Internal Revenue Bulletin 2008-31 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 200
8-31
August 4, 2008
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2008–38, page 249.
Limited partner’s distributive share.This ruling addresses
whether a limited partner’s distributive share of interest ex-
pense attributable to indebtedness allocable to property held
for investment described in section 163(d)(5)(A)(ii) of the Code
is taken into account when determining the limited partner’s
adjusted gross income. See Announcement 2008–65, in this
Bulletin, for additional information. Rev. Rul. 2008–12 ampli-
fied.
Rev. Rul. 2008–39, page 252.
Characterization of management fees.This ruling ad-
dresses the characterization of the management fees paid by
an upper-tier investment partnership (UTP) and by lower-tier
trader partnerships (LTPs) to their respective managers under
sections 162 and 212 of the Code where the UTP’s activities
consist solely of acquiring, holding, and disposing of interests
in the LTPs and UTP’s management fee is not paid or incurred
by UTP on behalf of any LTP in connection with the trades or
businesses of the LTPs.
Rev. Rul. 2008–43, page 258.
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 August 2008.
T.D. 9402, page 254.
REG–102122–08, page 278.
Final, temporary, and proposed regulations under section 956
oftheCodeprovideguidancetodeterminethebasisinprop-
erty acquired by a controlled foreign corporation as a result of
certain transactions that otherwise qualify for nonrecognition
treatment.
Notice 2008–63, page 261.
This notice sets forth and requests comments on a proposed
revenue ruling concerning the income, gift, estate, and gener-
ation-skipping transfer tax consequences in situations in which
family members create a private trust company to serve as
the trustee of trusts in which family members are grantors and
beneficiaries.
Notice 2008–64, page 268.
This notice solicits comments on a proposal to require taxpay-
ers to disclose to the IRS their groupings and regroupings of
activities and the addition and disposition of specific activities
within the chosen groupings of activities for purposes of sec-
tion 469 of the Code and regulations section 1.469–4.
Notice 2008–66, page 270.
This notice provides for the suspension of certain requirements
under section 42 of the Code for low-income housing credit
projects in the United States in order to provide emergency
housing relief needed as a result of the devastation caused by
severe storms and flooding in Missouri beginning on June 1,
2008.
(Continued on the next page)
Finding Lists begin on page ii.

Rev. Proc. 2008–47, page 272.
This procedure describes the conditions under which changes
to certain subprime mortgage loans will not cause the Ser-
vice to challenge the tax status of certain securitization vehi-
cles holding the loans. Rev. Proc. 2007–72, 2007–52 I.R.B.
1257, provided similar guidance regarding fast-track loan mod-
ifications that were effected in a manner consistent with cer-
tain principles, recommendations, and guidelines (the “Frame-
work”), which the American Securitization Forum (ASF) released
on December 6, 2007. On July 8, 2008, the ASF released
an updated Framework, which covers additional fast-track loan
modifications. Rev. Proc. 2007–72 amplified and super-
seded.
Announcement 2008–65, page 279.
This announcement clarifies that the limited partner described
in Rev. Rul. 2008–12, 2008–10 I.R.B. 520, properly includes
the allowable amount of his distributive share of the trading
partnership’s interest expense in computing the limited part-
ner’s ordinary business income or loss on Schedule E of the
partner’s Form 1040. Rev. Rul. 2008–12 clarified.
ESTATE TAX
Notice 2008–63, page 261.
This notice sets forth and requests comments on a proposed
revenue ruling concerning the income, gift, estate, and gener-
ation-skipping transfer tax consequences in situations in which
family members create a private trust company to serve as
the trustee of trusts in which family members are grantors and
beneficiaries.
GIFT TAX
Notice 2008–63, page 261.
This notice sets forth and requests comments on a proposed
revenue ruling concerning the income, gift, estate, and gener-
ation-skipping transfer tax consequences in situations in which
family members create a private trust company to serve as
the trustee of trusts in which family members are grantors and
beneficiaries.
August 4, 20082008–31 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2008–31 I.R.B.August 4, 2008

August 4, 20082008–31 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 August 2008
. See Rev. Rul. 2008-43, page 258.
Section 62.—A
djusted
Gross Income Defined
A ruling addresses whether a non materially partic-
ipating partner’s distributive share of interest expense
attributable to indebtedness allocable to property held
for investment described in section 163(d)(5)(A)(ii)
is taken into account when determining the limited
partner’s adjusted gross income under section 62. See
Rev. Rul. 2008-38, page 249.
A ruling addresses whether a non materially partic-
ipating partner’s distributive share of interest expense
attributable to indebtedness allocable to property held
for investment described in section 163(d)(5)(A)(ii)
is taken into account when determining the limited
partner’s adjusted gross income under section 62. See
Announcement 2008-65, page 279.
Section 162.—Trade or
Business Expenses
A revenue ruling addresses the characterization of
the management fees paid by an upper-tier invest-
ment partnership and by lower-tier trader partner-
ships to their respective managers under sections 162
and 212 where the upper tier partnership’s activities
consist solely of acquiring, holding, and disposing
of interests in the lower tier trader partnerships and
UTP’s management fee is not paid or incurred by
UTP on behalf of any LTP in connection with the
trades or businesses of the LTPs. See Rev. Rul.
2008-39, page 252.
Section 163.—Interest
A ruling addresses whether a non materially partic-
ipating partner’s distributive share of interest expense
attributable to indebtedness allocable to property held
for investment described in section 163(d)(5)(A)(ii)
is taken into account when determining the limited
partner’s adjusted gross income under section 62. See
Rev. Rul. 2008-38, page 249.
A ruling addresses whether a non materially partic-
ipating partner’s distributive share of interest expense
attributable to indebtedness allocable to property held
for investment described in section 163(d)(5)(A)(ii)
is taken into account when determining the limited
partner’s adj
usted gross income under section 62. See
Announcement
2008-65, page 279.
Section 212.—Expenses for
Production of Income
A revenue ruling addresses the characterization of
the management fees paid by an upper-tier invest-
ment partnership and by lower-tier trader partner-
ships to their respective managers under sections 162
and 212 where the upper tier partnership’s activities
consist solely of acquiring, holding, and disposing
of interests in the lower tier trader partnerships and
UTP’s management fee is not paid or incurred by
UTP on behalf of any LTP in connection with the
trades or businesses of the LTPs. See Rev. Rul.
2008-39, page 252.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of August 2008. See Rev.
Rul. 2008-43, page 258.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-I
n Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of August 2008. See Rev. Rul.
2008-43, page 258.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2008. See Rev. Rul. 2008-43, page 258.
Sectio
n 467.—Certain
Paymen
ts 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 August 2008. See Rev. Rul. 2008-43, page 258.
Section 468.—
Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2008. See Rev. Rul. 2008-43, page 258.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of August 2008. See Rev.
Rul. 2008-43, page 258.
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 August 2008. See Rev. Rul. 2008-43, page 258.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of August 2008. See Rev.
Rul. 2008-43, page 258.
Section 671.—Trust
Income, Deductions, and
Credits
Attributable to
Granto
rs and Others as
Substa
ntial Owners
26 CFR 1
.671–1: Grantors and others treated as sub-
stanti
al owners; scope.
This no
tice sets forth a proposed revenue ruling
concer
ning the income, gift, estate, and generation-
skippi
ng transfer tax consequences in situations in
which f
amily members create a private trust com-
pany t
o serve as the trustee of trust in which family
membe
rs are grantors and beneficiaries. See Notice
2008-
63, page 261.
Section 702.—Income and
Credits of Partner
(Also: §§ 62, 163.)
Limited partner’s distributive share.
This ruling addresses whether a limited
2008–31 I.R.B.249August 4, 2008

partner’s distributive share of interest ex-
pense attributable to indebtedness alloca-
ble to property held for investment de-
scribed in section 163(d)(5)(A)(ii) of the
Code is taken into account when determin-
ing the limited partner’s adjusted gross in-
come. See Announcement 2008–65, in
this Bulletin, for additional information.
Rev. Rul. 2008–12 amplified.
Rev. Rul. 2008–38
ISSUES
(1) In the case of an individual, is
interest paid or accrued on indebted-
ness allocable to property described in
§ 163(d)(5)(A)(ii) of the Internal Revenue
Code deductible (after the application of
the § 163(d)(1) limitation) in determining
the taxpayer’s adjusted gross income or
does the interest (after the application of
the § 163(d)(1) limitation) instead consti-
tute an itemized deduction?
(2) If an individual has both investment
interest expense attributable to indebt-
edness allocable to property described
in § 163(d)(5)(A)(ii) and investment in-
terest expense attributable to indebted-
ness allocable to property described in
§ 163(d)(5)(A)(i) and the individual’s
aggregate investment interest expense is
greater than the individual’s net invest-
ment income, how does the individual
determine the portion of the allowed
investment interest deduction that is de-
ductible in determining the taxpayer’s
adjusted gross income and the portion that
constitutes an itemized deduction?
FACTS
Situation 1
PRS is a partnership that is engaged
solely in the trade or business of trading
securities for its own account and not for
customers. LP, an individual, owns an in-
terest in PRS as a limited partner. LP does
not materially participate (as that term is
used in § 469) in the activity in which PRS
is engaged. The taxable year for PRS and
LP is the calendar year.
PRS incurs indebtedness in its trade or
business of trading securities. In Year 1,
LP’s distributive share of PRS’ income,
gain, loss, deduction, and credit includes
$200x of interest expense incurred by
PRS with respect to its indebtedness.
LP’s net investment income, as defined in
§ 163(d)(4), for Year 1 is equal to $150x.
During Year 1, LP’s distributive share of
PRS’ interest expense is the only inter-
est paid or accrued by LP (either directly
or through any flow-through entity) on
indebtedness properly allocable to prop-
erty held for investment (as defined in
§ 163(d)(5)(A)). LP’s distributive share of
PRS’ interest expense is not subject to any
limitation under § 465 or 704(d).
Situation 2
ThefactsarethesameasinSituation
1except that during Year 1 LP also pays
$100x of interest expense on indebtedness
properly allocable to stocks and bonds held
by LP for investment (within the meaning
of § 163(d)(5)(A)(i)). None of the $100x
of interest expense is described in § 265(a).
LAW AND ANALYSIS
Section 62(a) provides that the term
“adjusted gross income” means, in the
case of an individual taxpayer, gross in-
come minus the deductions specified in
§ 62(a)(1) through (21).
Section 62(a)(1) provides that deduc-
tions allowed by chapter 1 of subtitle A,
other than by part VII of subchapter B,
which are attributable to a trade or busi-
ness carried on by the taxpayer, if such
trade or business does not consist of the
performance of services by the taxpayer as
an employee, are taken into account in de-
termining the adjusted gross income of the
taxpayer.
Section 63(d) defines the term “item-
ized deductions” as including all deduc-
tions allowable under chapter 1 of subtitle
A other than deductionsallowable in arriv-
ingatadjustedgrossincomeandthede-
duction for personal exemptions provided
in§151.
Section 163(d)(1) provides that, in
the case of a noncorporate taxpayer, the
amount allowed as a deduction under
chapter 1 of subtitle A for investment in-
terest for any taxable year shall not exceed
the amount of the taxpayer’s net invest-
ment income for the taxable year. Section
163(d)(2) provides that any amount not
allowed as a deduction for a given tax-
able year by reason of § 163(d)(1) shall
be treated as investment interest paid or
accrued by the taxpayer in the next suc-
ceeding taxable year.
Section 163(d)(3)(A) provides that the
term “investment interest” means any in-
terest allowable as a deduction under chap-
ter 1 of subtitle A (determined without re-
gard to paragraph (1) of § 163(d)) which is
paid or accrued on indebtedness properly
allocable to property held for investment.
Section 702(a)(8) provides that, in
determining the partner’s income tax,
each partner shall take into account the
partner’s distributive share of the partner-
ship’s taxable income or loss, exclusive of
the items requiring separate computation
under § 702(a)(1) through (7). Section
702(a)(1) through (6) lists specific items
of income, gain, loss, deduction or credit
that must be separately stated by a partner-
ship. Section 702(a)(7) provides that other
items of income, gain, loss, deduction or
credit also must be separately stated if
required by regulations prescribed by the
Secretary.
Section 702(b) provides that the char-
acter of any item of income, gain, loss,
deduction, or credit included in a part-
ner’s distributive share under paragraphs
(1) through (7) of § 702(a) shall be de-
termined as if such item were realized di-
rectly from the source from which realized
by the partnership, or incurred in the same
manner as incurred by the partnership.
Section § 1.702–1(a)(8)(ii) of the In-
come Tax Regulations provides that each
partner must take into account separately
the partner’s distributive share of any part-
nership item that, if separately taken into
account by the partner, would result in an
income tax liability for that partner, or for
any other person, different from that which
would result if that partner did not take the
item into account separately.
Section 706(a) provides that, in com-
puting the taxable income of a partner for
a taxable year, the inclusions required by
§ 702 and § 707(c) with respect to a part-
nership shall be based on the income, gain,
loss, deduction, or credit of the partnership
for any taxable year of the partnership end-
ing within or with the taxable year of the
partner.
Revenue Ruling 2008–12, 2008–10
I.R.B. 520, holds that, by virtue of the
definition of the term “property held for
investment” in § 163(d)(5)(A)(ii), a non-
corporate limited partner’s distributive
share of interest expense on indebted-
ness allocable to a partnership’s trade or
business of trading securities for its own
August 4, 20082502008–31 I.R.B.

account constitutes investment interest
described in § 163(d)(3) and is therefore
subject to the limitation on the deduction
of investment interest in § 163(d)(1), pro-
vided that the limited partner does not
materially participate (as that term is used
in§469)inthetradingactivity. Therul-
ing further holds that a partnership that
engages in the trade or business of trading
securities for its own account must sep-
arately state the amount of interest paid
or accrued on indebtedness properly al-
locable to its trading activity because the
degree of participation by each noncorpo-
rate partner of the partnership could limit
the deductibility of such interest by the
partner on his or her individual tax return.
Situation 1
LP’s only investment interest (as de-
fined in § 163(d)(3)) for Year 1 is LP’s
$200x distributive share of PRS’ interest
expense in Year 1. This investment interest
is subject to the limitation on investment
interest in § 163(d)(1). Section 163(d)(1)
limits LP’s deduction for investment in-
terest in Year 1 to $150x, the amount of
LP’s net investment income (as defined in
§ 163(d)(4)) for that year. Accordingly,
in Year 1, LP may deduct $150x of LP’s
$200x distributive share of the interest ex-
pense of PRS. Pursuant to § 163(d)(2), the
$50x of interest expense not allowed as a
deduction for Year 1 is treated as invest-
ment interest paid or accrued in Year 2.
LP’s distributive share of PRS’ Year
1 interest expense that is allowed under
§ 163(d)(1) is deductible in arriving at
LP’s adjusted gross income pursuant to
§ 62(a)(1). Section 702(b) provides that
the character of any item of deduction in-
cluded in a partner’s distributive share un-
der § 702(a) shall generally be determined
as if such item were incurred in the same
manner as incurred by the partnership. Be-
cause the interest expense of PRS is at-
tributable to the carrying on of its trade or
business of trading securities, LP’s share
of that expense is described in § 62(a)(1).
While LP’s distributive share of PRS’ in-
terest expense is subject to the investment
interest limitation in § 163(d)(1), the in-
vestment interest limitation does not affect
the character of the interest expense for
other purposes of the Code. Thus, except
for purposes of applying the investment in-
terest limitation, LP’s distributive share of
PRS’ interest expense deductions are char-
acterized under § 702(b).
Accordingly, $150x of LP’s distributive
share of the Year 1 interest expense of PRS
is deductible in arriving at LP’s adjusted
gross income. Therefore, such amount
does not constitute an itemized deduction
(as defined in 63(d)).
Situation 2
InSituation 2,inadditiontoLP’s
$200x distributive share of PRS’ Year 1
interest expense, LP also pays $100x of
interest expense on indebtedness prop-
erly allocable to stocks and bonds held
by LP for investment (within the meaning
of § 163(d)(5)(A)(i)). Accordingly, LP’s
total investment interest expense for Year
1 is $300x. Pursuant to 163(d)(1), LP
is allowed to deduct only $150x of this
investment interest expense in Year 1.
To the extent that LP’s $150x of al-
lowed investment interest deduction is at-
tributable to indebtedness incurred in PRS’
trade or business of trading securities, the
deduction is taken into account in arriving
at LP’s adjusted gross income. To the ex-
tent the $150x of allowed investment inter-
est deduction is attributable to the indebt-
edness attributableto the stock and bonds
held for investment, the deduction is not
taken into account in arriving at LP’s ad-
justed gross income and is instead reported
as an itemized deduction.
When an individual has both invest-
ment interest expense attributable to prop-
erty described in § 163(d)(5)(A)(i) and
investment interest expense attributable to
property described in § 163(d)(5)(A)(ii)
and the individual’s aggregate invest-
ment interest expense is greater than the
individual’s net investment income, the
individual must allocate the taxpayer’s
net investment income to the two cat-
egories of investment interest expenses
using a reasonable method of allocation.
One reasonable method is to allocate
the net investment income to the two
categories of investment interest in the
same proportion that the amount of in-
vestment interest in each category bears
to the total amount of investment inter-
est (thepro ratamethod). InSituation
2, two-thirds ($200x/$300x) of LP’s ag-
gregate investment interest expense is
attributable to LP’s interest in the trade
or business of trading securities of PRS
(property described in § 163(d)(5)(A)(ii)),
and one-third ($100x/$300x) is attrib-
utable to stocks and bonds held by LP
for investment (property described in
§ 163(d)(5)(A)(i)). Accordingly, using a
pro ratamethod, two-thirds of LP’s $150x
of net investment income is allocated to
LP’s distributive share of the interest ex-
pense of PRS, while one-third of LP’s
$150x of net investment income is allo-
cated to LP’s other investment interest
expense. Therefore,using this method of
allocation, of LP’s allowed $150x invest-
ment interest deduction in Year 1 under
§ 163(d)(1), $100x is taken into account
in arriving at LP’s adjusted gross income
under § 62(a), while the remaining $50x
constitutes an itemized deduction under
§ 63(d). The $150x of investment interest
that is not allowed as a deduction under
§ 163(d)(1) in Year 1 is treated as invest-
ment interest paid or accrued in Year 2
pursuant to § 163(d)(2). The $150x of
investment interest that is not allowed as
a deduction under § 163(d)(1) in Year 1
is comprised of $100x of investment in-
terest attributable to LP’s interest in PRS’
trade or business (an interest described in
§ 163(d)(5)(A)(ii)) and $50x of investment
interest expense attributable to stocks and
bonds held for investment (within the
meaning of § 163(d)(5)(A)(i)).
HOLDINGS
Issue 1: In the case of an individual, in-
terest paid or accrued on indebtedness al-
locable to property held for investment de-
scribed in § 163(d)(5)(A)(ii) is (after the
application of the § 163(d)(1) limitation)
a deduction described in § 62(a)(1) and is
therefore taken into account in determin-
ing the individual’s adjusted gross income.
Issue 2: If an individual has both in-
vestment interest expense attributable to
indebtedness allocable to property de-
scribed in § 163(d)(5)(A)(i) and invest-
ment interest expense attributable to in-
debtedness allocable to property described
in § 163(d)(5)(A)(ii) and the individual’s
aggregate investment interest expense is
greater than the individual’s net invest-
ment income, the individual must allocate
the individual’s net investment income be-
tween the two categories of investment in-
terest expense using a reasonable method
of allocation. One reasonable method of
allocation is to allocate the individual’s
2008–31 I.R.B.251August 4, 2008

