respect to basis calculations in the S corpo-
ration and partnership context, considered
adopting a rule similar to the one cur-
rently in §1.704–1(b)(2)(iv)(d)(2), which
provides that a partner’s capital account
is increased with respect to non-readily
tradable partner notes only (i) when there
is a taxable disposition of such note by
the partnership, or (ii) when the partner
makes principal payments on such note.
The Treasury Department and the IRS re-
quest comments concerning the propriety
of this model in the S corporation and the
partnership context.
Proposed Effective Date
The regulations, as proposed, apply to
loan transactions enteredintoonorafter
the date of publication of a Treasury de-
cision adopting these rules as final regula-
tions in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
July 2, 201262012–27 I.R.B.

regulatory action as defined in Executive
Order 12866, as supplemented by Execu-
tive Order 13563. Therefore, a regulatory
assessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these proposed reg-
ulations. Because these proposed regula-
tions do not impose a collection of infor-
mation 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 rulemak-
ing will be submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS request comments on all
aspects of the proposed rules. All com-
ments will be available for public inspec-
tion and copying.
A public hearing has been scheduled
forOctober 9, 2012, 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 15 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 comments and an outline of
the topics to be discussed and the time to be
devoted to each topic (signed original and
eight (8) copies) by September 10, 2012.
A period of 10 minutes is allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for re-
ceiving outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal authors of these pro-
posed regulations are Caroline E. Hay,
Michael H. Beker, and Stacy L. Short,
Office of the Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.108–7 [Amended]
Par. 2. Section 1.108–7 is amended by:
1.Removing the language
“§1.1366–2(a)(5)” in paragraph (d)(2)(iii)
and adding “§1.1366–2(a)(6)” in its place.
2. Adding a sentence to the end of para-
graph (f)(2).
The addition reads as follows:
§1.108–7 Reduction of attributes.
*****
(f)Effective/applicability date.
(2) * * * The revision to the citation
to §1.1366–2(a) in paragraph (d)(2)(iii) of
this section is applicable on and after the
date these proposed regulations are pub-
lished as final in theFederal Register.
*****
§1.1366–0 [Amended]
Par. 3. Section 1.1366–0 is amended
by:
1. Redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as para-
graphs (a)(3), (a)(4), (a)(5), (a)(6),
and (a)(7) in the table of contents for
§1.1366–2, respectively, and adding a new
paragraph (a)(2).
2. Revising the title of §1.1366–5 in the
table of contents.
The additions read as follows:
§1.1366–0 Table of contents.
*****
§1.1366–2 Limitations on deduction of
passthrough items of an S corporation to
its shareholders.
(a) * * *
(2) Basis of indebtedness.
(i) In general.
(ii) Guarantees.
(iii) Examples.
*****
§1.1366–5 Effective/Applicability date.
§1.1366–2 [Amended]
Par. 4. Section 1.1366–2 is amended
by:
1. Redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as para-
graphs (a)(3), (a)(4), (a)(5), (a)(6), and
(a)(7) respectively, and adding a new para-
graph (a)(2).
2. Removing the language “(a)(3)(i)”
in paragraph (a)(1)(i), and adding the lan-
guage “(a)(4)(i)” in its place.
3. Removing the language “paragraph
(a)(3)(ii)” in paragraph (a)(1)(ii), and
adding the language “paragraphs (a)(2)
and (a)(4)(ii)” in its place.
4. Removing the language “(a)(3)(i)
and (ii)” in newly redesignated paragraph
(a)(3), and adding the language “(a)(4)(i)
and (ii)” in its place.
5. Removing the language “paragraphs
(a)(1)(i) and (2)” in newly redesignated
paragraph (a)(4)(i), and adding the lan-
guage “paragraphs (a)(1)(i) and (3)” in its
place.
6. Removing the language “paragraphs
(a)(1)(ii) and (2)” in newly redesignated
paragraph (a)(4)(ii), and adding the lan-
guage “paragraphs (a)(1)(ii) and (3)” in its
place.
7. Removing the language “(a)(3)(i)”
and “(a)(3)(ii)” in newly redesignated
paragraph (a)(5), and adding the language
“(a)(4)(i)” and “(a)(4)(ii)”, respectively, in
their place.
8. Removing the language “(a)(5)(ii)”
in newly redesignated paragraph (a)(6)(i)
2012–27 I.R.B.7July 2, 2012