net investment income to the two cate-
gories of investment interest in proportion
to the relative amounts of interest expense
within each category.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 2008–12 is amplified.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Faith P. Colson of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this revenue ruling, contact
Faith P. Colson at (202) 622–3060 (not a
toll-free call).
26 CFR 1.702–1(b): Character of items constituting
distributive share.
(Also: §§ 162, 212, 703.)
Characterization of management
fees.This ruling addresses the charac-
terization of the management fees paid
by an upper-tier investment partnership
(UTP) and by lower-tier trader partner-
ships (LTPs) to their respective managers
under sections 162 and 212 of the Code
where the UTP’s activities consist solely
of acquiring, holding, and disposing of
interestsintheLTPsandUTP’smanage-
ment fee is not paid or incurred by UTP
on behalf of any LTP in connection with
the trades or businesses of the LTPs.
Rev. Rul. 2008–39
ISSUE
Under the facts described below, how
are the management fees incurred by each
of the lower tier partnerships (LTPs) and
the management fee incurred by the upper
tier partnership (UTP) taken into account
in computing the tax liability of an individ-
ual who is a limited partner (LP) of UTP?
FACTS
LP, an individual, owns a limited part-
nership interest in UTP. UTP owns limited
partnership interests in several LTPs. Each
LTP is engaged in the business of trad-
ing in securities and such business consti-
tutes a trade or business within the mean-
ing of § 162 of the Internal Revenue Code
(Code). UTP’s activities consist solely of
acquiring, holding, and disposing of in-
terests in LTPs, and such activities, with-
out regard to the activities of LTPs, do
not constitute a trade or business within
the meaning of § 162. Instead, UTP’s ac-
tivities (without regard to the activities of
LTPs) consist of holding limited partner-
ship interests in LTPs for the production
of income within the meaning of § 212.
UTP and each LTP pay an annual man-
agement fee to their respective managers
in consideration for management services
performed for their benefit. Each man-
agement fee is computed as a specified
percentage of the value of the net assets
owned by UTP and each LTP, as the case
may be.
The management fee paid or incurred
by each LTP is an ordinary and neces-
sary business expense within the meaning
of § 162 in carrying on its trade or busi-
ness. The management fee paid or in-
curred by UTP, without regard to the ac-
tivities of LTP, is an ordinary and neces-
sary expense in carrying on its investment
activities. UTP’s management fee is not
paid or incurred by UTP on behalf of any
LTPinconnectionwithanLTP’stradeor
business. None of the management fees
are properly capitalized under § 263.
Under the terms of the partnership
agreement of each LTP, UTP receives a
distributive share of the items of income,
gain, loss, deduction and credit of each
LTP. Under the terms of UTP’s partner-
ship agreement, LP receives a distributive
share of UTP’s items of income, gain, loss,
deduction and credit.
LAW AND ANALYSIS
Section 162(a) provides, in part, that
there shall be allowed as a deduction all
the ordinary and necessary expenses paid
or incurred during the taxable year in car-
rying on any trade or business.
Section 212 provides that in the case of
an individual, there shall be allowed as a
deduction all the ordinary and necessary
expenses paid or incurred during the tax-
able year (1) for the production or collec-
tion of income, (2) for the management,
conservation, or maintenance of property
held for the production of income, or (3)
in connection with the determination, col-
lection, or refund of any tax.
Section 1.212–1(d) of the Income Tax
Regulations provides that expenses, to be
deductible under § 212, must be “ordinary
and necessary.” Thus, such expenses must
be reasonable in amount and must bear a
reasonable and proximate relation to the
production or collection of taxable income
or to the management, conservation, or
maintenance of property held for the pro-
duction of income.
Section 1.212–1(g)provides that fees
for services of investment counsel and
similar expenses paid or incurred by a tax-
payer in connection with investments held
by the taxpayer are deductible under § 212
if they are paid or incurred for the produc-
tion of income and they are ordinary and
necessary under the circumstances.
Section 702(a)(8) provides that, in
determining the partner’s income tax,
each partner shall take into account the
partner’s distributive share of the partner-
ship’s taxable income or loss, exclusive of
the items requiring separate computation
under § 702(a)(1) through (7). Section
702(a)(1) through (6) lists specific items
of income, gain, loss, deduction or credit
that must be separately stated by a partner-
ship. Section 702(a)(7) provides that other
items of income, gain, loss, deduction or
credit also must be separately stated if
required by regulations prescribed by the
Secretary.
Section 702(b) provides that the char-
acter of any item of income, gain, loss,
deduction, or credit included in a part-
ner’s distributive share under paragraphs
(1) through (7) of § 702(a) shall be de-
termined as if such item were realized di-
rectly from the source from which realized
by the partnership, or incurred in the same
manner as incurred by the partnership.
Section 703(a) provides that the tax-
able income of a partnership shall be com-
puted in the same manner as in the case of
an individual, except that the items listed
in § 702(a) shall be separately stated and
the deductions listed in paragraph (2) of
§ 703(a) shall not be allowed.
Section 703(a)(2)(E) provides that the
additional itemized deductions for indi-
viduals in part VII of subchapter B of the
Code, including expenses described in
§ 212, are not allowed to the partnership.
Section 1.702–1(a)(1) through (a)(8)(i)
lists specific items of income, gain, loss,
deduction or credit that must be sepa-
rately stated by a partnership. Specifically,
August 4, 20082522008–31 I.R.B.

§ 1.702–1(a)(8)(i) provides, in part, that
each partner shall take into account sep-
arately the partner’s distributive share of
the partnership’s nonbusiness expenses
that are described in § 212.
InButler v. Commissioner,36T.C.
1097 (1961),acq.,1962–2C.B.4,theTax
Court held that, because loans made by
a limited partner to a partnership were a
vital factor in the existence and further-
ance of the partnership’s business and were
proximately related to the business activi-
ties of the partnership, the limited partner
was entitled to a business bad debt deduc-
tion. The Tax Court noted its agreement
with other cases that “[b]y reason of being
a partner in a business petitioner was indi-
vidually engaged in business.” 36 T.C. at
1106. Other courts have permitted a gen-
eral partner to deduct as a trade or busi-
ness expense amounts paid on behalf of
the business of the partnership. InWard
v. Commissioner, 20 T.C. 332 (1953),
acq., 1956–2 C.B. 9,aff’d, 224 F.2d 547
(9
th
Cir. 1955), following the termination
of a general partnership, a general partner
paid medical expenses of a partnership em-
ployee. The court held that the partner was
individually engaged in business by reason
of being a partner. Because of the termi-
nation of the partnership, the fact that the
partner was no longer in business at the
time of the expense did not mean the de-
duction was denied. A similar result was
reached inFlood v. United States,133
F.2d 173 (1
st
Cir. 1943).
InGoodwin v. Commissioner,75T.C.
424 (1980),aff’d,691F.2d490(3dCir.
1982), the Tax Court concluded that, for
the purpose of characterizing partnership
expenses for purposes of § 162, a part-
nership must be viewed as a substantive
economic entity clearly distinct from its
partners. InGoodwin, the taxpayer was
individually engaged in real estate activi-
ties and attempted to claim deductions un-
der § 162(a) for his distributive share as a
limited partner of certain startup costs in-
curred by two limited partnerships formed
to construct housing projects. The tax-
payer argued that his activities as a part-
ner constituted an expansion or continua-
tion of his existing trade or business. The
Tax Court, citingMadison Gas and Elec-
tricCo.v.Commissioner,72T.C.521
(1979),aff’d,633F.2d512(7
th
Cir. 1980),
held that in the context of § 162, the char-
acter of deductions incurred by the part-
nership,i.e., whether the deductions are
incurred in the course of a trade or busi-
ness, must be resolved at the partnership
level. The partnership was not yet carry-
ing on a trade or business at the time the
startup costs were paid or incurred. Ac-
cordingly, the Tax Court determined that
the taxpayer’s share of the startup costs
were not deductible under § 162 regardless
of the taxpayer’s individual activities.
The Tax Court inGoodwindistin-
guished the question of whether a part-
nership expense was an ordinary and
necessary expense incurred in carrying on
the trade or business of a partnership from
the question of whether a partner may
deduct unreimbursed amounts paid by the
partner on behalf of the partnership. It was
the latter question that the Tax Court con-
cluded was the issue inButler,Ward,and
Flood.InGoodwin, the Tax Court inter-
pretedButler,Ward,andFloodto stand for
the proposition that, under certain facts,
a partner may be entitled to individually
deduct under § 162 as an ordinary and
necessary expense an amount paid by the
partner on behalf of the partnership for
which the partner is not reimbursed.See
also Cropland Chemical v. Commissioner,
75 T.C. 288 (1980);Klein v. Commis-
sioner, 25 T.C. 1045 (1956),acq., 1956–2
C.B. 6; and Rev. Rul. 70–253, 1970–1
C.B. 31.
UTP’s management fee is not an or-
dinary and necessary expense paid or in-
curred by UTP on behalf of the LTPs in
carrying on the trading business of the
LTPs. Thus, the reasoning and conclusions
inButler,Ward,andFloodare inapposite
to the facts presented in this ruling.
Further, the reasoning and conclusions
in Rev. Rul. 98–15, 1998–1 C.B. 718,
do not apply to the question presented in
this ruling. Rev. Rul. 98–15 addresses
whether, under the facts described in that
ruling, an organization that operates an
acute care hospital continues to qualify for
exemption from federal income tax as an
organization described in § 501(c)(3) when
it forms a limited liability company (LLC)
with a for-profit corporation and then con-
tributes its hospital and all of its other op-
erating assets to the LLC, which then op-
erates the hospital. The question addressed
in Rev. Rul. 98–15 is distinguishable from
the question presented in this ruling.
Accordingly, underGoodwin,theques-
tion of whether the management fee paid
or incurred by UTP may be deducted under
§ 162 or § 212 must be resolved solely by
reference to the activities of UTP. Because
UTP itself is not engaged in a trade or busi-
ness within the meaning of § 162 and be-
cause the management fee is not paid or
incurred on behalf of any LTP in connec-
tion with an LTP’s trade or business, the
management fee is not deductible under
§ 162. Instead, UTP’s annual manage-
ment fees are ordinary and necessary ex-
penses described in § 212 paid or incurred
in connection with UTP’s investment ac-
tivities. Accordingly, LP’s share of the
UTP’s management fee is deductible un-
der § 212. Pursuant to § 703(a)(2)(E), UTP
does not take into account UTP’s manage-
ment fees in computing UTP’s taxable in-
come. Instead, § 1.702–1(8)(a)(i) requires
that UTP separately state UTP’s manage-
ment fees and that LP take into account
separately LP’s distributive share of UTP’s
management fees.
Because the management fee of each
LTP is an ordinary and necessary expense
paid or incurred in carrying on the trade
or business of the LTP, the management
fee is deductible under § 162. As a result,
each LTP takes its management fee into
account in computing its taxable income
or loss described in § 702(a)(8), and UTP
takes into account its distributive share of
the taxable income or loss of each LTP in
computing UTP’s own taxable income or
loss described in § 702(a)(8). LP takes
into account its distributive share of UTP’s
taxable income or loss in computing LP’s
tax liability.
HOLDING
UTP’s management fee is not an or-
dinary and necessary expense paid or in-
curred by UTP on behalf of the LTPs in
carryingontheirtradingbusiness. The
management fee paid or incurred by UTP
constitutes an expense described in § 212.
This expense is not taken into account in
computing UTP’s taxable income or loss
described in § 702(a)(8). Instead, the man-
agement fee must be separately stated by
UTP and separately taken into account by
LP in computing LP’s tax liability.
The management fee paid or incurred
by an LTP constitutes an expense de-
scribedin§162andistakenintoaccount
in computing the LTP’s taxable income or
loss described in § 702(a)(8). UTP’s dis-
2008–31 I.R.B.253August 4, 2008

tributive share of taxable income or loss of
an LTP is taken into account in computing
UTP’s taxable incomeor loss described in
§ 702(a)(8). In computing LP’s tax liabil-
ity, LP takes into account LP’s distributive
shareofUTP’staxableincomeorloss.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Faith P. Colson of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this revenue ruling, contact
Faith P. Colson at (202) 622–3060 (not a
toll-free call).
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 August 2008. See Rev. Rul. 2008-43, page 258.
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 August 2008. See Rev. Rul. 2008-43, page 258.
Section 860G.—Other
Definitions and Special
Rules
This revenue procedure describes the conditions
under which changes to certain subprime mortgage
loans will not cause the Internal Revenue Service to
challenge the tax status of certain securitization vehi-
cles holding the loans or to assert that those modifi-
cations create a liability for tax on a prohibited trans-
action. See Rev. Proc. 2008-47, page 272.
Section 956.—Investment
of Earnings in United
States Property
26 CFR 1.956–1: Shareholder’s pro rata share of a
controlled foreign corporation’s increase in earnings
invested in United States property.
T.D. 9402
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 956
for Determining the Basis of
Property Acquired in Certain
Nonrecognition Transactions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations under sec-
tion 956 of the Internal Revenue Code
(Code) regarding the determination of
basis in certain United States property
(within the meaning of section 956(c) of
the Code) acquired by a controlled for-
eign corporation incertain nonrecogniti
on
transactions that are intended to repatr
i-
ate earnings and profits of the controll
ed
foreign corporation without United Sta
tes
income taxation. The final regulation a
dds
a cross reference to the temporary regu-
lations. These regulations affect Unit
ed
States shareholders of a controlled for
-
eign corporation that acquires United
States property in certain nonrecogni
tion
transactions. The text of the tempora
ry
regulations serves as the text of the p
ro-
posed regulations (REG–102122–08) s
et
forth in the notice of proposed rulema
king
published in this issue of the Bulleti
n.
DATES:Effective Date:These regulations
areeffectiveJune24,2008.
Applicability Date:These regulations
apply to property acquired in exchanges
occurring on or after June 24, 2008.
FOR FURTHER INFORMATION
CONTACT: John H. Seibert at (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR Part 1 under section 956, which
was added to the Code by the Revenue Act
of 1962, Public Law 87–834 (76 Stat. 960
(1962)). The temporary regulations in this
document are issued under the authority of
sections 367(b) and 956(e). Section 367(b)
was added to the Code by section 1042(a)
of the Tax Reform Act of 1976, Public Law
94–455 (90 Stat. 1520 (1976)). Section
956(e) was added to the Code by section
13232(b) of the Omnibus Budget Recon-
ciliation Act of 1993, Public Law 103–66,
(107 Stat. 312 (1993)).
The temporary regulations in this doc-
ument apply to determine the basis of
certain United States property (as defined
in section 956(c) of the Code) acquired by
a controlled foreign corporation in certain
nonrecognition transactions that are in-
tended to repatriate earnings and profits of
the controlled foreign corporation without
an income inclusion by the United States
shareholders of the controlled foreign cor-
poration under section 951(a)(1)(B).
Explanation of Provisions
A.Transactions at Issue
The IRS and the Treasury Department
are aware that certain taxpayers are engag-
ing in certain nonrecognition transactions
in which a controlled foreign corporation
(CFC) acquires certain United States prop-
erty (within the meaning of section 956(c))
without resulting in an income inclusion to
the United States shareholders of the CFC
under section 951(a)(1)(B).
In one such transaction, for example,
USP, a domestic corporation and the com-
mon parent of an affiliated group that files
a consolidated tax return, owns 100-per-
cent of the outstanding stock of US1 and
US2, both domestic corporations that join
USP in the filing of a consolidated tax re-
turn. US1 owns 100 percent of the stock
of CFC, a controlled foreign corporation.
US2issues$100xofitsstocktoCFCin
exchange for $10x of CFC stock and $90x
cash.
USP takes the position that: (i) US2’s
transfer of its stock to CFC in exchange
for $10x of CFC stock and $90x cash is
an exchange to which section 351 applies;
August 4, 20082542008–31 I.R.B.

(ii) US2 recognizes no gain on the receipt
of $10x of CFC stock and $90x cash in
exchange for its stock pursuant to section
1032(a); (iii) CFC recognizes no gain on
the issuance of its stock to US2 under sec-
tion 1032(a); (iv) CFC’s basis in the US2
stock is zero pursuant to section 362(a);
and (v) US1 and US2 do not and will not
have an income inclusion under section
951(a)(1)(B) as a result of CFC holding
the US2 stock (which constitutes United
States property under section 956(c)).
The IRS and the Treasury Department
believe these transactions raise significant
policy concerns because the transactions
may have the effect of repatriating earn-
ings and profits of a CFC without a corre-
sponding dividend inclusion, or an income
inclusion under section 951(a)(1)(B) by
reason of the CFC’s investment in United
States property.
B.Section 956 — In General
Section 956 was enacted to require
an income inclusion by United States
shareholders of a CFC that invests cer-
tain earnings and profits in United States
property “on the grounds that [the invest-
ment] is substantially the equivalent of a
dividend being paid to them.” S. Rep. No.
87–1881, 1962–3 C.B. 703, 794 (1962).
(See §601.601(d)(2)(ii)(b)).
Under Section 951(a)(1)(B) each
United States shareholder (as defined in
section 951(b)) of a CFC (as defined in
section 957(a)) must include in its gross
income for its taxable year in which or
with which the taxable year of the CFC
ends, the amount determined under sec-
tion 956 with respect to such shareholder
for such year (but only to the extent not
excluded from gross income under section
959(a)(2)).
The amount determined under section
956withrespecttoaUnitedStatesshare-
holder of a CFC for any taxable year is
the lesser of: (1) the excess, if any, of the
shareholder’spro ratashare of the aver-
age amounts of United States property held
(directly or indirectly) by the CFC as of the
close of each quarter of such taxable year,
over the amount of earnings and profits of
the CFC described in section 959(c)(1)(A)
with respect to such shareholder; or (2)
the shareholder’spro ratashare of the ap-
plicable earnings of the CFC. In general,
the amount taken into account with respect
to any United States property for this pur-
pose is the adjusted basis of such prop-
erty as determined for purposes of comput-
ing earnings and profits, reduced by any
liability to which the property is subject.
Earnings and profits described in section
959(c)(1)(A) are attributable to amounts
previously included in gross income by the
United States shareholder under section
951(a)(1)(B) (or which would have been
included except for section 959(a)(2)).
Section 956(c)(1) defines United States
property to generally include stock of a do-
mestic corporation and an obligation of a
United States person. However, section
956(c)(2) excludes from the definition of
United States property, the stock or obli-
gations of a domestic corporation which is
neither a United States shareholder of the
CFC, nor a domestic corporation 25 per-
cent or more of the total combined vot-
ing power of which, immediately after the
CFC’s acquisition of stock in such domes-
tic corporation, is owned (or is consid-
ered as being owned) by the United States
shareholders of the CFC in the aggregate.
Section 956(e) grants the Secretary
authority to prescribe such regulations as
may be necessary to carry out the pur-
poses of section 956, including regulations
to prevent the avoidance of section 956
through reorganizations or otherwise.
C.Section 367(b) — In General
Section 367(b)(1) provides that in the
case of any exchange described in section
332, 351, 354, 355, 356 or 361, in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the Sec-
retary which are necessary or appropriate
to prevent the avoidance of Federal income
taxes.
Section 367(b)(2) provides that the
regulations prescribed pursuant to section
367(b)(1) shall include (but shall not be
limited to) regulations dealing with the
sale or exchange of stock or securities in
a foreign corporation by a United States
person, including regulations providing
the circumstances under which gain is rec-
ognized, amounts are included in gross in-
come as a dividend, adjustments are made
to earnings and profits, or adjustments are
made to basis of stock or securities, and
basis of assets.
Section 367(b) was enacted to ensure
that international tax considerations are
adequately addressed when the provisions
of subchapter C of the Code apply to cer-
tain nonrecognition exchanges involving
foreign corporations. In adopting section
367(b), Congress noted that “it is essential
to protect against tax avoidance...upon the
repatriation of previously untaxed foreign
earnings.” H.R. Rep. No. 658, 94
th
Cong.,
1
st
Sess. 241 (1975).
D.Determination of Basis in Certain
Nonrecognition Exchanges
Section 358(a)(1) generally provides
that the basis of property received pursuant
to an exchange to which section 351, 354,
355, 356, or 361 applies is the same as that
of the property exchanged, decreased by
the fair market value of any other property
(except money) received by the taxpayer,
the amount of any money received by the
taxpayer, and the amount of loss to the
taxpayer which was recognized on such
exchange, and increased by the amount
which was treated as a dividend, and the
amount of gain to the taxpayer which was
recognized on such exchange (not includ-
inganyportionofsuchgainwhichwas
treated as a dividend).
Section 362(a) provides that if property
is acquired by a corporation in connection
with a transaction to which section 351 ap-
plies, or as paid-in surplus or as a contribu-
tion to capital, then the basis of such prop-
erty shall be the same as it would be in
the hands of the transferor, increased in the
amount of gain recognized to the transferor
on such transfer.
Section 1032(a) provides that no gain
or loss shall be recognized to a corporation
on the receipt of money or other property
in exchange for stock (including treasury
stock) of such corporation.
E.Determination of Basis for Purposes
of Section 956
These temporary regulations apply
when a CFC acquires stock or obligations
of a domestic issuing corporation, that
constitute United States property under
section 956(c), from such corporation
pursuant to an exchange in which the
controlled foreign corporation’s basis in
such property is determined under section
2008–31 I.R.B.255August 4, 2008

362(a). If these temporary regulations
apply to such an exchange, then, solely for
purposes of section 956, the CFC’s basis
in such United States property shall be no
less than the fair market value of the prop-
erty transferred by thecontrolled foreign
corporation in exchange for such property.
For purposes of the temporary regulations,
the term property has the meaning set forth
in section 317(a), but includes any lia-
bilityassumedbytheCFCinconnection
with the exchange notwithstanding section
357(a).
These temporary regulations also ap-
ply if United States property, the basis of
which is determined under these tempo-
rary regulations, is transferred to a related
person (related person transferee), or by
a related person transferee to another re-
lated person, pursuant to an exchange in
which the related person transferee’s basis
in such property is determined, in whole
or in part, by reference to the transferor’s
basis in such property. This rule is in-
tended to prevent taxpayers from attempt-
ing to avoid the general rule of the tempo-
rary regulations by subsequently transfer-
ring the United States property to a related
person in another nonrecognition transac-
tion.
The basis of United States property
determined under the temporary regu-
lations shall apply only for purposes of
determining the amount of United States
property acquired or held by a CFC under
section 956, and accordingly the amount
of a United States shareholder’s income
inclusion under section 951(a)(1)(B) with
respect to such CFC.
The temporary regulations apply only
to determine the basis of United States
property acquired by a CFC pursuant to
an exchange that is within the scope of
these temporary regulations. All other
basis determinations are made under the
rules provided under section 956(a) and
§1.956–1(e)(1)(4).
Effective/Applicability Dates
These regulations apply to United
States property acquired in exchanges
occurring on or after June 24, 2008. No
inference is intended as to the basis of
United States property acquired by a con-
trolled foreign corporation pursuant to a
transaction described herein under current
law, and the IRS may, where appropriate,
challenge such transactions under applica-
ble provisions or judicial doctrines.
Special Analyses
These temporary and final regulations
are necessary to prevent abusive trans-
actions of the type described in the ex-
planation of provisions in this preamble.
Accordingly, good cause is found for dis-
pensing with notice and public procedure
pursuant to 5 U.S.C. 553(b) of the Admin-
istrative Procedures Act and for dispensing
with a delayed effective date pursuant
to 5 U.S.C. 553(d)(1) and (3) of such
Act. For applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6), please
refer to the notice of proposed rulemaking
published in this issue of the Bulletin.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small entities.
Drafting Information
The principal author of these regula-
tions is John H. Seibert, Office of Asso-
ciate Chief Counsel (International). How-
ever, other personnel from the IRS and the
Treasury Department participated in their
development.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.956–1 is amended by
adding a sentence to the end of paragraph
(e)(1) and adding new paragraphs (e)(5),
(e)(6) and (f) to read as follows:
§1.956–1 Shareholder’s pro rata share
of a controlled foreign corporation’s
increase in earnings invested in United
States property.
*****
(e) * * * (1) * * * See §1.956–1T(e)(6)
for a special rule for determining amounts
attributable to United States property ac-
quired as the result of certain nonrecogni-
tion transactions.
*****
(e)(5) and (e)(6) [Reserved]. For fur-
ther guidance, see §1.956–1T(e)(5) and
(e)(6).
(f)Effective/applicability dates.(1)
Paragraph (e)(5) of this section is effective
June 14, 1988, with respect to investments
made on or after June 14, 1988. Paragraph
(e)(6) of this section applies to nonrecog-
nition property acquired in exchanges
occurring on or after June 24, 2008.
Par. 3. Section 1.956–1T is amended
by:
1. Redesignating paragraph (e)(5)(i)
as paragraph (e)(5) and revising the para-
graph heading for the newly-designated
paragraph (e)(5).
2. Adding paragraph (e)(6).
3. Redesignating paragraph (e)(5)(ii)
as paragraph (f) and revising newly-desig-
nated paragraph (f).
The revisions and additions read as fol-
lows:
§1.956–1T Shareholder’s pro rata share
of a controlled foreign corporation’s
increase in earnings invested in United
States property (temporary).
*****
(e)(5)Exclusion for certain recourse
obligations. ***
(6)Adjusted basis of property ac-
quired in certain nonrecognition trans-
actions—(i)Scope and purpose.This
paragraph (e)(6) provides rules for de-
termining, solely for purposes of section
956, the basis of certain United States
property acquired by a controlled foreign
corporation pursuant to an exchange in
which the controlled foreign corporation’s
basis in such United States property is
determined under section 362(a). This
paragraph (e)(6) also applies if United
States property, the basis in which has
been determined under these temporary
regulations, is transferred (in one or more
subsequent exchanges) to a related person
(within the meaning of section 954(d)(3)),
pursuant to an exchange in which the re-
lated person’s basis in such property is
determined, in whole or in part, by ref-
erence to the transferor’s basis in such
property. The purpose of this paragraph
August 4, 20082562008–31 I.R.B.

(e)(6) is to prevent the effective repatria-
tion of earnings and profits of a controlled
foreign corporation that acquires United
States property in connection with an
exchange to which this paragraph (e)(6)
applies without a corresponding income
inclusion under section 951(a)(1)(B) by
claiming a basis in the United States prop-
erty less than the amount of earnings and
profits effectively repatriated.
(ii)Definition of United States prop-
erty. For purposes of this paragraph
(e)(6),United States propertyis stock
of a domestic corporation described in
section 956(c)(1)(B) or an obligation of
a domestic corporation described in sec-
tion 956(c)(1)(C) that is acquired by a
controlled foreign corporation from the
domestic issuing corporation. The ex-
ceptions provided under section 956(c)(2)
shall apply for this purpose.
(iii)Basis of United States property.
Solely for purposes of section 956, the ba-
sis of United States property acquired by a
controlled foreign corporation in connec-
tion with an exchange to which this para-
graph (e)(6) applies shall be no less than
the fair market value of the property trans-
ferred by the controlled foreign corpora-
tion in exchange for such United States
property. For purposes of this paragraph
(e)(6), the term property has the mean-
ing set forth in section 317(a), but also in-
cludes any liability assumed by the con-
trolled foreign corporation in connection
with the exchange notwithstanding the ap-
plication of section 357(a). The fair mar-
ket value of the property transferred by the
controlled foreign corporation in exchange
for the United States property shall be de-
termined at the time of the exchange.
(iv)Timing.For purposes of
§1.956–2(d)(1)(i)(a), a controlled foreign
corporation that acquires United States
property in an exchange to which this
paragraph (e)(6) applies acquires an ad-
justed basis in such property at the time
of the controlled foreign corporation’s ex-
change of property for such United States
property.
(v)Transfers to related persons.Ifa
controlled foreign corporation transfers
United States property, the basis in which
has been determined under this paragraph
(e)(6), to a related person (within the
meaning of section 954(d)(3)) (related per-
son transferee) in an exchange pursuant to
which the related person transferee’s basis
in such United States property is deter-
mined, in whole or in part, by reference to
the controlled foreign corporation’s basis
in such United States property, then, solely
for purposes of section 956, the related
person transferee’s basis in such United
States property shall be no less than the
basisofsuchUnitedStatespropertyinthe
hands of the controlled foreign corporation
immediately before the exchange as deter-
mined under paragraph (e)(6)(iii) of this
section. This paragraph (e)(6)(v) shall also
apply in the case of one or more successive
transfers of the United States property by
a related person transferee to one or more
persons related to the controlled foreign
corporation (within the meaning of section
954(d)(3)). This paragraph (e)(6)(v) shall
apply regardless of whether a subsequent
transfer was part of a plan (or series of
related transactions) that includes the con-
trolled foreign corporation’s acquisition of
the United States property.
(vi)Examples. The rules of this para-
graph (e)(6) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. USP, a domestic corpo-
ration, is the common parent of an affiliated group
that joins in the filing of a consolidated return. USP
owns 100 percent of the stock of US1 and US2, both
domestic corporations and members of the USP con-
solidated group. US1 owns 100 percent of the stock
of CFC, a controlled foreign corporation. US2 is-
sues $100x of its stock to CFC in exchange for $10x
of CFC stock and $90x cash. US2’s transfer of its
stocktoCFCisdescribedinsection351,US2recog-
nizes no gain in the exchange under section 1032(a),
andCFC’sbasisintheUS2stockacquiredintheex-
change is determined under section 362(a).
(ii)Analysis. The US2 stock acquired by CFC in
the exchange constitutes United States property un-
der paragraph (e)(6)(ii) of this section because CFC
acquires the US2 stock from US2, the issuing corpo-
ration. Therefore, because CFC’s basis in the US2
stock is determined under section 362(a), then for
purposes of section 956, CFC’s basis in the US2 stock
shall, under paragraph (e)(6)(iii) of this section, be no
less than $90x, the fair market value of the property
exchanged by CFC for the US2 stock (the $10x of
CFC stock issued in the exchange does not constitute
property for purposes of paragraph (e)(6)(iii) of this
section). Pursuant to paragraph (e)(6)(iv) of this sec-
tion, for purposes of §1.956–2(d)(1)(i)(a) CFC shall
be treated as acquiring its basis of no less than $90x
in the US2 stock at the time of its transfer of prop-
erty to US2 in exchange for the US2 stock. The re-
sult would be the same if, instead of CFC transferring
$90x of cash to US2 in the exchange, CFC assumes a
$90x liability of US2.
Example 2.(i)Facts. USP, a domestic corpora-
tion owns 100 percent of the stock of USS, a domestic
corporation. USP also owns 100 percent of the stock
of CFC, a controlled foreign corporation. USP’s ba-
sis in its USS stock equals the fair market value of
the USS stock, or $100x. USP transfers its USS stock
to CFC in exchange for $100x of CFC stock. USP’s
transfer of its USS stock to CFC is described in sec-
tion 351, USP recognizes no gain in the exchange un-
der section 351(a), and CFC’s basis in the USS stock
acquired in the exchange, determined under section
362(a), equals $100x.
(ii)Analysis. The USS stock acquired by CFC in
the exchange does not constitute United States prop-
erty under paragraph (e)(6)(ii) of this section because
CFC acquires the USS stock from USP. Therefore,
CFC’s basis in the US2 stock, for purposes of section
956, is not determined under this paragraph (e)(6).
Instead, CFC’s basis in the USS stock is determined
under the general rule of section 956(a) and under
§1.956–1(e)(1) – (4). As determined under section
362(a), CFC’s basis in the USS stock is $100x.
Example 3.(i)Facts. USP, a domestic corpo-
ration, owns 100 percent of the stock of CFC1, a
controlled foreign corporation. CFC1 holds United
States property (within the meaning of paragraph
(e)(6)(ii) of this section) with a basis of $30x for
purposes of section 956 that was determined under
paragraph (e)(6)(iii) of this section. CFC1 owns 100
percent of the stock of CFC2, a controlled foreign
corporation. CFC1 transfers the United States prop-
erty to CFC2 in an exchange described in section
351. CFC2’s basis in the United States property is
determined under section 362(a).
(ii)Analysis. In the section 351 exchange, CFC1
transferred United States property to CFC2 with a ba-
sis that was determined under paragraph (e)(6)(iii)
of this section. Further, CFC2’s basis in the United
States property is determined under section 362(a)
by reference, in whole or in part, to CFC’s basis in
such property. Therefore, for purposes of section
956, pursuant to paragraph (e)(6)(v) of this section
CFC2’s basis in the United States property shall be
no less than $30x. Paragraph (e)(6)(v) of this sec-
tion would also apply if CFC2 subsequently transfers
the United States property to another person related
to CFC1 (within the meaning of section 954(d)(3)) if
such related person’s basis in the United States prop-
erty is determined by reference, in whole or in part,
to CFC2’s basis in such property.
(f)Effective/applicability date.(1)
Paragraph (e)(5) of this section is effective
June 14, 1988, with respect to investments
made on or after June 14, 1988. Paragraph
(e)(6) of this section applies to nonrecog-
nition property acquired in exchanges
occurring on or after June 24, 2008.
(2) The applicability of paragraph (e)(6)
of this section will expire on June 23, 2011.
Steven T. Miller,
Acting Deputy Commissioner
for Services and Enforcement.
Approved June 6, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
2008–31 I.R.B.257August 4, 2008

(Filed by the Office of the Federal Register on June 23, 2008,
8:45 a.m., and published in the issue of the Federal Register
for June 24, 2008, 73 F.R. 35580)
Section 1001.—Determi-
nation of Amount of and
Recognition of Gain or Loss
26 CFR 1.1001–3: Modifications of debt instruments.
This revenue procedure describes the conditions
under which changes to certain subprime mortgage
loans will not cause the Internal Revenue Service to
challenge the tax status of certain securitization vehi-
cles holding the loans or to assert that those modifi-
cations create a liability for tax on a prohibited trans-
action. See Rev. Proc. 2008-47, page 272.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for August 2008.
Rev. Rul. 2008–43
This revenue ruling provides various
prescribed rates for federal income tax
purposes for August 2008 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2008–43 TABLE 1
Applicable Federal Rates (AFR) for August 2008
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR
2.54%2.52%2.51%2.51%
110% AFR2.79%2.77%2.76%
2.75%
120% AFR3.04%3.02%3.01%3.00%
130% AFR3.31%3.28%3.27%3.26%
Mid-term
AFR
3.55%3.52%3.50%
3.49%
110% AFR3.91%3.87%
3.85%
3.84%
120% AFR4.26%4.22%4.20%4.18%
130% AFR4.63%
4.58%4.55%4.54%
150% AFR5.35%5.28%5.25%5.22%
175% AFR6.25%
6.16%6.11%6.08%
Long-term
AFR
4.58%4.53%4.50%
4.49%
110% AFR
5.04%
4.98%
4.95%
4.93%
120% AF
R
5.51%5.44%5.40%5.38%
130% AFR
5.98%5.89%5.85%5.82%
August 4, 20082582008–31 I.R.B.