and (a)(6)(iii), and adding the language
“(a)(6)(ii)” in its place.
9. Removing the language “(a)(4)” in
newly redesignated paragraph (a)(6)(ii),
and adding the language “(a)(5)” in its
place.
10. Removing the language “para-
graphs (a)(1)(i) and (2)” in newly redes-
ignated paragraph (a)(7), and adding the
language “paragraphs (a)(1)(i) and (3)” in
its place.
The additions read as follows:
§1.1366–2 Limitations on deduction of
passthrough items of an S corporation to
its shareholders.
(a) * * *
(2)Basis of indebtedness—(i)In gen-
eral.Thetermbasis of any indebtedness of
the S corporation to the shareholdermeans
the shareholder’s adjusted basis (as de-
fined in §1.1011–1 and as specifically pro-
vided in section 1367(b)(2)) in anybona
fideindebtedness of the S corporation that
runs directly to the shareholder. Whether
indebtedness isbona fideindebtedness to
a shareholder is determined under general
Federal tax principles and depends upon
all of the facts and circumstances.
(ii)Guarantees. A shareholder does not
obtain basis of indebtedness in the S cor-
poration merely by guaranteeing a loan or
acting as a surety, accommodation party,
or in any similar capacity relating to a
loan. When a shareholder makes a pay-
ment onbona fideindebtedness for which
the shareholder has acted as guarantor or
in a similar capacity, based on the facts
and circumstances, the shareholder may
increase its basis of indebtedness to the ex-
tent of that payment.
(iii)Examples. The following exam-
ples illustrate the provisions of paragraph
(a)(2)(i) and (ii) of this section:
Example 1.Shareholder loan transaction.A
is the sole shareholder of S, an S corporation. S
received a loan from A. Whether the loan from A
to S constitutesbona fideindebtedness from S to A
is determined under general Federal tax principles
and depends upon all of the facts and circumstances.
See paragraph (a)(2)(i) of this section. If the loan
constitutesbona fideindebtedness from S to A, A’s
loan to S increases A’s basis of indebtedness under
paragraph (a)(2)(i) of this section. The result is the
same if A made the loan to S through an entity that
is disregarded as an entity separate from A under
§301.7701–3.
Example 2.Guarantee. A is a shareholder of S,
an S corporation. In 2013, S received a loan from
Bank. Bank required A’s guarantee as a condition of
making the loan to S. Beginning in 2014, S could no
longer make payments on the loan and A made pay-
ments directly to Bank from A’s personal funds until
the loan obligation was satisfied. For each payment
A made on the note, A obtains basis of indebtedness
under paragraph (a)(2)(ii) of this section. Thus, A’s
basis of indebtedness is increased during 2014 under
paragraph (a)(2)(ii) of this section to the extent of A’s
payments to Bank pursuant to the guarantee agree-
ment.
Example 3.Back-to-back loan transaction.Ais
the sole shareholder of two S corporations, S1 and S2.
S1 loaned $200,000 to A. A then loaned $200,000 to
S2. Whether the loan from A to S2 constitutesbona
fideindebtedness from S2 to A is determined under
general Federal tax principles and depends upon all of
the facts and circumstances. See paragraph (a)(2)(i)
of this section. If A’s loan to S2 constitutesbona fide
indebtedness from S2 to A, A’s back-to-back loan in-
creases A’s basis of indebtedness in S2 under para-
graph (a)(2)(i) of this section.
Example 4.Loan restructuring through distribu-
tions. A is the sole shareholder of two S corporations,
S1 and S2. In March 2013, S1 made a loan to S2. In
December 2013, S1 assigned its creditor position in
the note to A by making a distribution to A of the
note. Under local law, after S1 distributed the note to
A, S2 was relieved of its liability to S1 and was di-
rectly liable to A. Whether S2 is indebted to A rather
than S1 is determined under general Federal tax prin-
ciples and depends upon all of the facts and circum-
stances. See paragraph (a)(2)(i) of this section. If the
note constitutesbona fideindebtedness from S2 to A,
the note increases A’s basis of indebtedness in S2 un-
der paragraph (a)(2)(i) of this section.
*****
§1.1366–5 [Amended]
Par. 5. Section 1.1366–5 is amended
by:
1. Removing the language “Sec-
tions 1.1366–2(a)(5)(i), (ii) and (iii)”,
and adding the language “Sections
1.1366–2(a)(6)(i), (ii) and (iii)” in its
place.
2. Adding two sentences to the end of
the paragraph.
The additions read as follows:
§1.1366–5 Effective/Applicability date.
***UponthepublicationoftheTrea-
sury decision adopting these rules as fi-
nal regulations in theFederal Register,
§1.1366–2(a)(2) will apply to transactions
entered into on or after the date these pro-
posed regulations are published as final in
theFederal Register. In addition, the re-
visions to §§1.1366–0, 1.1366–2, and this
section are applicable on and after the date
these proposed regulations are published
as final in theFederal Register.
§1.1367–1 [Amended]
Par. 6. Section 1.1367–1(h)Exam-
ple 5(iii) is amended by removing the lan-
guage “§1.1366–2(a)(2)” in the third and
fourth sentences and adding the language
“§1.1366–2(a)(3)” in its place.
§1.1367–3 [Amended]
Par. 7. Section 1.1367–3 is amended
by adding one sentence to the end of the
paragraph to read as follows:
§1.1367–3 Effective/Applicability date.
* * * The revisions to citations to
§1.1366–2(a) in §1.1367–1(h)Example
5(iii) are applicable on and after the date
these proposed regulations are published
as final in theFederal Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on June 11, 2012,
8:45 a.m., and published in the issue of the Federal Register
for June 12, 2012, 77 F.R. 34884)
U.S.-Netherlands Agreement
on Dutch Limited Funds for
Mutual Account
Announcement 2012–26
The following is a copy of the Com-
petent Authority Agreement (“the Agree-
ment”) entered into on May 21, 2012, by
the Competent Authorities of the United
States and the Netherlands regarding the
eligibility of a besloten fonds voor gemene
rekening (limited fund for mutual ac-
count) (“LFMA”) and its participants for
treaty-reduced rates of withholding on
U.S. source dividends and interest under
the Convention between the Kingdom
of the Netherlands and the United States
of America for the Avoidance of Double
Taxation and the Prevention of Fiscal Eva-
sion with Respect to Taxes on Income and
Capital Gains, signed on December 18,
1992, and amended by Protocols signed
on October 13, 1993 and March 8, 2004.
July 2, 201282012–27 I.R.B.

The text of the Agreement is as follows:
COMPETENT AUTHORITY
AGREEMENT
The Competent Authorities of the
Netherlands and the United States en-
ter into the following agreement (the
“Agreement”) to clarify the application
of the Convention between the Kingdom
of the Netherlands and the United States
of America for the Avoidance of Double
Taxation and the Prevention of Fiscal Eva-
sion with Respect to Taxes on Income and
Capital Gains, signed on December 18,
1992, and amended by Protocols signed
on October 13, 1993 and March 8, 2004
(the “Treaty”) with respect to U.S. source
dividends and interest paid to a besloten
fonds voor gemene rekening (limited fund
for mutual account) (“LFMA”). The
Agreement is enteredinto under Article
29 (Mutual Agreement Procedure) of the
Treaty.
A LFMA is a Dutch arrangement
whereby participants in the LFMA agree
to pool their capital toinvest collectively
in a variety of assets and to share in the
proceeds of the investment. A LFMA is
not a legal entity, but is an aggregate of
the LFMA’s assets and obligations. Each
participant in a LFMA is entitled to a
pro ratashare, based on the size of the
investor’s interest in the LFMA, of the
LFMA’s assets and any income generated
by the LFMA’s assets. A participant’s
interest in a LFMA is based on the amount
of participations held by the participant.
Participations are recorded in registered
form and no certificates are issued. Each
participation represents an equal interest
in the net asset value of the LFMA.
Under Dutch law, a LFMA is treated as
a fiscally transparent entity and the partici-
pants in the LFMA, wherever resident, are
required to take into account separately,
on a current basis, the participant’s respec-
tive share of an item of income paid to
the LFMA, whether or not distributed to
the participant. In addition, the character
and source of the item of income in the
hands of the participant are determined as
if such item of income were realized di-
rectly from the source from which realized
by the LFMA. Accordingly, participants in
a LFMA are subject to tax on their propor-
tionate share of the LFMA’s income in the
same manner as if they had received the in-
come or assets directly.
It is understood that a LFMA organized
under Dutch law is not a “resident” of the
Netherlands within the meaning of Article
4 (Resident) of the Treaty because it is
not a person that is liable to tax in the
Netherlands. Therefore, a LFMA is not
eligible to claim benefits in its own right
under the Treaty.
Paragraph 4 of Article 24 (Basis of Tax-
ation) of the Treaty provides that:
In the case of an item of income, profit
or gain derived through a person that is
fiscally transparent under the laws of ei-
ther State, such item shall be considered
to be derived by a resident of a State
to the extent that the item is treated for
the purposes of the taxation law of such
State as the Income, profit or gain of a
resident.
Pursuant to Article 24(4), the Compe-
tent Authorities agree that U.S. source div-
idends and interest received by a LFMA
will be treated as income derived by a res-
ident of the Netherlands to the extent that
such income is subject to tax as the income
of a resident of the Netherlands. Thus, a
person who is a resident of the Netherlands
that derives dividends or interest Income
through a LFMA may be entitled to treaty
benefits if such person otherwise meets all
applicable requirements under the Treaty.
Procedures for claiming treaty benefits
A LFMA may claim treaty benefits on
behalf of its participants by filing a Form
W–8lMY (Certificate of Foreign Interme-
diary, Foreign Flow-Through Entity, or
Certain U.S. Branches for United States
Tax Withholding), in accordance with all
applicable U.S. procedures, as either a
withholding foreign partnership or a non-
withholding foreign partnership.
Notwithstanding the previous para-
graph, a LFMA whose participants are ex-
clusively Netherlands resident tax-exempt
companies referred to in points 1) or 2) of
Chapter IV of the mutual agreement en-
tered into on August 6, 2007 with respect
to the qualification of certain Netherlands
entities for benefits under Article 35 (Ex-
empt Pension Trusts) of the Treaty may
continue to follow the procedures set forth
in Chapter V of that agreement with re-
spect to claims for benefits under Article
35 of the Treaty.
Publication
The Agreement will be published in
the Dutch Government Gazette (in Dutch:
“Staatscourant”) and in the Internal Rev-
enue Bulletin. TheAgreement will en-
ter into force from the date of signing the
Agreement by the competent authorities
of the United States of America and the
Netherlands and shall be subject to regu-
lar review.
Agreed to by the undersigned compe-
tent authorities:
Washington D.C.The Hague
Date: 21/05/2012Date: 15/05/2012
Michael DanilackH.G.(Harry) Roodbeen
U.S. Competent AuthorityNetherlands Competent Authority
2012–27 I.R.B.9July 2, 2012