REV. RUL. 2008–43 TABLE 2
Adjusted AFR for August 2008
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adj
usted
AFR
2.09%2.08%2.07%2.07%
Mid-term adjusted AFR3.48%
3.45%
3.44%3.43%
Long-term adjusted
AFR
4.65%
4.60%
4.57%4.56%
REV. RUL. 2008–43 TABLE 3
Rates Under Section 382 for August 2008
Adjusted federal long-term rate for the current month
4.65%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.65%
REV. RUL. 2008–43 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for August 2008
Appropriate percentage for the 70% present value low-income housing credit7.94%
Appropriate percentage for the 30% present value low-income housing credit3.40%
REV. RUL. 2008–43 TABLE 5
Rate Under S
ection 7520 for August 2008
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest4.2%
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 August 2008. See Rev. Rul. 2008-43, page 258.
Section 2036.—Transfers
With Retained Life Estate
26 CFR 20.2036–1: Transfers with retained life es-
tate.
This notice sets forth a proposed revenue ruling
concerning the income, gift, estate, and generation-
skipping transfer tax consequences in situations in
which family members create a private trust com-
pany to serve as the trustee of trust in which family
members are grantors and beneficiaries. See Notice
2008-63, page 261.
Section 2038.—Revocable
Transfers
26 CFR 20.2038–1: Revocable transfers.
This notice sets forth a proposed revenue ruling
concerning the income, gift, estate, and generation-
skipping transfer tax consequences in situations in
which family members create a private trust com-
pany to serve as the trustee of trust in which family
members are grantors and beneficiaries. See Notice
2008-63, page 261.
Section 2041.—Powers
of Appointment
26 CFR 20.2041–1: Powers of appointment; in gen-
eral.
This notice sets forth a proposed revenue ruling
concerning the income, gift, estate, and generation-
skipping transfer tax consequences in situations in
which family members create a private trust com-
pany to serve as the trustee of trust in which family
members are grantors and beneficiaries. See Notice
2008-63, page 261.
Section 2511.—Transfers
in General
26 CFR 25.2511–1: Transfers in general.
This notice sets forth a proposed revenue ruling
concerning the income, gift, estate, and generation-
skipping transfer tax consequences in situations in
which family members create a private trust com-
pany to serve as the trustee of trust in which family
members are grantors and beneficiaries. See Notice
2008-63, page 261.
Section 2601.—Tax
Imposed
26 CFR 26.2601–1: Effective dates.
This notice sets forth a proposed revenue ruling
concerning the income, gift, estate, and generation-
2008–31 I.R.B.259August 4, 2008

skipping transfer tax consequences in situations in
which family members create a private trust com-
pany to serve as the trustee of trust in which family
members are grantors and beneficiaries. See Notice
2008-63, page 261.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2008. See Rev. Rul. 2008-43, page 258.
Section 7701.—Definitions
26 CFR 301.7701–4: Trusts.
This revenue procedure describes the conditions
under which changes to certain subprime mortgage
loans will not cause the Internal Revenue Service to
challenge the tax status of certain securitization vehi-
cles holding the loans or to assert that those modifi-
cations create a liability for tax on a prohibited trans-
action. See Rev. Proc. 2008-47, page 272.
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 August 2008. See Rev. Rul. 2008-43, page 258.
August 4, 20082602008–31 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Guidance on Private Trust
Companies
Notice 2008–63
TEXT
I.Overview and Purpose
This notice sets forth the contents of a
proposed revenue ruling concerning the in-
come, estate, gift, and generation-skipping
transfer tax consequences in situations in
which family members create a private
trust company to serve as the trustee of
trusts having family members as grantors
and beneficiaries.
This notice solicits public comments re-
garding the proposed revenue ruling. The
IRS and the Treasury Department antic-
ipate issuing a final revenue ruling after
the comments have been considered. The
IRS and the Treasury Department intend
that the revenue ruling, once issued, will
confirm certain tax consequences of the
use of a private trust company that are not
more restrictive than the consequences that
could have been achieved by a taxpayer di-
rectly, but without permitting a taxpayer
to achieve tax consequences through the
use of a private trust company that could
not have been achieved had the taxpayer
acted directly. Comments are specifically
requested as to whether or not the draft rev-
enue ruling will achieve that intended re-
sult.
II.Proposed Revenue Ruling
Part I
Section 2036.—Transfers With Retained
Life Estate
26 CFR 20.2036–1: Transfers with re-
tained life estate.
(Also: § 2038, § 20.2038–1, § 2041,
§ 20.2041–1, § 2501, § 2511, § 25.2511,
§ 2601, § 26.2601–1, § 671, § 672(c),
§ 674, § 675, § 677, § 678.)
Rev. Rul. [XXXX–XX]
ISSUES
(1) If the private trust company (PTC)
described inSituation 1orSituation 2is
appointed and serves as the trustee of a
trust, will the value of the trust assets be
included in a grantor’s gross estate under
§§ 2036(a) or 2038(a)?
(2) If the PTC described inSituation 1
orSituation 2is appointed and serves as
the trustee of a trust, will the value of the
trust assets be included in a beneficiary’s
gross estate under § 2041?
(3) If the PTC described inSituation
1orSituation 2is appointed and serves
as the trustee of a trust that provides the
trustee with the discretionary power to
distribute income and/or principal to the
grantor’s child or descendants, will the
grantor’s transfer to that trust constitute a
completed gift?
(4) Does the appointment and service of
a PTC as the trustee of a trust affect the ex-
empt status of a trust that is otherwise ex-
empt from the generation-skipping trans-
fer (GST) tax under § 2601, or change the
inclusion ratio of a trust?
(5) If the PTC described inSituation
1orSituation 2is appointed and serves
as the trustee of a trust, is the grantor or
any beneficiary of that trust treated as the
owner of any portion of the trust under
§§ 671 through 678?
FACTS
A and B, who are husband and wife,
have three children, C, D, and E. C, D, and
E are each married, and each has children.
References to Family include A, B, their
children, the spouses and former spouses
of their children, and each other descen-
dant of A and B (both now living and fu-
ture) and the spouses and former spouses
of such descendants.
A and B have established separate ir-
revocable trusts for each of their children
and grandchildren. In addition, C, D, and
E have established irrevocable trusts for
their respective descendants. Each child or
grandchild of A and B is the primary bene-
ficiary of the trust established for that child
or grandchild. Each trust receives contri-
butions only from the person who created
the trust. All grantors and beneficiaries are
United States persons and no trust is a for-
eign trust.
Each trust instrument provides the
trustee with discretionary authority to
distribute income and/or principal to the
primary beneficiary of the trust during
the primary beneficiary’s lifetime. In ad-
dition, each trust provides the primary
beneficiary with the testamentary power
to appoint the trust corpus to or for the
benefit of one or more members of Family
(other than the primary beneficiary) and/or
one or more organizations described in
§§ 170(c), 2055(a) and 2522(a) of the
Internal Revenue Code. Each trust also
provides that the grantor, or the primary
beneficiary if the grantor is not living,
may appoint a successor trustee other than
himself or herself if the current trustee
either resigns or is no longer able to fulfill
the duties of trustee. Finally, each trust
provides that the trust will terminate, in
all events, no later than 21 years after the
death of the last to die of certain desig-
nated individuals living at the time of the
creation of the trust.
Situation 1 — PTC formed under laws
of a state that has enacted a private trust
company statute. The facts and the terms
of the trusts are as described above. All
trusts are governed by the laws of State 1,
a state that has enacted a private trust com-
pany statute (Statute). Statute provides
that any PTC formedunder Statute must
create a Discretionary Distribution Com-
mittee (DDC) and delegate to the DDC the
exclusive authorityto make all decisions
regarding discretionary distributions from
each trust for which it serves as trustee.
Discretionary distributions are defined as
permissible distributions that are not man-
dated in the trust instrument or by appli-
cable law. Statute does not restrict who
may serve on the DDC, but provides that
no member of the DDC may participate
in the activities of the DDC with regard
to any trust of which that DDC member
or his or her spouse is a grantor, or any
trust of which that DDC member or his
or her spouse is a beneficiary. In addi-
tion, Statute provides that a DDC mem-
ber may not participate in the activities of
the DDC with respect to any trust with a
beneficiary to whom that DDC member or
his or her spouse owes a legal obligation
of support. Statute provides that only of-
ficers and managers of the PTC may par-
ticipate in decisions regarding personnel of
the PTC (including the hiring, discharge,
promotion and compensation of employ-
2008–31 I.R.B.261August 4, 2008

ees). Statute also provides that nothing in
Statute or in PTC’s governing documents
may override a more restrictive provision
in the trust instrument of a trust for which
PTC is acting as a trustee. Finally, Statute
provides that no Family member may en-
ter into any reciprocalagreement, express
or implied, regarding discretionary distri-
butions from any trust for which PTC is
serving as a trustee.
In 2008, Family formed a corporation
that is a PTC under Statute. PTC’s gov-
erning documents create a DDC that will
make all decisions with respect to dis-
cretionary distributions from all trusts for
which it serves as trustee, consistent with
Statute. PTC’s governing documents do
not restrict who may serve on the DDC.
Family owns all of the stock in PTC, ei-
ther outright or through trusts and/or other
entities. A, C, and D are officers of PTC
and serve on PTC’s Board of Directors.
A, C, and D also serve on the DDC. B and
E own shares of PTC, but neither is on the
DDC and neither is an officer or director
of PTC. E is a manager and employee of
PTC.
X, a financial institution organized un-
der the banking laws of State 1, has served
as trustee of each of the trusts since their
inception. No grantor of any of the trusts
has a relationship with X other than as a
customer or client of X.
Subsequent to PTC’s formation, X
resigned as trustee of each of the trusts
and PTC was appointed as the successor
trustee of each trust. In addition, A created
and transferred property to three additional
irrevocable trusts (the 2008 trusts), one for
the primary benefit of each of A’s children,
C, D, and E, and that child’s descendants.
The terms of each of the 2008 trusts are
the same as those described above, except
that these trusts provide that the trustee
has discretionary authority to distribute in-
come and/or principal to any one or more
beneficiaries during the beneficiary’s life.
Each 2008 trust receives contributions
only from A. PTC will serve as the initial
trustee of each of the 2008 trusts.
Situation2—PTCformedinastate
without a statute governing private trust
companies.The facts and the terms of the
trusts are as described above. In 2008,
Family formed a corporation that is a PTC
in State 2, a state that has not enacted spe-
cific legislation governing the formation or
operation of a private trust company. PTC
is established for the specific purpose of
acting as the trustee for the various trusts
established by members of Family. Fam-
ily owns all of the stock in PTC, either out-
right or through trusts and/or other entities.
PTC’s governing documents create a
DDC and delegate to the DDC the exclu-
sive authority to make all decisions regard-
ing discretionary distributions from each
trust for which it servesastrustee.Discre-
tionary distributionsare defined as permis-
sible distributions that are not mandated in
the trust instrument or by applicable law.
PTC’s governing documents do not restrict
who may serve on the DDC, but provide
that no member of the DDC may partici-
pate in the activities of the DDC with re-
gard to any trust of which that DDC mem-
ber or his or her spouse is a grantor, or
any trust of which that DDC member or
his or her spouse is a beneficiary. In ad-
dition, the governing documents provide
that a DDC member may not participate in
the activities of the DDC with respect to
any trust with a beneficiary to whom that
DDC member or his or her spouse owes a
legal obligation of support. PTC’s govern-
ing documents also provide that only offi-
cers and managers of the PTC may partic-
ipate in decisions regarding personnel of
the PTC (including the hiring, discharge,
promotion and compensation of employ-
ees). PTC’s governing documents also
provide that nothing in PTC’s governing
documents may override a more restrictive
provision in the trust instrument of a trust
for which PTC is acting as a trustee. In
addition, PTC’s governing documents also
provide that no Family member may enter
into any reciprocal agreement, express or
implied, regarding discretionary distribu-
tions from any trust for which PTC is serv-
ing as a trustee.
PTC’s governing documents also pro-
vide for the creation of an Amendment
Committee, a majority of whose members
must always be individuals who are nei-
ther Family members nor persons related
or subordinate (as described in §672(c))
to any shareholder of PTC. The govern-
ing documents further provide that the
Amendment Committee, by no less than
majority vote, shall have the sole authority
to make any changes to PTC’s govern-
ing documents regarding the creation,
function, or membership of the DDC or
of the Amendment Committee itself, the
provisions delegating exclusive authority
regarding personnel decisions to the of-
ficers and managers, and the prohibition
of reciprocal agreements between Family
members. The vesting of these powers
exclusively in the Amendment Committee
is not contrary to any applicable provision
ofthelawofState2. F,G,andAare
the initial members of the Amendment
Committee. F and G are not members of
Family, are not employed by PTC, and are
not otherwise related or subordinate to any
Familymemberasdefinedin§672(c).
A, C, and D are officers of PTC. A,
C, D, F, and G serve on PTC’s Board of
Directors. A, C, and D also serve on the
DDC. B and E own shares of PTC, but
neither is on the DDC and neither is an
officer or director of PTC. E is a manager
and employee of PTC.
X, a financial institution organized un-
der the banking laws of State 2, has served
as trustee of each of the trusts since their
inception. No grantor of any of the trusts
has a relationship with X other than as a
customer or client of X.
Subsequent to PTC’s formation, X
resigned as trustee of each of the trusts
and PTC was appointed as the successor
trustee of each trust. In addition, A created
and transferred property to three additional
irrevocable trusts (the 2008 trusts), one for
the primary benefit of each of A’s children,
C, D, and E, and that child’s descendants.
The terms of each of the 2008 trusts are
the same as those described above, except
that these trusts provide that the trustee
has discretionary authority to distribute in-
come and/or principal to any one or more
beneficiaries during the beneficiary’s life.
Each 2008 trust receives contributions
only from A. PTC will serve as the initial
trustee of each of the 2008 trusts.
LAW AND ANALYSIS
Issue 1
Section 2036(a) provides that the value
of the gross estate shall include the value
of all property to the extent of any interest
therein of which the decedent has at any
time made a transfer (except in the case of
abona fidesale for an adequate and full
consideration in money or money’s worth),
by trust or otherwise, under which he has
retained for his life or for any period not as-
certainable without reference to his death
or for any period that does not in fact end
August 4, 20082622008–31 I.R.B.

before his death — (1) the possession or
enjoyment of, or the right to the income
from, the property, or (2) the right, either
alone or in conjunction with any person,
to designate the persons who shall possess
or enjoy the property or the income there-
from.
Section 20.2036–1(b)(2) of the Estate
Tax Regulations provides that the “use,
possession, right to the income, or other
enjoyment of the transferred property” is
considered as having been retained by or
reserved to the decedent to the extent that
the use, possession, right to the income, or
other enjoyment is to be applied toward the
discharge of a legal obligation of the dece-
dent, or otherwise for the decedent’s pecu-
niary benefit. The term “legal obligation”
includes a legal obligation to support a de-
pendent during a decedent’s lifetime.
Section 20.2036–1(b)(3) provides, in
part, that the phrase “right . . . to des-
ignate the person or persons who shall
possess or enjoy the transferred property
or the income therefrom” includes a re-
served power to designate the person or
persons to receive the income from the
transferred property, or to possess or enjoy
non-income-producing property, during
the decedent’s life. With respect to such
power, it is immaterial: (i) whether the
power was exercisable alone or only in
conjunction with another person or per-
sons, whether or not having an adverse
interest; (ii) in what capacity the power
was exercisable by the decedent or by
another person or persons in conjunction
with the decedent; and (iii) whether the
exercise of the power was subject to a
contingency beyond the decedent’s con-
trol which did not occur before his death.
The phrase, however, does not include a
power over the transferred property itself
which does not affect the enjoyment of
the income received or earned during the
decedent’s life. (See, however, § 2038 for
the inclusion of property in the gross estate
on account of such a power.) Nor does
the phrase generally apply to a power held
solely by a person other than the decedent.
Section 2038(a)(1) provides that the
value of the gross estate shall include the
value of all property to the extent of any
interest therein of which the decedent has
at any time made a transfer (except in the
case of abona fidesale for an adequate and
full consideration in money or money’s
worth), by trust or otherwise, where the
enjoyment thereof was subject at the date
of the decedent’s death to any change
through the exercise of a power (in what-
ever capacity exercisable) by the decedent
alone or by the decedent in conjunction
with any other person (without regard to
when or from what source the decedent
acquired the power), to alter, amend, re-
voke, or terminate, or where any power is
relinquished during the three-year period
ending on the date of the decedent’s death.
Under § 2038, the discretionary author-
ity to distribute or withhold income is a
right to alter, amend, revoke, or terminate
a trust. Thus, if a grantor holds these pow-
ers at death, or if any such power is relin-
quished during the three-year period end-
ing on the date of the decedent’s death,
the value of the trust corpus is includible
in the grantor’s gross estate under § 2038
and § 2035, respectively. See Rev. Rul.
70–348, 1970–2 C.B. 193.
InSituation 1,PTCisthetrusteeofthe
Family trusts. All distribution decisions
aretobemadebytheDDC,andnoFam-
ily member serving on the DDC may par-
ticipate in making discretionary distribu-
tion decisions with respect to any trust of
which that person or his or her spouse is
either a grantor or a beneficiary, or with
respect to any trust of which the benefi-
ciary is a person to whom the Family mem-
ber or his or her spouse owes an obligation
of support. Further, Statute prohibits any
shareholder(s) of PTC from changing the
governing provisions regarding the DDC.
Therefore, no Family member, either alone
or with any other person, has any right or
power described in § 2036(a) or § 2038(a)
with regard to a Family trust solely by rea-
son of PTC’s service as trustee or of the
Family member’s ownership of or relation-
ship(s) with PTC. In addition, no Family
member may insert themselves into the po-
sition of holding such a power. As a result,
provided that PTC operates as required by
State 1’s Statute, no portion of the value
of a Family trust will be includible in the
gross estate of A, C, or D under § 2036(a)
or § 2038(a) by reason of PTC’s service as
trustee or that person’s service as an offi-
cer, director, or member of the DDC. Fi-
nally, for the same reasons, no portion of
the value of the trust will be includible in
the gross estate of B or E solely because B
and E are shareholders and/or a manager
or employee of PTC.
InSituation 2, no Family member cur-
rently has a power described in § 2036(a)
or § 2038(a) because of the provisions in
PTC’s governing documents regarding the
DDC. With regard to whether any Fam-
ily member may acquire such a power,
however,Situation 2differs fromSitua-
tion 1.AsinSituation 1, Family owns
all of the stock in PTC but, unlikeSitu-
ation 1, State 2 has no state statute re-
stricting the ability of PTC’s shareholders
to change the applicable provisions gov-
erning the DDC. InSituation 2,Family
members who are PTC’s shareholders do
have a power to amend PTC’s govern-
ing documents. However, PTC’s Amend-
ment Committee has the sole authority to
amend PTC’s governing documents with
regard to the DDC and the Amendment
Committee, with regard to the authority
to make personnel decisions, and with re-
gard to the prohibition on reciprocal agree-
ments. Thus, as inSituation 1,evenasole
shareholder of PTC does not have the au-
thority to change the provisions regarding
the Amendment Committee. Under these
facts, no Family member, including A who
is a member of the Amendment Commit-
tee, will be deemed to have a power to
change the governing provisions regarding
the DDC that would thereby result in the
inclusion of any part of a Family trust in
a Family member’s gross estate. There-
fore, if PTC operates in a manner consis-
tent with its governing documents as de-
scribed above, and if the provisions de-
scribed above are not changed (those re-
garding the DDC, the Amendment Com-
mittee, the authority over personnel de-
cisions, and the prohibition of reciprocal
agreements), no portion of the value of
a Family trust will be includible in the
gross estate of a grantor under § 2036(a)
or § 2038(a) by reason of PTC’s service
as Trustee, a grantor’s interest in PTC,
or a grantor’s service as an officer, di-
rector, manager, employee, or member of
the DDC or the Amendment Committee of
PTC.
Issue 2
Section 2041(a)(2) provides that the
value of the gross estate shall include
the value of all property to the extent of
any property with respect to which the
decedent has, at the time of his death, a
general power of appointment created after
2008–31 I.R.B.263August 4, 2008