Financial Asset Securitization
Investment Trusts; Withdrawal
Announcement 2012–27
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking.
SUMMARY: This document withdraws
a notice of proposed rulemaking relat-
ing to financial asset securitization trusts
(FASITs). The FASIT provisions (sections
860H through 860L) of the Internal
Revenue Code (Code) were repealed by
Public Law 108–357, effective January 1,
2005, with a limited exception for existing
FASITs.
FOR FURTHER INFORMATION
CONTACT: Julanne Allen at (202)
622–3920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 1621(a) of the Small Busi-
ness Job Protection Act of 1996, Public
Law 104–188 (110 Stat. 1755 (1996)),
amended the Code by adding part V (sec-
tions 860H through 860L) (the FASIT
provisions) to subchapter M of chapter
1. Part V, which was effective Septem-
ber 1, 1997, authorized a securitization
vehicle called a Financial Asset Securiti-
zation Investment Trust (FASIT). FASITs
were meant to facilitate the securitization
of debt instruments, such as credit card
receivables, home equity loans, and auto
loans.
Proposed regulations providing guid-
ance with respect to the application of the
FASIT provisions were published in the
Federal Registeron February 7, 2000
(65 FR 5807). (Section 1.860E–1(c) of
the proposed regulations, governing the
transfer of non-economic REMIC residual
interests, was finalized on July 18, 2002, in
T.D. 9004, 2002–2 C.B. 331.) In general,
the proposed regulations pertaining to
FASITs are proposed to be applicable
on the date final regulations are filed
with theFederal Register. The portion
of the proposed regulations containing
an anti-abuse rule and the portion of
the proposed regulations implementing
special transition rules for securitization
entities in existence on August 31, 1997,
were proposed to apply on February 4,
2000.
The FASIT provisions were repealed
by section 835(a) of the American
Jobs Creation Act of 2004, Public Law
108–357 (118 Stat. 1418 (2004)), ef-
fective January 1, 2005. During the
period of legislative consideration of the
FASIT provisions and subsequently, other
structures for loan securitizations were
developed. In its discussion of the reasons
for the repeal of the FASIT provisions, the
Ways and Means Committee stated:
The Committee is aware that FASITs
arenotbeingusedwidelyintheman-
ner envisioned by the Congress and,
consequently, the FASIT rules have not
served the purposes for which they orig-
inally were intended. Moreover, the
Joint Committee staff’s report [on its
investigation of Enron Corporation and
related entities] and other information
indicate that FASITS are particularly
prone to abuse and likely are being used
to facilitate tax avoidance transactions.
H. R. Rep. No. 108–548, Pt. 1, at 295
(2004) (footnote omitted).
In light of the repeal of the FASIT pro-
visions and their limited use, the Treasury
Department and the IRS have decided to
withdraw the proposed regulations.
Drafting Information
The principal authors of this with-
drawal announcement are Richard LaFalce
and Julanne Allen of the Office of the
Associate Chief Counsel (Financial
Institutions and Products).
*****
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of
26 U.S.C. 7805, the notice of proposed
rulemaking (REG–100276–97) published
in theFederal Registeron February 7,
2000 (65 FR 5807) is withdrawn.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on June 15, 2012,
8:45 a.m., and published in the issue of the Federal Register
for June 18, 2012, 77 F.R. 36228)
Announcement of Disciplinary Sanctions From the Office
of Professional Responsibility
Announcement 2012-28
TheOfficeofProfessionalResponsi-
bility (OPR) announcesrecent disciplinary
sanctions involving attorneys, certified
public accountants, enrolled agents, en-
rolled actuaries, enrolled retirement plan
agents, and appraisers. These individuals
are subject to the regulations governing
practice before the Internal Revenue Ser-
vice (IRS), which are set out in Title 31,
Code of Federal Regulations, Part 10, and
which are published in pamphlet form as
Treasury Department Circular No. 230.
The regulations prescribe the duties and
restrictions relating to such practice and
prescribe the disciplinary sanctions for
violating the regulations.
The disciplinary sanctions to be im-
posed for violation of the regulations are:
Disbarred from practice before the
IRS—An individual who is disbarred is
not eligible to represent taxpayers before
the IRS.
Suspended from practice before the
IRS—An individual who is suspended is
not eligible to represent taxpayers before
the IRS during the term of the suspension.
Censured in practice before the
IRS—Censure is a public reprimand. Un-
like disbarment or suspension, censure
does not affect an individual’s eligibility
to represent taxpayers before the IRS, but
OPR may subject the individual’s future
July 2, 2012102012–27 I.R.B.