October 21, 1942, or with respect to which
the decedent has at any time exercised
or released a power of appointment by
a disposition that is of such nature that,
if it were a transfer of property owned
by the decedent, the property would be
includible in the decedent’s gross estate
under §§ 2035 to 2038, inclusive. For
purposes of § 2041(a)(2), the power of
appointment shall be considered to exist
on the date of the decedent’s death even
though the exercise of the power is subject
to a precedent giving of notice or even
though the exercise of the power takes
effect only on the expiration of a stated
period after its exercise, whether or not
notice has been given or the power has
been exercised on or before the date of the
decedent’s death.
Section 2041(b)(1) provides that a gen-
eral power of appointment is a power that
is exercisable in favor of the decedent, the
decedent’s estate, the decedent’s creditors,
or the creditors of the decedent’s estate.
However, a power to consume, invade, or
appropriate the property for the benefit of
the decedent that is limited by an ascertain-
able standard relating to the health, educa-
tion, support, or maintenance of the dece-
dent shall not be deemed a general power
of appointment.
Section 20.2041–1(b)(1) provides that a
donee may have a power of appointment if
he has the power to remove or discharge
a trustee and appoint himself as trustee.
For example, if under the terms of the in-
strument, the trustee or a successor trustee
has the power to appoint the principal of
the trust for the benefit of individuals in-
cluding the decedent, and the decedent has
the unrestricted power to remove or dis-
charge the trustee at any time and appoint
any other person including himself or her-
self as trustee, the decedent is considered
to have a power of appointment. How-
ever, the mere power of management, in-
vestment, custody of assets, or the power
to allocate receipts and disbursements as
between income and principal, exercisable
in a fiduciary capacity, whereby the holder
has no power to enlarge or shift any of the
beneficial interests therein except as an in-
cidental consequence of the discharge of
fiduciary duties, is not a power of appoint-
ment.
Section 2041(b)(1) defines a general
power of appointment as a power exercis-
able in favor of the decedent, his estate, his
creditors, or the creditors of his estate. The
regulations contemplate that a beneficiary
may possess a power of appointment over
trust property. Section 20.2041–1(b)(1).
Thus, if a trust instrument provides a ben-
eficiary with the power to appropriate or
consume the principal of a trust, the power
is a general power of appointment. The
fact that the beneficiary holds the power
in a fiduciary capacity as a trustee will not
prevent the power from being a general
powerofappointment.Estate of Lanigan
v. Commissioner, 45 T.C. 247, 251 (1965).
InSituation 1, the governing documents
of the Family trusts provide a trustee with
the discretionary authority to distribute in-
come or principal to a beneficiary of a
trust. Under State 1’s Statute, however,
PTC’s powers to make discretionary dis-
tributions are delegated exclusively to the
DDC, and no beneficiary who is a mem-
ber of the DDC is permitted to participate
in discretionary distribution decisions with
respect to a trust in which that beneficiary
has a beneficial interest (including a trust
whose beneficiary is a person to whom the
beneficiary owes an obligation of support).
In addition, Family members are prohib-
ited from entering into reciprocal arrange-
ments designed to affect distribution deci-
sions. Under these circumstances, C and
D, as beneficiaries who also serve as of-
ficers, directors, and members of PTC’s
DDC, do not have the unrestricted power
to distribute trust assets to themselves as
contemplated by § 2041. Similarly, neither
E nor any other beneficiary will be deemed
to have a general power of appointment
under § 2041 solely because a particular
beneficiary is a shareholder or otherwise
participates in the daily activities of PTC,
such as decisions regarding investments,
or the retention of attorneys, accountants,
or other professional advisors.
InSituation 2, the PTC’s governing
documents rather than applicable law re-
strict the powers of members of the DDC.
PTC’s governing documents preclude a
beneficiary from having the power as a
member of the DDC to affect the bene-
ficial enjoyment of the trust property as
described in § 2041. In addition, Fam-
ily members are prohibited from entering
into reciprocal arrangements designed to
affect distribution decisions. Therefore, C
and D, as beneficiaries who also serve as
officers, directors, and members of PTC’s
DDC, do not have the power to distribute
trust assets to themselves as contemplated
by § 2041. Further, neither E nor any other
beneficiary will be deemed to have a gen-
eral power of appointment under § 2041
solely because a particular beneficiary is
a shareholder or otherwise participates in
the daily activities of PTC. In addition,
basedonthefactsofSituation 2,andfor
the reasons discussed regarding Issue 1,
no beneficiary who is a member of the
Amendment Committee will be deemed to
have a general power of appointment un-
der § 2041 solely because such beneficiary
serves on the Amendment Committee.
Issue 3
Section 2501 imposes a tax on any
transfer of property by gift by any individ-
ual. Section 2511 provides for application
of the gift tax regardless of the nature of
the property transferred and whether the
transfer is direct or indirect, or in trust or
otherwise.
Section 25.2511–1(g)(1) provides, in
part, that a transfer by a trustee of trust
property in which the trustee has no bene-
ficial interest does not constitute a gift by
the trustee (but such a transfer may con-
stitute a gift by the creator of the trust, if
until the transfer the creator had the power
to change the beneficiaries by amending
or revoking the trust).
Section 25.2511–2(b) provides that, as
to any property, or part thereof or interest
therein, of which the donor has so parted
with dominion and control as to leave in
him no power to change its disposition,
whether for his own benefit or for the ben-
efit of another, the gift is complete. But
if upon a transfer of property (whether
intrustorotherwise)thedonorreserves
any power over its disposition, the gift
may be wholly incomplete, or may be par-
tially complete and partially incomplete,
depending upon all the facts in the partic-
ular case.
Section 25.2511–2(c) provides that a
gift is incomplete if the grantor has re-
served the power to revest the beneficial
title to the property in the grantor, or to
the extent that the grantor has reserved
a power to name new beneficiaries or to
change the interests of the beneficiaries as
between themselves, unless the power is a
fiduciary power limited by a fixed or as-
certainable standard.
August 4, 20082642008–31 I.R.B.

Section 25.2511–2(e) provides that a
grantorisconsideredtoholdapowerif
the power is exercisable by the grantor in
conjunction with any other person not hav-
ing a substantial adverse interest in the dis-
position of the transferred property or the
income therefrom. A trustee, merely by
reason of that fiduciary position, does not
have such an adverse interest.
InSituation 1andSituation 2,subse-
quent to the formation of PTC, A, a Family
member, creates and transfers property to
the 2008 trusts, one for the benefit of each
of A and B’s children, C, D, and E, and that
child’s descendants. Each trust instrument
provides the trustee with discretionary au-
thority to distribute income and/or princi-
pal to the child and/or the child’s then-liv-
ing descendants. PTC will serve as the
trustee of each trust, and the DDC will
make all of the decisions with respect to
discretionary distributions. Statute inSit-
uation 1and the governing documents in
Situation 2do not prohibit A from serving
on the DDC, and in each situation, A is a
member of the DDC. However, pursuant
to Statute inSituation 1and the govern-
ing documents inSituation 2,nomember
of the DDC may participate in the activ-
ities of the DDC with regard to any trust
of which that DDC member or his or her
spouse is a grantor, or any trust of which
that DDC member or his or her spouse is
a beneficiary. Further, in both situations,
Family members are prohibited from en-
tering into any reciprocal agreements de-
signed to affect distribution decisions. If
PTC operates in accordance with Statute
inSituation 1or the governing documents
inSituation 2as the case may be, A will
not have the power to change the inter-
ests of the beneficiaries of the 2008 trusts.
In addition, A will not be considered to
hold a power exercisable by A in conjunc-
tion with any other person not having a
substantial adverse interest in the disposi-
tion of the transferred property or the prop-
erty’s income merely because of A’s mem-
bership on the DDC. Thus, in each situa-
tion, the value of the property transferred
by A to the 2008 trusts will be considered
completed gifts for purposes of chapter 12
of the Code. Also, inSituation 1andSit-
uation 2, the provisions of the DDC pro-
hibit any beneficiary who is a member of
the DDC from participating in decisions
with regard to any trust in which the bene-
ficiary has a beneficial interest. Thus, dis-
tributions of income or principal from a
trust of which PTC is the trustee will not
be deemed to be a gift by any member of
the DDC. See § 25.2511–1(g).
Issue 4
Section 2601 imposes a tax on ev-
ery generation-skipping transfer. Under
§ 1433(b)(2)(A) of the Tax Reform Act of
1986 and § 26.2601–1(b)(1)(i), the GST
tax provisions do not apply to any gen-
eration-skipping transfer under a trust (as
defined in § 2652(b)) that was irrevocable
on September 25, 1985, but only to the
extent that the transfer is not made out of
corpus added to the trust after September
25, 1985 (or out of income attributable to
corpus so added).
Section 26.2601–1(b)(1)(ii)(A) pro-
vides that any trust in existence on
September 25, 1985, is considered an
irrevocable trust, except as provided in
§§ 26.2601–1(b)(ii)(B) or (C) relating to
property includible in a grantor’s gross es-
tate under §§ 2038 and 2042, respectively.
Section 26.2601–1(b)(1)(v)(B) pro-
vides that the release, exercise, or lapse
of a power of appointment (other than a
general power of appointment as defined
in § 2041(b)) is not treated as an addition
to a trust if — (1) the power of appoint-
ment was created in an irrevocable trust
that is not subject to chapter 13 under
§ 26.2601–1(b); and (2) in the case of an
exercise, the power of appointment is not
exercised in a manner that may postpone
or suspend the vesting, absolute owner-
ship or power of alienation of an interest
in property for a period measured from
the date of creation of the trust, extending
beyond any life in being at the date of cre-
ation of the trust plus a period of 21 years
plus, if necessary, a reasonable period of
gestation (the perpetuities period). For
purposes of § 26.2601–1(b)(1)(v)(B)(2),
the exercise of a power of appointment
that validly postpones or suspends the
vesting, absolute ownership or power of
alienation of an interest in property for a
term of years that will not exceed 90 years
(measured from the date of creation of the
trust) will not be considered an exercise
that postpones or suspends vesting, abso-
lute ownership or the power of alienation
beyond the perpetuities period. If a power
is exercised by creating another power,
it is deemed to be exercised to whatever
extent the second power may be exercised.
Section 26.2601–1(b)(4) provides rules
for determining when a modification,
judicial construction, settlement agree-
ment, or trustee action with respect to
a trust that is exempt from the GST tax
under § 26.2601–1(b)(1), (2), or (3) (here-
inafter referred to as an exempt trust)
will not cause the trust to lose its exempt
status. In general, unless specifically
provided otherwise, the rules contained
in § 26.2601–1(b)(4) are applicable only
for purposes of determining whether an
exempt trust retains its exempt status for
GST tax purposes. Unless specifically
noted, the rules do not apply in determin-
ing, for example, whether the transaction
results in a gift subject to gift tax, or may
cause the trust to be included in the gross
estate of a beneficiary, or may result in the
realization of capital gain for purposes of
§ 1001.
Section 26.2601–1(b)(4)(i)(D)(1) pro-
vides that a modification of the govern-
ing instrument of an exempt trust by ju-
dicial reformation, or nonjudicial reforma-
tion that is valid under applicable state
law, will not cause an exempt trust to be
subject to the provisions of chapter 13 if
the modification does not shift a benefi-
cial interest in the trust to any beneficiary
who occupies a lower generation (as de-
fined in § 2651) than the person or persons
who held the beneficial interest prior to the
modification, and if the modification does
not extend the time for vesting of any ben-
eficial interest in the trust beyond the pe-
riod provided in the original trust. Further-
more, a modification that is administrative
in nature that only indirectly increases the
amount transferred (for example, by low-
ering administrative costs or income taxes)
will not be considered a shift in a benefi-
cial interest in a trust.
InSituation 1andSituation 2,Xre-
signed as trustee of each of the pre-2008
trusts and PTC replaced X as trustee. Un-
der the facts ofSituation 1andSituation 2,
the change in trustee will not subject the
value of the trust corpus to the tax under
Chapter 11 or 12, and this modification
is an administrativechange that does not
shift a beneficial interest in a trust to any
beneficiary who occupies a lower gener-
ation (as described in § 2651) than the
person or persons who held the beneficial
interest prior to the modification. In ad-
2008–31 I.R.B.265August 4, 2008

dition, each trust will terminate no later
than 21 years after the death of the last
to die of certain designated individuals
living at the time of the creation of the
trust. Thus, even if PTC is formed and
operates in a jurisdiction other than that
of the original trustee, the appointment
of PTC alone will not extend the time
for vesting of any beneficial interest in a
trust for which PTC acts as trustee beyond
the date provided for in the original trust.
See § 26.2601–1(b)(4)(i)(E),Example 4
andExample 10. Therefore, under the
facts ofSituation 1andSituation 2,the
appointment of PTC as trustee does not
change the status of a trust that was other-
wise exempt from the GST tax by virtue
of having been irrevocable (as defined in
§ 26.2601–1(b)(1)(ii)(A)) on September
25, 1985.
Further, as discussed in Issues 1 and
2, if PTC operates in a manner consis-
tent with Statute and/or its governing
documents, no portion of the value of
a Family trust will be includible in the
gross estate of a grantor under § 2036(a)
or § 2038(a) by reason of PTC’s service
as trustee, the grantor’s interest in PTC,
or the grantor’s service as an officer, di-
rector, manager, employee, or member of
the DDC or the Amendment Committee
of PTC. Similarly, beneficiaries who also
serve as officers, directors, and members
of PTC’s DDC, do not have the power
to distribute trust assets to themselves as
contemplated by § 2041, and no benefi-
ciary will be deemed to have a general
power of appointment under § 2041 solely
because a particular beneficiary is a share-
holder, or otherwise participates in the
daily activities, of PTC. Therefore, under
the circumstances described inSituation
1andSituation 2, appointing PTC as the
trustee of the Family trusts does not affect
the inclusion ratio of a trust subject to
Chapter 13.
Issue 5
Section 671 provides that, where it is
specified in subpart E of Part I of subchap-
ter J that the grantor or another person shall
be treated as the owner of any portion of a
trust, there shall then be included in com-
puting the taxable income and credits of
the grantor or the other person those items
of the trust’s income, deductions, and cred-
its against tax which are attributable to that
portion of the trust to the extent that such
items would be taken into account under
chapter 1 in computing taxable income or
credits against the tax of an individual.
Section 672(a) provides that the term
“adverse party” means any person hav-
ing a substantial beneficial interest in the
trust which would be adversely affected by
the exercise or nonexercise of the power
which he possesses respecting the trust.
A person having a general power of ap-
pointment over the trust property shall be
deemed to have a beneficial interest in the
trust.
Section 672(c) provides that, for pur-
poses of subpart E, part 1, subchapter J,
chapter 1, subtitle A of the Code, the term
“related or subordinate party” means any
nonadverse party who is any one of the fol-
lowing: the grantor’s spouse if living with
the grantor; the grantor’s father, mother, is-
sue, brother or sister; an employee of the
grantor; a corporation or any employee of
a corporation in which the stock holdings
of the grantor and the trust are significant
from the viewpoint of voting control; a
subordinate employee of a corporation in
which the grantor is an executive.
Section 674(a) provides, in general, that
the grantor shall be treated as the owner of
any portion of a trust in respect of which
the beneficial enjoyment of the corpus or
the income therefrom is subject to a power
of disposition, exercisable by the grantor
or a nonadverse party, or both, without the
approval or consent of any adverse party.
Section 674(c) provides that § 674(a)
shall not apply to a power solely exercis-
able (without the approval or consent of
any other person) by a trustee or trustees,
none of whom is the grantor, and no more
than half of whom are related or subor-
dinate parties who are subservient to the
wishes of the grantor: (1) to distribute, ap-
portion, or accumulate income to or for a
beneficiary or beneficiaries, or to, for, or
within a class of beneficiaries; or (2) to pay
out corpus to or for a beneficiary or bene-
ficiaries or to or for a class of beneficiaries
(whether or not income beneficiaries).
Under § 675 and applicable regulations,
the grantor is treated as the owner of any
portion of a trust if, under the terms of the
trust agreement or circumstances attendant
on its operation, administrative control is
exercisable primarily for the benefit of the
grantor rather than the beneficiaries of the
trust.
Section 675(4) provides that the grantor
shall be treated as the owner of any portion
of a trust in respect of which a power of
administration is exercisable in a nonfidu-
ciary capacity by any person without the
approval or consent of any person in a fidu-
ciary capacity. For purposes of § 675(4),
the term “power of administration” means
any one or more of the following powers:
(A) a power to vote or direct the voting of
stock or other securities of a corporation
in which the holdings of the grantor and
the trust are significant from the viewpoint
of voting control; (B) a power to control
the investment of the trust funds either by
directing investments or reinvestments, or
by vetoing proposed investments or rein-
vestments, to the extent that the trust funds
consist of stocks or securities of corpora-
tions in which the holdings of the grantor
and the trust are significant from the view-
point of voting control; or (C) a power to
reacquire the trust corpus by substituting
other property of an equivalent value.
Section 677(a)(1) provides that the
grantor shall be treated as the owner of
any portion of a trust, whether or not the
grantor is treated as such owner under
§ 674, whose income, without the ap-
proval or consent of any adverse party, is,
or, in the discretion of the grantor or a non-
adverse party, or both, may be distributed
to the grantor or the grantor’s spouse.
Section 1.677(a)–1(d) of the Income
Tax Regulations provides that, under
§ 677, a grantor is, in general, treated as
the owner of a portion of a trust whose
income is, or in the discretion of the
grantor or a nonadverse party, or both,
may be applied in discharge of a legal
obligation of the grantor or, in certain sit-
uations, of the grantor’s spouse. However,
§ 1.677(b)–1(a) provides that a grantor is
not treated as the owner of a trust merely
because its income may, in the discretion
of any person other than the grantor (ex-
cept when the grantor is acting as trustee or
cotrustee), be applied or distributed for the
support or maintenance of a beneficiary
(other than the grantor’s spouse in the case
of income from property transferred in
trust after October 9, 1969), such as the
child of the grantor, whom the grantor or
his spouse is legally obligated to support.
If income of the current year of the trust
is actually so applied or distributed, the
grantor may be treated as the owner of
any portion of the trust under § 677 to that
August 4, 20082662008–31 I.R.B.