representations to conditions designed to
promote high standards of conduct.
Monetary penalty—A monetary
penalty may be imposed on an individual
who engages in conduct subject to sanc-
tion or on an employer, firm, or entity
if the individual was acting on its behalf
and if it knew, or reasonably should have
known, of the individual’s conduct.
Disqualification of appraiser—An
appraiser who is disqualified is barred
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or the IRS.
Under the regulations, attorneys, cer-
tified public accountants, enrolled agents,
enrolled actuaries, and enrolled retirement
plan agents may not assist, or accept assis-
tance from, individuals who are suspended
or disbarred with respect to matters consti-
tuting practice (i.e., representation) before
the IRS, and they may not aid or abet sus-
pended or disbarred individuals to practice
before the IRS.
Disciplinary sanctions are described in
these terms:
Disbarred by decision after hearing,
Suspended by decision after hearing,
Censured by decision after hearing,
Monetary penalty imposed after hear-
ing, and Disqualified after hearing—An
administrative law judge (ALJ) conducted
an evidentiary hearing upon OPR’s com-
plaint alleging violation of the regulations
and issued a decision imposing one of
these sanctions. After 30 days from the
issuance of the decision, in the absence of
an appeal, the ALJ’s decision became the
final agency decision.
Disbarred by default decision, Sus-
pended by default decision, Censured by
default decision, Monetary penalty im-
posed by default decision, and Disqual-
ified by default decision—An ALJ, after
findingthatnoanswertoOPR’scomplaint
had been filed, granted OPR’s motion for a
default judgment and issued a decision im-
posing one of these sanctions.
Disbarment by decision on appeal,
Suspended by decision on appeal, Cen-
sured by decision on appeal, Monetary
penalty imposed by decision on ap-
peal, and Disqualified by decision on
appeal—The decision of the ALJ was
appealed to the agency appeal authority,
acting as the delegate of the Secretary
of the Treasury, and the appeal authority
issued a decision imposing one of these
sanctions.
Disbarred by consent, Suspended by
consent, Censured by consent, Mone-
tary penalty imposed by consent, and
Disqualified by consent—In lieu of a
disciplinary proceeding being instituted
or continued, an individual offered a con-
sent to one of these sanctions and OPR
accepted the offer. Typically, an offer
of consent will provide for: suspension
for an indefinite term; conditions that the
individual must observe during the sus-
pension; and the individual’s opportunity,
after a stated number of months, to file
with OPR a petition for reinstatement af-
firming compliance with the terms of the
consent and affirming current eligibility
to practice (i.e., an active professional
license or active enrollment status). An
enrolled agent or an enrolled retirement
plan agent may also offer to resign in order
to avoid a disciplinary proceeding.
Suspended by decision in expedited
proceeding, Suspended by default de-
cision in expedited proceeding, Sus-
pended by consent in expedited pro-
ceeding—OPR instituted an expedited
proceeding for suspension (based on cer-
tain limited grounds, including loss of a
professional license and criminal convic-
tions).
OPR has authority to disclose the
grounds for disciplinary sanctions in these
situations: (1) an ALJ or the Secretary’s
delegate on appeal has issued a decision
on or after September 26, 2007, which was
theeffectivedateofamendmentstothe
regulations that permit making such deci-
sions publicly available; (2) the individual
has settled a disciplinary case by signing
OPR’s “consent to sanction” form, which
requires consenting individuals to admit to
one or more violations of the regulations
and to consent to the disclosure of the in-
dividual’s own return information related
to the admitted violations (for example,
failure to file Federal income tax returns);
or (3) OPR has issued a decision in an
expedited proceeding for suspension.
Announcements of disciplinary sanc-
tions appear in the Internal Revenue Bul-
letin at the earliest practicable date. The
sanctions announced below are alphabet-
ized first by the names of states and sec-
ond by the last names of individuals. Un-
less otherwise indicated, section numbers
(e.g., § 10.51) refer to the regulations.
City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Alabama
AuburnDouglas Jr., James B.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
February 2, 2012
California
Palo AltoGonzales, Juanita A.Enrolled AgentReinstated
to practice
before the IRS,
January 29, 2012
2012–27 I.R.B.11July 2, 2012