extent, even though that income might
have been applied or distributed for other
purposes.
Section 678(a)(1) provides that a per-
son other than the grantor is treated as the
owner of any portion of a trust with respect
to which the person has a power, exercis-
able solely by that person, to vest the cor-
pus or the income therefrom in that per-
son. This rule does not apply, however, to
a power over income if a grantor or other
transferor is otherwise treated as the owner
of the trust.
InSituation 1, the existence of and pro-
visions governing the DDC, as well as the
provisions of Statute regarding the DDC,
render the identity of the trustee irrelevant
to the determination of whether any per-
son is treated as an owner of a trust under
§§ 675, 677, or 678. None of the terms of
the Family trusts, the provisions of Statute,
or the governing documents of PTC re-
veal any of the circumstances that would
cause administrativecontrols to be con-
sidered exercisable primarily for the ben-
efit of the grantors of the Family trusts for
which PTC will act as trustee under § 675.
Nevertheless, the circumstances attendant
on the operation of the PTC, the DDC,
and the Family trusts for which the PTC
is acting as trustee will determine whether
any grantor will be treated as the owner
of any portion of those trusts under § 675.
Whether or not a trust is a grantor trust
by reason of a power described in § 675
is a question of fact, the determination of
which is deferred until the examination of
the federal income tax returns of the par-
ties involved.
Similarly, nothing in the facts indicates
that any grantor or beneficiary of the trust
would be deemed to be an owner of a trust
under § 673, § 676, § 677, or § 678, and
Statute would prevent any grantor or ben-
eficiary from acquiring any right or power
that would result in such treatment. Un-
der § 677(b), the grantor will be deemed
to be the owner of the trust to the extent
that trust income is actually used to dis-
charge a support obligation of the grantor,
but this will be true regardless of the iden-
tity of the trustee. Thus, the appointment
and service of PTC as trustee does not af-
fect whether or not the grantor or any other
person will be treated as the owner of a
trust under these provisions, and none of
the grantors or beneficiaries of the Fam-
ilytrustsforwhichPTCisactingastrustee
will be treated as an owner of those trusts
or any portion thereof under §§ 673, 675,
676, 677, or 678 solely by reason of their
ownership or management of, or employ-
ment by, PTC.
The identity of the trustee is relevant
with regard to whether the grantor will be
treated as the owner of a trust under § 674.
The general rule is that powers must be
subject to the approval or consent of an ad-
versepartyasdefinedin§672(a)inorder
to avoid treating the grantor as the owner
of a trust for income tax purposes. InSitu-
ation 1andSituation 2, Statute or the gov-
erning documents, as the case may be, pro-
hibit a DDC member from acting with re-
gard to each trust in which that DDC mem-
ber has an interest, so there will be no ad-
verse party with the power to grant ap-
proval or consent.
Some powers (specifically, those de-
scribedin§674(b)and(d))maybeheldby
any trustee without causing the grantor to
be deemed to be the owner of the trust un-
der this section. The appointment and ser-
vice of PTC as trustee is irrelevant with re-
gard to these powers. Section 674(c), how-
ever, describes powers that will not cause
the grantor to be treated as the owner of
the trust as long as those powers are held
by trustees, none of whom is the grantor
and no more than half of whom are related
or subordinate to the grantor as defined in
§ 672(c).
Two clauses of § 672(c)(2) have rele-
vance with regard to the facts described
inSituation 1andSituation 2.Thefirst
is the clause defining “related or subordi-
nate party” as including a corporation or
any employee of a corporation in which the
stock holdings of the grantor and the trust
are significant from the viewpoint of vot-
ing control.
For purposes of this test, voting con-
trol of PTC has been made irrelevant as
it applies to the power to make distribu-
tions from the Family trusts by the provi-
sions of Statute (inSituation 1)orthepres-
ence of the Amendment Committee (inSit-
uation 2) with regard to the DDC and by
the delegation of all PTC personnel deci-
sions to the officers and managers of PTC.
Thus, the ownership of voting stock of
PTC (even the sole ownership of all of that
voting stock) should not be deemed to be
“significant” under § 672(c) for this pur-
pose. “Voting control” is relevant insofar
as it gives a grantor or trusts created by a
grantor power over distributions made in
the discretion of the corporate trustee or
power over the employees of the corporate
trustee who make such discretionary dis-
tribution decisions on behalf of the corpo-
ration. UnderSituation 1andSituation 2,
adequate safeguards protect against the ex-
ercise of such powers.
The second relevant clause of
§ 672(c)(2) is that which defines “related
or subordinate party” as including a subor-
dinate employee of a corporation in which
the grantor is an executive.
InSituation 1andSituation 2,thetrust
instruments do not require the trustee to
be a person or entity that is not related
or subordinate to the grantor as defined in
§ 672(c). In fact, it is possible that more
than half of the members of the DDC may
be nonadverse parties who are related or
subordinate to the grantor.
In determining whether or not PTC as
trustee is related or subordinate for pur-
poses of this second clause, one must look
at the members of the DDC who are au-
thorized to act with regard to that partic-
ular trust (as if those DDC members in-
dividually were the trustees). This partial
look-through is necessary to ensure that a
grantor cannot achieveincome tax results
indirectly through a PTC trustee that could
not be achieved with an individual trustee
or trustees. A subordinate employee of a
corporation in which the grantor is an ex-
ecutive will still be deemed to be subordi-
nate to the grantor under § 672(c). Thus,
underSituation 1andSituation 2a non-
Family member serving on the DDC who
is an employee of PTC will be related and
subordinate to A, C, D, and E, but not to B
who is not an officer or manager of PTC.
In summary, whether or not a grantor
will be treated as the owner of a trust or
any portion thereof under § 674 depends
both upon the powers of the trustee and
upon the proportion of the members of the
DDC with authority to act with regard to
that trust who are related or subordinate
to the grantor applying a “look-through”
test in which each employee of PTC serv-
ingontheDDC,ifany,istestedasifthat
employee was a trustee of the trust in his
or her individual capacity, rather than as
a member of a committee existing within
and functioning on behalf of PTC. For pur-
poses of this test, the ownership of the vot-
ing stock of PTC inSituation 1andSitua-
tion 2shall be deemed to be not significant.
2008–31 I.R.B.267August 4, 2008

For these purposes, the analysis and tax
consequences underSituation 1andSitua-
tion 2are substantially identical.
HOLDINGS
Under the facts set forth inSituation 1
andSituation 2:
(1) Neither the appointment nor the ser-
vice of PTC as the trustee of a Family trust
described inSituation 1orSituation 2will
alone cause the value ofthe trust assets to
be included in a grantor’s gross estate un-
der §§ 2036(a) or 2038(a).
(2) Neither the appointment nor the ser-
vice of PTC as the trustee of a Family trust
described inSituation 1orSituation 2will
alone cause the value ofthe trust assets to
be included in a beneficiary’s estate under
§ 2041.
(3) Neither the appointment nor the ser-
vice of PTC as the trustee of the trusts
in which the trustee has the discretionary
power to distribute income and/or princi-
pal to the grantor’s child or descendants
inSituation 1orSituation 2will alone
cause the grantor’s transfer to that trust to
be deemed to be an incomplete gift under
§ 2511, or any distribution from the trust
to be a gift by any DDC member.
(4) Neither the appointment nor the ser-
vice of PTC as trustee of a Family trust in
Situation1andSituation 2will alone affect
the exempt status of that trust if the trust is
otherwise exempt from the GST tax under
§ 26.2601–1(b)(1)(i), or change the inclu-
sion ratio of a trust.
(5) Neither the appointment nor the ser-
vice of PTC as the trustee of a Family trust
in eitherSituation 1orSituation 2will
alone cause any grantor or beneficiary of
that trust to be treated as the owner of that
trust or any portion thereof under §§ 673,
676, 677, or 678. Whether any grantor is
treated as an owner of the trust or any por-
tion thereof under § 675 is a question of
fact, the determination of which must be
deferred until the federal income tax re-
turns of the parties involved have been ex-
amined by the office with responsibility for
such examination. Whether any grantor
is treated as an owner of the trust or any
portion thereof under § 674 will depend
upon the particular powers of the trustee
and may depend upon the proportion of the
members of the DDC with authority to act
with regard to that trust who are related or
subordinate to the grantor. For purposes of
this determination, the ownership of vot-
ing stock of PTC shall be deemed to be not
significant under § 672(c).
The conclusions regarding the tax con-
sequences of PTC as trustee of the Family
trusts would not change even if (1) in
Situation 2, F and/or G also serve on the
Board of Directors, (2) any of the discre-
tionary distributions are made pursuant
to a reasonably definite external standard
provided in the trust instrument; or (3) a
single Family member was the sole owner
of PTC. Distribution powers subject to
such a standard would generally not cause
the grantor or beneficiary to be treated as
the owner of a trust or any portion of a trust
under §§ 674 and 678, unless a grantor or
spouse of a grantor is the trustee, regard-
less of the terms of Statute or the existence
of the Amendment Committee.
The conclusions inSituation 1andSit-
uation 2are otherwise limited to the facts
of those situations. If the Statute inSit-
uation 1was changed, or if the Amend-
ment Committee inSituation 2exercised
its powers to change the provisions regard-
ing the DDC and/or the Amendment Com-
mittee itself, then the federal tax treatment
of the Family trusts for which PTC acts
as trustee, and/or the grantors and/or ben-
eficiaries of those trusts, may be different
from that described forSituation 1andSit-
uation 2.
III.Request for Comments
Comments are requested regarding the
proposed revenue ruling. The IRS and the
Treasury Department also welcome com-
ments regarding any potential alternative
scenarios that should be addressed in the
final revenue ruling. In particular, the IRS
and the Treasury Department request com-
ments on whether additional guidance is
necessary where trust assets include stock
in a controlled corporation or life insur-
ance, and whether the creation of similar
special committees for tax sensitive issues
relating to such assets would be helpful.
All comments will be available for public
inspection and copying. Comments must
be submitted by November 4, 2008. Com-
ments should be addressed to:
Internal Revenue Service
Office of the Associate Chief Counsel
(Passthroughs and Special Industries),
CC:PSI
Attn: Mary Berman, Room 5300
1111 Constitution Avenue, NW
Washington, DC 20224.
In addition, comments may be sub-
mitted electronically via the Inter-
net by sending them in an e-mail to
notice.comments@irscounsel.treas.go
v
and specifying that the comments concern
Notice 2008–63.
DRAFTING INFORMATION
The principal authors of this notice
are Mary Berman and Bradford Poston of
theOfficeoftheAssociateChiefCoun-
sel (Passthroughs & Special Industries).
However, other personnel from the IRS
and the Treasury Department participated
in its development. For further infor-
mation regarding the estate, gift, and
generation-skipping transfer tax issues,
contact Ms. Berman at (202) 622–3090
(not a toll-free call); for further infor-
mation regarding the income tax issues,
contact Mr. Poston at (202) 622–3060 (not
a toll-free call).
Disclosure of Activity
Groupings Under Section
469
Notice 2008–64
PURPOSE
This notice requests comments from the
public regarding a proposal to require tax-
payers to report to the Internal Revenue
Service their groupings and regroupings
of activities and the addition and disposi-
tion of specific activities within their ex-
isting groupings of activities for purposes
of § 469 of the Internal Revenue Code and
§ 1.469–4 of the Income Tax Regulations.
To date, the IRS has not prescribed report-
ing requirements for taxpayer groupings
under section 469 other than those pro-
vided for in § 1.469–9(g) (relating to the
election available to certain real estate pro-
fessionals). As a result, the IRS and tax-
payers have had difficulty verifying tax-
payers’ historical groupings. The proposal
August 4, 20082682008–31 I.R.B.

described in this notice would provide a re-
porting system that seeks to address this is-
sue without unduly burdening taxpayers.
The proposal described in this notice
is one possible approach. The IRS is in-
terested in considering other possible ap-
proaches. Therefore, any requirement will
not become effective until the IRS consid-
ers public commentsand suggestions re-
ceived in response to this notice and pub-
lishes final guidance announcing any new
reporting rules.
BACKGROUND
Section 469 generally provides that de-
ductions from passive trade or business ac-
tivities, to the extent they exceed income
from all such passive activities (exclusive
of portfolio income), may not be deducted
against other income.
Section 469(g)(1)(A) generally pro-
vides that if during the taxable year a
taxpayer disposes of his entire interest in
any passive activity (or former passive
activity), and all gain or loss realized on
such disposition is recognized, the excess
of (i) any loss from such activity for such
taxable year (determined after the applica-
tion of § 469(b)), over (ii) any net income
or gain for such taxable year from all other
passive activities (determined after the ap-
plication of § 469(b)), shall be treated as a
loss which is not from a passive activity.
Section 1.469–4 sets forth the rules for
grouping a taxpayer’s trade or business ac-
tivities and rental activities for purposes
of applying the passive activity loss and
credit limitation rules of § 469.
Section 1.469–4(c)(1) provides that
one or more trade or business activities
or rental activities may be treated as a
single activity if the activities constitute
an appropriate economic unit for the mea-
surement of gain or loss for purposes of
§ 469.
Section 1.469–4(c)(2) provides guide-
lines for determining whether activities
constitute an appropriate economic unit
and, therefore, may be treated as a sin-
gle activity. Section 1.469–4(d) describes
limitations on grouping certain activities.
Section 1.469–4(e)(1) provides that
except as provided in § 1.469–4(e)(2)
and § 1.469–11 (providing three periods
of time, all of which are now closed, in
which a taxpayer could have regrouped
its activities without having to establish
that the original grouping was clearly in-
appropriate under § 1.469–4(e)(2)), once
a taxpayer has grouped activities under
§ 1.469–4, the taxpayer generally may not
regroup those activities in subsequent tax-
able years. Taxpayers must comply with
disclosure requirements that the Commis-
sioner may prescribe with respect to both
their original groupings and the addition
and disposition of specific activities within
those existing groupings in subsequent
taxable years.
Section 1.469–4(e)(2) provides that if
it is determined that a taxpayer’s origi-
nal grouping was clearly inappropriate or
a material change in the facts and circum-
stances has occurred that makes the origi-
nal grouping clearly inappropriate, the tax-
payer must regroup the activities and must
comply with the disclosure requirements
that the Commissioner may prescribe.
PROPOSAL
The IRS is considering whether to
change the reporting requirements for
taxpayer groupings under section 469.
Although the Service has considered a
number of approaches, the proposal de-
scribedinparagraphsAthroughFwould
generally require taxpayers to report to
the Service, as part of their regular annual
return, changes to a taxpayer’s groupings.
The proposal would apply to all persons
or entities to whom the rules in § 1.469–4
apply. It would not apply to persons or
entities who have made the election pro-
vided for in § 1.469–9(g) (relating to the
election available to certain real estate
professionals).
A.Statement Required for New Groupings
The proposal provides that a taxpayer
shall file a written statement with its orig-
inal return for the first taxable year in
which one or more trade or business ac-
tivities or rental activities are originally
grouped as a single activity or as separate
activities. This statement must identify
the names, addresses, and employer iden-
tification numbers, if applicable, for the
trade or business activities or rental ac-
tivities that are being grouped as a single
activity or as separate activities. In ad-
dition, any statement reporting a new
grouping of two or more trade or business
activities or rental activities as a single
activity must contain a declaration that the
grouped activities constitute an appropri-
ate economic unit for the measurement of
gain or loss for purposes of § 469. Pur-
suant to § 1.469–4(e)(1) and except as
otherwise provided in § 1.469–4(e)(2) and
§ 1.469–11, once a taxpayer has grouped
activities under § 1.469–4, the taxpayer
may not regroup those activities in subse-
quent taxable years.
B.Statement Required for Addition of
New Activities to Existing Groupings
The proposal provides that whenever
a taxpayer adds a new trade or business
activity or a rental activity to an existing
grouping within a taxable year, the tax-
payer shall file a written statement with the
taxpayer’s original return for the taxable
year in which the new trade or business ac-
tivity or rental activity is added to the exist-
ing grouping. This statement must identify
the names, addresses, and employer identi-
fication numbers, if applicable, for the new
trade or business activity or rental activity
that is being added to the existing group-
ing. The statement reporting an addition to
an existing grouping must also identify the
names, addresses, and employer identifi-
cation numbers, if applicable, for the activ-
ity or activities within the existing group-
ing. In addition, the statement reporting an
addition to an existing grouping must con-
tain a declaration that the activities consti-
tute an appropriate economic unit for the
measurement of gain or loss for purposes
of § 469.
C.Statement Required for Disposition of
Activities from Existing Groupings
The proposal provides that whenever
a taxpayer disposes of a specific activity
from an existing grouping within a taxable
year, the taxpayer shall file a written state-
ment with the taxpayer’s original return for
the taxable year in which the disposition
of the specific trade or business activity or
rental activity within the existing grouping
occurs. This statement must identify the
names, addresses, and employer identifi-
cation numbers, if applicable, for the spe-
cific trade or business activity or rental ac-
tivity that is disposed of, as well as the
names, addresses, and employer identifi-
cation numbers, if applicable, for the activ-
ity or activities that remain in the existing
2008–31 I.R.B.269August 4, 2008

grouping. The statement reporting a dis-
position of a specific activity within an ex-
isting grouping must contain a declaration
that the remaining activities (if more than
one) within the existing grouping consti-
tute an appropriate economic unit for the
measurement of gain or loss for purposes
of § 469. Except as otherwise provided in
§ 1.469–4(g) (providing for the treatment
of partial dispositions where there is a dis-
position of substantially all of an activity),
the rules provided for in § 469(g) will not
apply to the disposition of a specific activ-
ity from an existing grouping. For exam-
ple, assumeA, an individual, owns and op-
erates four bakeries whichAhas treated as
one activity under § 1.469–4. If, within a
taxable year,AsellsA’s entire interest in
one of those bakeries, the rules provided
for in § 469(g) will generally not apply to
the sale, and any losses or credits attrib-
utable to the disposed of bakery will be
treated as a deduction or credit allocable
to the continuing bakery activity. If a tax-
payer believes § 1.469–4(g) applies to the
disposition of a specific activity within an
existing grouping, the statement reporting
the disposition must contain a declaration
that the disposition satisfies the require-
ments of § 1.469–4(g).
D.Statement Required for Regroupings
The proposal provides that, under
§ 1.469–4(e)(2), if it is determined that the
taxpayer’s original grouping was clearly
inappropriate or a material change in the
facts and circumstances has occurred that
makes the original grouping clearly inap-
propriate, the taxpayer must regroup the
activities. If such a determination and
regrouping is made, the taxpayer shall file
a written statement with the taxpayer’s
original return for the taxable year in
which the trade or business activities or
rental activities are regrouped. This state-
ment must identify the names, addresses,
and employer identification numbers, if
applicable, for the trade or business or
rental activities that are being regrouped.
If two or more activities are regrouped
into a single activity, the statement re-
porting a regrouping must also contain a
declaration that the regrouped activities
constitute an appropriate economic unit
for the measurement of gain or loss for
purposes of § 469. Furthermore, the state-
ment reporting a regrouping must contain
an explanation of why the taxpayer’s orig-
inal grouping was determined to be clearly
inappropriate or the nature of the material
change in the facts and circumstances that
makes the original grouping clearly inap-
propriate.
E.Reporting of Pre-Existing Groupings
Required only upon Change
The proposal clarifies that no written
statement is required to be filed reporting
the grouping of the trade or business ac-
tivities and rental activities that have been
made as of the effective date of any pub-
lished final guidance until the taxpayer
makes a change to the grouping as de-
scribedinparagraphsA,B,C,orDofthis
notice.
F.Effect of Failure to Report
Under the proposal, except as provided
in § 1.469–4(d)(5), if a taxpayer is engaged
in two or more trade or business activi-
ties or rental activities and fails to report
whether the activities have been grouped
as a single activity or as separate activities
in accordance with this proposal, then each
trade or business activity or rental activity
will be treated as having been grouped as a
separate activity for purposes of applying
the passive activity loss and credit limita-
tion rules of § 469.
EFFECTIVE DATE
The proposal would be effective on the
date that final guidance is published by the
Internal Revenue Service.
REQUEST FOR COMMENTS
The proposal contained in this notice
is one way, but not the only way, to im-
plement a reporting system for taxpayer
groupings under section 469. The IRS
requests public comments on this proposal
and, specifically, whether it sufficiently
balances the need for reporting with the
burden of compliance. Comments regard-
ing other possible approaches are also
requested. All comments will be avail-
able for public inspection and copying.
Therefore, submissions received by the
IRS should not include taxpayer-specific
information of a confidential nature. Sub-
missions should include the name and
telephone number of a person to con-
tact. Comments must be submitted by
November 4, 2008. Comments should be
addressed to:
Internal Revenue Service
Office of the Associate Chief Counsel
(Passthroughs and Special Industries),
CC:PSI
Attn: Jonathan Cornwell, Room 5004
1111 Constitution Avenue, NW
Washington, DC 20224
In addition, comments may be sub-
mitted electronically via the Inter-
net by sending them in an email to
notice.comments@irscounsel.treas.gov
and specifying that the comments concern
Notice 2008–64.
DRAFTING INFORMATION
The principal author of this notice is
Jonathan E. Cornwell of the Office of
Associate Chief Counsel (Passthroughs
& Special Industries). For further in-
formation regarding this notice, contact
Mr. Cornwell at (202) 622–3050 (not a
toll-free call).
Relief From Certain
Low-Income Housing Credit
Requirements Due to Severe
Storms and Flooding in
Missouri
Notice 2008–66
The Internal Revenue Service is sus
-
pending certain requirements unde
r§42
of the Internal Revenue Code for low
-in-
come housing credit projects in th
eUnited
States to provide emergency housi
ng relief
needed as a result of the devastat
ion caused
by severe storms and flooding in M
issouri
beginning on June 1, 2008. This re
lief is
being granted pursuant to the Ser
vice’s au-
thority under § 42(n) and § 1.42–1
3(a) of
theIncomeTaxRegulations.
BACKGROUND
On June 25, 2008, the President de-
clared a major disaster for the State of
Missouri. This declaration was made un-
der the Robert T. Stafford Disaster Relief
and Emergency Assistance Act, 42 U.S.C.
5121–5206 (2000 and Supp. II 2002).
Subsequently, the Federal Emergency
Management Agency (FEMA) designated
August 4, 20082702008–31 I.R.B.

jurisdictions for Individual Assistance.
The State of Missouri has requested that
the Service allow owners of low-income
housing credit projects to provide tempo-
rary housing in vacant units to individuals
who resided in jurisdictions designated
for Individual Assistance in Missouri and
who have been displaced because their
residences were destroyed or damaged
as a result of the devastation caused by
the severe storms and flooding. Based
upon this request andbecause of the wide-
spread damage to housing caused by the
severe storms and flooding, the Service
has determined that the Missouri Housing
Development Commission (Commission)
may provide approval to project owners to
provide temporary emergency housing for
displaced individuals in accordance with
this notice.
I. SUSPENSION OF INCOME
LIMITATIONS
The Service has determined that it is
appropriate to temporarily suspend certain
income limitation requirements under § 42
for certain qualified low-income projects.
The suspension will apply to low-income
housing projects approved by the Commis-
sion, in which vacant units are rented to
displaced individuals. The Commission
will determine the appropriate period of
temporary housing for each project, not to
extend beyond July 31, 2009 (temporary
housing period).
II. STATUS OF UNITS
A. Units in the first year of the credit
period
A displaced individual temporarily
occupying a unit during the first year of
the credit period under § 42(f)(1) will be
deemed a qualified low-income tenant
for purposes of determining the project’s
qualified basis under § 42(c)(1), and for
meeting the project’s 20–50 test or 40–60
test as elected by the project owner under
§ 42(g)(1). After the end of the tempo-
rary housing period established by the
Commission (not to extend beyond July
31, 2009), a displaced individual will no
longer be deemed a qualified low-income
tenant.
B. Vacant units after the first year of the
credit period
During the temporary housing period
established by the Commission, the status
of a vacant unit (that is, market-rate or low-
income for purposes of § 42 or never pre-
viously occupied) afterthe first year of the
credit period that becomes temporarily oc-
cupied by a displaced individual remains
the same as the unit’s status before the
displaced individual moves in. Displaced
individuals temporarily occupying vacant
units will not be treated as low-income
tenants under § 42(i)(3)(A)(ii). However,
even if it houses a displaced individual, a
low-income or market rate unit that was
vacant before the effective date of this no-
tice will continue to be treated as a va-
cant low-income or market rate unit. Sim-
ilarly, a unit that was never previously oc-
cupied before the effective date of this no-
tice will continue to be treated as a unit
that has never been previously occupied
even if it houses a displaced individual.
Thus, the fact that a vacant unit becomes
occupied by a displaced individual will
not affect the building’s applicable frac-
tion under § 42(c)(1)(B) for purposes of
determining the building’s qualified basis,
nor will it affect the 20–50 test or 40–60
test of § 42(g)(1). If the income of oc-
cupants in low-income units exceeds 140
percent of the applicable income limita-
tion, the temporary occupancy of a unit by
a displaced individual will not cause ap-
plication of the available unit rule under
§ 42(g)(2)(D)(ii). In addition, the project
owner is not required during the temporary
housingperiodtomakeattemptstorent
to low-income individuals the low-income
units that house displaced individuals.
III. SUSPENSION OF
NON-TRANSIENT REQUIREMENTS
The non-transient use requirement of
§ 42(i)(3)(B)(i) shall not apply to any
unit providing temporary housing to a
displaced individual during the temporary
housingperioddeterminedbytheCom-
mission in accordance with section I of
this notice.
IV. OTHER REQUIREMENTS
All other rules and requirements of
§ 42 will continue to apply during the
temporary housing period established
by the Commission. After the end of
the temporary housing period, the ap-
plicable income limitations contained in
§ 42(g)(1), the available unit rule un-
der § 42(g)(2)(D)(ii), the nontransient
requirement of § 42(i)(3)(B)(i), and the
requirement to make reasonable attempts
to rent vacant units to low-income individ-
uals shall resume. If a project owner offers
to rent a unit to a displaced individual after
the end of the temporary housing period,
the displaced individual must be certified
under the requirements of § 42(i)(3)(A)(ii)
and § 1.42–5(b) and (c) to be a qualified
low-income tenant. To qualify for the re-
lief in this notice, the project owner must
additionally meet all of the following re-
quirements:
(1) Major Disaster Area
The displaced individual must have
resided in a Missouri jurisdiction desig-
nated for Individual Assistance by FEMA
as a result of the severe storms and flood-
ing in Missouri beginning on June 1, 2008.
(2) Approval of the Missouri Housing
Development Commission
The project owner must obtain approval
from the Commission for the relief de-
scribed in this notice. The Commission
will determine the appropriate period of
temporary housing for each project, not to
extend beyond July 31, 2009.
(3) Certifications and Recordkeeping
To comply with the requirements of
§ 1.42–5, project owners are required to
maintain and certify certain information
concerning each displaced individual tem-
porarily housed in the project, specifically:
name, address of damaged residence,
social security number, and a statement
signed under penalties of perjury by the
displaced individualthat, because of dam-
age to the individual’s residence in a
Missouri jurisdiction designated for Indi-
vidual Assistance by FEMA as a result of
the severe storms and flooding beginning
on June 1, 2008, the individual requires
temporary housing. The owner must no-
tify the Commission that vacant units are
available for rent to displaced individuals.
The owner must also certify the date the
displaced individual began temporary oc-
cupancy and the date the project will dis-
continue providing temporary housing as
established by the Commission. The certi-
fications and recordkeeping for displaced
individuals must be maintained as part of
the annual compliancemonitoring process
with the Commission.
(4) Rent Restrictions
Rents for the low-income units that
house displaced individuals must not ex-
ceed the existing rent-restricted rates for
2008–31 I.R.B.271August 4, 2008

the low-income units established under
§ 42(g)(2).
(5) Protection of Existing Tenants
Existing tenants in occupied low-in-
come units cannot be evicted or have their
tenancy terminated as a result of efforts to
provide temporary housing for displaced
individuals.
EFFECTIVE DATE
This notice is effective June 25, 2008
(the date of the President’s major disas-
ter declarations as a result of the severe
storms and flooding in Missouri beginning
on June 1, 2008).
PAPERWORK REDUCTION ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–2108.
An Agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this no-
tice is in the section titled “OTHER RE-
QUIREMENTS” under “(3) Certifications
and Recordkeeping.” This information is
required to enable the Service to verify
whether individuals are displaced as a re-
sult of the devastation caused by severe
storms and flooding in Missouri begin-
ning on June 1, 2008, and thus warrant
temporary housing in vacant low-income
housing credit units. The collection of in-
formation is required to obtain a benefit.
The likely respondents are individuals and
businesses.
The estimated total annual recordkeep-
ing burden is 125 hours.
The estimated annual burden per
recordkeeper is approximately 15 minutes.
The estimated numberof recordkeepers is
500.
Books or records relating to a collection
of information must be retained as long
as their contents may become material to
the administration of the internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
David Selig of the Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Mr. Selig at
(202) 622–3040 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.
(Also Part I, §§ 860D, 860G, 1001; 1.860G–2,
1.1001–3, 301.7701–2, 301.7701–3, 301.7701–4.)
Rev. Proc. 2008–47
SECTION 1. PURPOSE
This revenue procedure describes the
conditions under which modifications to
certain subprime mortgage loans will not
cause the Internal Revenue Service (Ser-
vice) to challenge the tax status of certain
securitization vehicles that hold the loans
or to assert that those modifications create
a liability for tax on a prohibited transac-
tion.
The purpose of this revenue procedure
is to provide certainty in the current eco-
nomic environment with respect to certain
potential tax issues that may be impli-
cated by fast track loan modifications,
as described below. No inference should
be drawn about whether similar conse-
quences would obtain if a transaction falls
outside the limited scope of this revenue
procedure. Furthermore, there should be
no inference that, in the absence of this
revenue procedure, transactions within its
scope would have impaired the tax status
of securitization vehicles or would have
created liability for tax on a prohibited
transaction.
Rev. Proc. 2007–72, 2007–52 I.R.B.
1257, provided similar guidance regarding
fast-track loan modifications that were
effected in a manner consistent with cer-
tain principles, recommendations, and
guidelines (the “Original Framework”),
which the American Securitization Forum
(“ASF”) released on December 6, 2007.
In July 2008, the ASF released an up-
dated Framework, which covers additional
fast-track loan modifications.
This revenue procedure amplifies and
supersedes Rev. Proc. 2007–72 by extend-
ing its provisions to these additional loan
modifications.
SECTION 2. BACKGROUND—THE
ASF “JULY 2008 FRAMEWORK”
.01OnJuly8,2008,theAmerican
Securitization Forum (“ASF”) released a
document entitled, “Statement of Princi-
ples, Recommendations and Guidelines
for a Streamlined Foreclosure and Loss
Avoidance Framework for Securitized
Subprime Adjustable Rate Mortgage
Loans” (the “July 2008 Framework”).
An Executive Summary of the July 2008
Framework (entitled “Streamlined Fore-
closure and Loss Avoidance Framework
for Securitized Subprime Adjustable Rate
Mortgage Loans”) was released simulta-
neously and is attached as an Appendix to
this revenue procedure.
.02 Both the Original Framework and
the July 2008 Framework have been
broadly supported as appropriate steps
in addressing certain risks in the current
economic environment.
.03 The July 2008 Framework applies
to first-lien subprime residential adjustable
rate mortgage (ARM) loans that—
(1) Have an initial fixed rate period of
36 months or less (including “2/28s” and
“3/27s”);
(2) Were originated between January 1,
2005, and July 31, 2007;
(3) Are included in securitized pools;
and
(4) Have an initial interest rate reset
date between January 1, 2008, and July 31,
2010.
This revenue procedure refers to these in-
struments as “Loans.”
.04 The July 2008 Framework provides
a “fast track” procedure for modifying
Loans in advance of an initial, or any sub-
sequent, interest rate reset date and details
the criteria for determining which Loans
are eligible for the procedure. Modifica-
tions pursuant to the procedure are referred
to as “fast track modifications.”
.05 A fast track modification affects the
interest rate on the Loan, generally for five
years following the date on which the rate
would have reset in the absence of the
modification. Duringthe period affected
by the modification, the interest rate on the
modified Loan is generally fixed at the rate
in effect prior to the upcoming reset date.
August 4, 20082722008–31 I.R.B.

SECTION 3.
BACKGROUND—REMICS
.01 Real Estate Mortgage Investment
Conduits (REMICs) are widely used secu-
ritization vehicles for mortgages. REMICs
are governed by sections 860A through
860G of the Internal Revenue Code.
.02 For an organization to qualify as a
REMIC, all of the interests in the organi-
zation must consist of one or more classes
of regular interests and a single class of
residual interests,seesection 860D(a),
and those interests must be issued on
the startup day, within the meaning of
§ 1.860G–2(k) of the Income Tax Regula-
tions.
.03 A regular interest is one that is des-
ignated as a regular interest and whose
terms are fixed on the startup day. Section
860G(a)(1). In addition, a regular interest
must (1) unconditionally entitle the holder
to receive a specified principal amount (or
other similar amount), and (2) provide that
interest payments, if any, at or before ma-
turity are based on a fixed rate (or to the
extent provided in regulations, at a variable
rate).
.04 An interest issued after the startup
day does not qualify as a REMIC regular
interest.
.05 Under section 860D(a)(4), an entity
qualifies as a REMIC only if, among other
things, as of the close of the third month
beginning after the startup day and at all
times thereafter, substantially all of its as-
sets consist of qualified mortgages and per-
mitted investments. This asset test is sat-
isfied if the entity owns no more than a
de minimisamount of other assets.See
§ 1.860D–1(b)(3)(i). As a safe harbor, the
amount of assets other than qualified mort-
gages and permitted investments isde min-
imisif the aggregate of the adjusted bases
of those assets is less than one percent of
the aggregate of the adjusted bases of all of
the entity’s assets. § 1.860D–1(b)(3)(ii).
.06 With limited exceptions, a mort-
gage loan is not a qualified mortgage
unless it is transferred to the REMIC on
the startup day in exchange for regular
or residual interests in the REMIC.See
section 860G(a)(3)(A)(i).
.07 The legislative history of the
REMIC provisions indicates that Congress
intended the provisions to apply only to
an entity that holds a substantially fixed
pool of real estate mortgages and related
assets and that “has no powers to vary
the composition of its mortgage assets.”
S. Rep. No. 99–313, 99
th
Cong., 2
d
Sess.
791–92; 1986–3 (Vol. 3) C.B. 791–92.
.08 Section 1.1001–3(c)(1)(i) defines a
“modification” of a debt instrument as any
alteration, including any deletion or addi-
tion, in whole or in part, of a legal right or
obligation of the issuer or holder of a debt
instrument, whether the alteration is evi-
denced by an express agreement (oral or
written), conduct of the parties, or other-
wise. Section 1.1001–3(e) governs which
modifications of debt instruments are “sig-
nificant.” Under § 1.1001–3(b), for most
federal income tax purposes, a significant
modification produces a deemed exchange
of the original debt instrument for a new
debt instrument.
.09 Under § 1.860G–2(b), related rules
apply to determine REMIC qualifica-
tion. Except as specifically provided in
§ 1.860G–2(b)(3), if there is a significant
modification of an obligation that is held
by a REMIC, then the modified obligation
is treated as one that was newly issued in
exchange for the unmodified obligation
that it replaced.See§ 1.860G–2(b)(1).
For this purpose, the rules in § 1.1001–3(e)
determine whether a modification is “sig-
nificant.”See§ 1.860G–2(b)(2). Thus,
even if an entity initially qualifies as a
REMIC, one or more significant modifi-
cations of loans held by the entity may
terminate the qualification if the modifica-
tions cause less than substantially all of the
entity’s assets to be qualified mortgages.
.10 Certain loan modifications, how-
ever, are not significant for purposes of
§ 1.860G–2(b)(1), even if the modifi-
cations are significant under the rules
in § 1.1001–3. In particular, under
§ 1.860G–2(b)(3)(i), if a change in the
terms of an obligation is “occasioned by
default or a reasonably foreseeable de-
fault,” the change is not a significant mod-
ification for purposes of § 1.860G–2(b)(1),
regardless of the modification’s status un-
der § 1.1001–3.
.11 Section 860F(a)(1) imposes a tax on
REMICs equal to 100 percent of the net
income derived from “prohibited transac-
tions.” The disposition of a qualified mort-
gage is a prohibited transaction unless the
“disposition [is] pursuant to-(i) the substi-
tution of a qualified replacement mortgage
foraqualifiedmortgage...,(ii)a
disposition incident to the foreclosure, de-
fault, or imminent default of the mortgage,
(iii) the bankruptcy or insolvency of the
REMIC, or (iv) a qualified liquidation.”
Section 860F(a)(2)(A).
SECTION 4.
BACKGROUND—TRUSTS
.01 Section 301.7701–2(a) of the Pro-
cedure and Administration Regulations
defines a “business entity” as any entity
recognized for federal tax purposes (in-
cluding an entity with a single owner that
may be disregarded as an entity separate
from its owner under § 301.7701–3) that
is not properly classified as a trust under
§ 301.7701–4 or otherwise subject to spe-
cial treatment under the Code.
.02 Section 301.7701–4(a) provides
that an arrangement is treated as a trust if
the purpose of the arrangement is to vest
in trustees responsibility for the protection
and conservation of property for benefi-
ciaries who cannot share in the discharge
of this responsibility and, therefore, are
not associates in a joint enterprise for the
conduct of business for profit.
.03 Section 301.7701–4(c) provides
that an “investment” trust is not classified
as a trust if there is a power under the trust
agreement to vary the investment of the
certificate holders.
SECTION 5. SCOPE
.01 This revenue procedure applies to
the following transactionsoccurringonor
before July 31, 2010—
(1) A fast track modification of a Loan
pursuant to the July 2008 Framework; and
(2) A second-lien holder’s action of
subordinating its lien to any new lien that
may arise under a Loan as the result of
such a fast track modification.
.02 If the July 2008 Framework is mate-
rially modified after July 8, 2008, this rev-
enue procedure does not necessarily apply
to fast track modifications under the mod-
ified Framework or to second-lien subor-
dinations to accommodate those modifica-
tions.
SECTION 6. APPLICATION
In the case of one or more transactions
to which this revenue procedure applies—
.01 The Service will not challenge a
securitization vehicle’s qualification as a
2008–31 I.R.B.273August 4, 2008