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
California (Continued)
Santa AnaOrtega, ManuelAttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
February 2, 2012
Newport BeachWolfe, Gerald L.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
March 14, 2012
Colorado
Colorado SpringsAnderson, Edwin G.Enrolled AgentReinstated
to practice
before the IRS,
February 2, 2012
Connecticut
WestonKingsley, Steven T.CPAReinstated to
practice before the
IRS, July 13, 2004
Florida
ClearwaterSchmautz, Emil N.CPASuspended by decision
in expedited proceeding
under § 10.82 (convicted
in state court, scheme to
defraud)
Indefinite from
March 6, 2012
Georgia
AustellBlack, Charles C.AttorneyReinstated
to practice
before the IRS,
January 29, 2012
AthensBonner, Charles B.CPAReinstated
to practice
before the IRS,
January 29, 2012
LeesburgMathis, Craig S.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
March 13, 2012
FayettevillePesanto, WilfredoAttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
February 6, 2012
July 2, 2012122012–27 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Iowa
OsceolaMurphy, Richard J.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
February 2, 2012
Kansas
LeawoodPoppe, Thomas V.CPASuspended by decision
in expedited proceeding
under § 10.82 (conviction
under 18 U.S.C. § 1027,
false statement on form
required by ERISA)
Indefinite from
April 4, 2012
Kentucky
Crestview HillsRobison, Jean P.CPAReinstated
to practice
before the IRS,
February 8, 2012
Louisiana
MandevilleTallon, Melissa H.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
February 3, 2012
Maryland
HarwoodVenuti, John J.AttorneySuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction
under 26 U.S.C. § 7203,
failure to file income tax
return)
Indefinite from
April 10, 2012
Michigan
LivoniaMatusz, Mark M.CPAReinstated
to practice
before the IRS,
February 2, 2012
Nevada
Las VegasSalas, Richard J.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
February 2, 2012
2012–27 I.R.B.13July 2, 2012

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
New Jersey
FreeholdDavis, Richard B.CPAReinstated
to practice
before the IRS,
March 16, 2012
West Long BranchNeedle, Leonard S.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
February 6, 2012
New York
BronxEngram, Jimmie L.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
February 6, 2012
AirmontKingoff, Stuart N.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
February 6, 2012
Pesanto, Wilfredo,
See Georgia
North Carolina
GrahamDrumwright Jr.,
Robert G.
CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
February 2, 2012
Ohio
ColumbusMerrelli Jr., Joseph J.CPAReinstated
to practice
before the IRS,
February 2, 2012
Oregon
PortlandBohn, Morton D.CPASuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction under
18 U.S.C. § 1344, bank
fraud and 18 U.S.C.
§ 1957, money
laundering)
Indefinite from
March 16, 2012
Pennsylvania
AmblerBreznicky, David M.CPAReinstated to
practice before the
IRS,
November 30, 2011
July 2, 2012142012–27 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Texas
San AntonioBurt, Charles E.CPASuspended by decision
in expedited proceeding
under § 10.82 (revocation
of CPA license)
Indefinite from
February 8, 2012
Virginia
AlexandriaHadeed Jr., Michael M. AttorneySuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction
under 18 U.S.C. § 371,
conspiracy to commit
immigration fraud and
to defraud the U.S. and
18 U.S.C. § 1001, material
false statements, aiding
and abetting)
Indefinite from
February 6, 2012
2012–27 I.R.B.15July 2, 2012

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
July 2, 2012i2012–27 I.R.B.

Numerical Finding List
1
Bulletin 2012–27
Announcements:
2012-26, 2012-27 I.R.B.8
2012-27, 2012-27 I.R.B.10
2012-28, 2012-27 I.R.B.10
Proposed Regulations:
REG-134042-07, 2012-27 I.R.B.5
Revenue Procedures:
2012-28, 2012-27 I.R.B.4
Revenue Rulings:
2012-20, 2012-27 I.R.B.1
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2012–1 through 2012–26 is in Internal Revenue Bulletin
2012–26, dated June 25, 2012.
2012–27 I.R.B.iiJuly 2, 2012

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2012–27
Proposed Regulations:
REG-100276-97
Withdrawn by
Ann. 2012-27, 2012-27 I.R.B.10
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2012–1 through 2012–26 is in Internal Revenue Bulletin 2012–26, dated June 25, 2012.
July 2, 2012iii2012–27 I.R.B.

2012–27 I.R.B.July 2, 2012

July 2, 20122012–27 I.R.B.

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