REMIC on the grounds that the transac-
tions are not among the exceptions listed
in § 1.860G–2(b)(3);
.02 The Service will not contend that
the transactions are prohibited transac-
tions under section 860F(a)(2) on the
grounds that the transactions resulted in
one or more dispositions of qualified mort-
gages and that the dispositions are not
among the exceptions listed in section
860F(a)(2)(A)(i)–(iv);
.03 The Service will not challenge a
securitization vehicle’s classification as a
trust under § 301.7701–4(c) on the grounds
that the transactions manifest a power to
vary the investment of the certificate hold-
ers; and
.04 The Service will not challenge a
securitization vehicle’s qualification as a
REMIC on the grounds that the transac-
tions resulted in a deemed reissuance of the
REMIC regular interests.
SECTION 7. OTHER GUIDANCE
For the treatment of mortgage loans
modified pursuant to certain foreclosure
prevention programs, see Rev. Proc.
2008–28, 2008–23 I.R.B. 1054.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2007–72 is amplified and,
as amplified, is superseded.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective on
July 8, 2008.
SECTION 10. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Diana Imholtz of the Office
of Associate Chief Counsel (Financial
Institutions and Products). For further
information, contactMs. Imholtz at (202)
622–3930 (not a toll-free call).
Appendix to Revenue Procedure 2008–47
American Securitization Forum
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans
Executive
Summary
July 8, 2008
Scope:
This streamlined framework applies to all first lien subprimeresidential adjustable rate mortgage (ARM) loans that have
an initial fixed rate period of 36 months or less (including “2/28s” and “3/27s”), referred to below as “subprime ARM
loans” that:
•were originated between January 1, 2005 and July 31, 2007;
•are included in securitized pools; and
•have an initial interest rate reset between January 1, 2008 and July 31, 2010.
This streamlined framework may be applied to subprime ARM loans in advance of an initial, or any subsequent, reset date.
Typically, servicer/borrower communication should begin 120 days prior to the initial reset date.
As a general overview, under this streamlined framework, if the loan is current and is eligible for refinance, then it
should be refinanced. If the loan is current but is not eligible for a refinance, then it would be eligible for a streamlined
modification if: the property is occupiedas the borrower’s primary residence; the borrower meets the “FICO test”; and the
payment amount would go up by more than 10% over the current payment amount at the upcoming reset.
August 4, 20082742008–31 I.R.B.

Overarching Principles:
•The servicer will not take any action that is prohibited by the pooling and servicing agreement (“PSA”) or other ap-
plicable securitization governing document, or that would violate applicable laws, regulations, or accounting standards.
ASF’s Statement of Principles, Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage Loans, published concurrently with this document, ana-
lyzes how the framework described in the Executive Summary is consistent with typical PSA provisions. The ASF urges
readers of this Executive Summary to review the full Statement.
•The ASF believes that this framework is consistent with the authority granted to a servicer to modify subprime mortgage
loans in typical PSAs. The ASF expects that the procedures in this framework will constitute standard and customary
servicing procedures for subprime loans.
•The servicer will expeditiously implement the ASF Investor Reporting Guidelines for the Modification of Subprime
ARM Loans recommended by the ASF, which is simultaneously released with this framework.
•LTV and CLTV will be determined based on information at origination. If an origination LTV is below 97%, a servicer
may obtain an updated home value by obtaining an AVM, BPO or other means.
•All servicers of second liens to subprime borrowers should cooperate fully with this framework by providing information
needed by first lien servicers and by agreeing to subordinate the second lien to any new first lien resulting from a refinance
(with no cash out) under this framework.
•All existing contractual obligations and remedies related to fraudulent mortgageorigination activity should be strictly
enforced.
•The streamlined framework outlined in this framework represents the consensus view of the membership of the ASF,
acting through its Board of Directors, asto the parameters used to determine the segmentation of subprime ARM loans,
including the numeric values included in those parameters. It is understood by theASF’s members that the numeric values
included in the parameters are not based on historic data, but rather simply represent a consensus view as to appropriate
numeric values for use within this framework for the purpose of supporting a streamlined approach to loan modifications
that complies with typical securitization governing documents. The ASF, acting through its Board of Directors, may in
the future change these numeric values or further refine these parameters as experience is gained and market conditions
evolve.
Borrower S
egmentation:
Under this
framework, subprime ARM loansare divided into 3 segments.
Segment 1i
ncludes current (as defined below) loans where the borrower is likely to be able to refinance into any available
mortgage p
roduct, including FHA, FHA Secure or readilyavailable mortgage industry products.
•Generally, the servicer will determine whether loans may beeligible for refinancing into readily available mortgage
industry products based on ascertainable data not requiringdirect communication with the borrower, such as LTV, loan
amount, FICO and payment history. Servicers will generallynot determine current income or DTI to determine initial
eligibility for refinancing.
•If the borrower also has a second lien on the property, this framework contemplates that the borrower is able to refinance
the first lien only, on a no cash out basis. In order for the loan to fall into this segment, the second lien does not have to
be refinanced; however, any second lien holder will need to agree to subordinate their interest to the refinanced first lien.
Segment 2includes current loans where the borrower is unlikely to be able to refinance into any readily available
mortgage industry product.
2008–31 I.R.B.275August 4, 2008

•Current: For pur
poses of this framework “current” means the loan must be not more than 30 days delinquent, and must
not have been mor
e than 1 x 60 days delinquent in the last 12 months, both under the OTS method. Corresponding tests
would apply und
er the MBA method if the servicer uses that standard.
•Not eligible fo
r refinance: All current loans that do not satisfy FHA Securerequirements, including delinquency history,
DTI at originat
ion, LTV (97% is the maximum LTV allowed under FHA Secure) and loan amount standards for this
program, are wi
thin Segment 2; unless the servicer can determine whether they may meet eligibility criteria for another
product, by rev
iewing eligibility criteria without performing an underwriting analysis.
Segment 3incl
udes loans where the borrower is not current as defined above, demonstrating difficulty meeting the
introductory
rate.
Segment 1 — Refinance:
•It is expected that borrowers in this category should refinance their loans, if they are unable or unwilling to meet their
reset payment. However, a servicer may evaluate each borrower in this category on a case by case basis or apply any
framework consistent with the applicable servicing standard in the transaction documents for a loan modification or other
loss mitigation outcome.
•The servicer will facilitate a refinancein a manner that avoids the imposition of prepayment penalties wherever feasible.
This may be accomplished by timing the refinance to occur after the upcoming reset date.
•Servicers should take all reasonable steps permitted under the PSA and other governing documents to encourage or facili-
tate refinancing for borrowers in Segment 1, or to borrowers in Segment 2 who become eligible for a refinance, including,
where permitted, providing borrowers with information about FHA, FHA Secure and other readily available mortgage
industry products, even if that servicer is not able to provide those products through any affiliated originator.
Segment 2 — Loan Modification:
•The servicer will determine the following for each Segment 2borrower: current owner occupancy status (based on in-
formation known to the servicer, including billing and property address), current FICO score and the FICO score at
origination of the loan.
•FICO test:
•IfthecurrentFICOscoreislessthan660andislessthanascore 10% higher than the FICO score at origination, the
borrower is considered to have met the “FICO test.” If theborrower meets the FICO test, the servicer will generally
not determine the borrower’s current income.
•If either a) the current FICO score is 660 or higher, or b) the current FICO is at least 10% higher than the FICO score
at origination, the borrower is considered to not meet the “FICO test.” If the borrower does not meet the FICO test,
the servicer will use an alternate analysis to determine if the borrower is eligible for a loan modification.
•Segment 2 loans will only be eligiblefor a fast track loan modification if:
•The borrower currently occupies the property as his or her primary residence;
•The borrower meets the FICO test; and
•The servicer determines that, at the upcoming reset,the payment amount would go up by more than 10% over the
current payment amount.
•Borrowers in this segment and eligible for a fast track loan modification as described above may be offered a loan mod-
ification under which the interest rate will be kept at the existing rate in effect prior to the upcoming reset, generally for
5 years following the upcoming reset.
•As to Segment 2 loans eligible for a fasttrack loan modification, the servicer may make the following presumptions:
•The borrower is able and willing to pay under the loan modification based on his or her current payment history prior
to the reset date.
August 4, 20082762008–31 I.R.B.

•The borrower is unable to pay (and default is reasonably foreseeable) after the upcoming reset under the original loan
terms, based on the size of the payment increase that would otherwise apply.
•The modification maximizes the net present value of recoveries to the securitization trust and is in the best interests
of investors in the aggregate, becauserefinancing opportunities are likely not available and the borrower is able and
willing to pay under the modified terms.
•The terms of the loan modification shall be binding on the servicer and the borrower, if there is no signed modification
agreement, so long as a) the terms of such loan modification are more favorable to the borrower than the existing
terms, and b) the servicer sends a written notice to theborrower describing the terms of the modification.
•For borrowers that do not meet the FICO test, the servicer will use an alternate analysis to determine if the borrower is
eligible for a loan modification, as well as the terms of the modification (which may vary). This may include a) con-
ducting an individual review of current income and debt obligations, debt-to-income analysis, and considering a tailored
modification for a borrower, or b) applying any other framework consistent with the applicable servicing standard in the
transaction documents to determine if a borrower is eligible for a loan modification.
•For borrowers that are eligible for a fast track modification,the fast track option is non-exclusive and does not preclude
a servicer from using an alternate analysis to determine if a borrower is eligible for a loan modification, as well as the
terms of the modification.
Segment 3 — Loss Mitigation:
•For loans in this category, the servicer will determine the appropriate loss mitigation approach in a manner consistent
with the applicable servicing standard in the transaction documents, but without employing the fast tracking procedures
described under Segment 2. The approach chosen should maximize the net present value of the recoveries to the se-
curitization trust. The available approaches may include loan modification (including rate reduction and/or principal
forgiveness), forbearance, short sale, short payoff, or foreclosure.
•These borrowers will require a more intensive analysis, including where appropriate current debt and income analysis,
to determine the appropriate loss mitigation approach.
2008–31 I.R.B.277August 4, 2008

Part IV. Items o
fGeneralInterest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Guidance Under Section 956
for Determining the Basis of
Property Acquired in Certain
Nonrecognition Transactions
REG–102122–08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS and the Treasury Department are
issuing temporary regulations (T.D. 9402)
under section 956 of the Internal Revenue
Code (Code) relating to the determination
of basis in property acquired by a con-
trolled foreign corporation in certain non-
recognition transactions that are intended
to avoid United States income tax. Those
regulations affect United States sharehold-
ers of a controlled foreign corporation that
acquires United States property in certain
nonrecognition transactions. The text of
those regulations also serves as the text of
these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 22, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–102122–08),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Sub-
missions may be hand delivered be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–102122–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal
athttp://www.regulations.gov(IRS
REG–102122–08).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, John H. Seibert, (202)
622–3860; concerning submissions of
comments and/or requests for a hearing,
Regina Johnson, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin provide guidance regarding
the determination of basis for property
acquired in certain nonrecognition trans-
actions that repatriate earnings and profits
of a controlled foreign corporation but
are structured with the intent to avoid an
income inclusion by the United States
shareholders of the controlled foreign cor-
poration under section 951(a)(1)(B). This
avoidance is achieved by the use of the
basis rules under section 362(a) for the
acquisition by the controlled foreign cor-
poration of certain stock or obligations that
constitute United States property within
the meaning of section 956(c).
The text of those regulations also serves
as the text of these proposed regulations.
The preamble to the temporary regulations
explains the temporary regulations and
these proposed regulations.
Special Analyses
It has been determined that this no-
tice of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore,
a regulatory assessment is not required.
Pursuant to the Regulatory Flexibility Act
(RFA) (5 U.S.C. chapter 6), it is hereby
certified that these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that these
regulations will affect primarily large
multi-national United States corporations
that own a significant interest in foreign
corporations that acquire certain United
States property in a transaction subject to
the regulations. Accordingly, a regulatory
flexibility analysis is not required.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small entities.
Comment
s and Requests for a 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)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department con-
tinue to consider, outside the context of
section 956, the appropriate basis of stock
or obligations issued by a transferor in the
hands of the transferee as determined un-
der section 362. The IRS and the Treasury
Department are also considering whether
any additional rules are necessary or ap-
propriate to coordinate the section 956 ba-
sis determinations under these regulations
with basis determinations under other pro-
visions of the Code or regulations. Com-
ments are requested in this regard. All
comments will be available for public in-
spection and copying. A public hearing
may be scheduled if requested by any per-
son who timely submits comments. If a
public hearing is scheduled, notice of the
date, time and place for the hearing will be
published in theFederal Register.
Drafting Information
T
he principal author of these regula-
t
ions is John H. Seibert, Office of Asso-
c
iate Chief Counsel (International). How-
e
ver, other personnel from the IRS and the
T
reasury 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 * * *
Par. 2. Section 1.956–1 is amended by
adding a sentence to the end of paragraph
(e)(1) and adding new paragraphs (e)(5),
(e)(6) and (f) to read as follows:
August 4, 20082782008–31 I.R.B.

§1.956–1 Shareholder’s pro rata share
of a controlled foreign corporation’s
increase in earnings invested in United
States property.
*****
(e) * * * (1) * * * See §1.956–1T(e)(6)
for a special rule for determining amounts
attributable to United States property ac-
quired as the result of certain nonrecogni-
tion transactions.
***
(e)(5) [The text of the proposed amend-
ment to §1.956–1(e)(5) is the same as the
text for §1.956–1T(e)(5) published else-
where in this issue of the Bulletin].
(e)(6) [The text of the proposed amend-
ment to §1.956–1(e)(6) is the same as the
text for §1.956–1T(e)(6) published else-
where in this issue of the Bulletin].
(f) [The text of the proposed amend-
ment to §1.956–1(f) is the same as the text
for §1.956–1T(f) published elsewhere in
this issue of the Bulletin].
Steven T. Miller,
Acting Deputy Commissioner
for Services and Enforcement.
(Filed by the Office of the Federal Register on June 23, 2008,
8:45 a.m., and published in the issue of the Federal Register
for June 24, 2008, 73 F.R. 35606)
Treatment of an Individual
Nonmaterially Participating
Partner’s Distributive Share of
Investment Interest Expense
From a Trader Partnership
Announcement 2008–65
In Revenue Ruling 2008–12, 2008–10
I.R.B. 520, the IRS clarified that a nonma-
terially participating partner’s distributive
share of the interest expense of a partner-
ship engaged in the trade or business of
trading in securities is subject to the in-
vestment interest limitation in § 163(d)(1),
provided that the partner is an individual.
This conclusion is based on the definition
of the term “property held for investment”
in § 163(d)(5)(A)(ii). Pursuant to that def-
inition, a taxpayer’s interest in a trade or
business activity that is not a passive activ-
ity is classified as property held for invest-
ment for § 163(d) purposes if the taxpayer
does not materially participate in such ac-
tivity. The scope of § 163(d)(5)(A)(ii) is
narrow because trade or business activi-
ties in which the taxpayer does not mate-
rially participate are generally treated as
passive activities under the general defi-
nition of “passive activity” in § 469(c)(1).
However, certain specified trade or busi-
ness activities are treated asper senon-
passive regardless of the taxpayer’s degree
of participation in the activity. For ex-
ample, § 469(c)(3) provides that the term
“passive activity” does not include certain
working interests in oil and gas properties.
In Revenue Ruling 2008–12, the partner-
ship’s activity involved the trading of per-
sonal property (as defined in § 1092(d)) for
its own account. Under § 1.469–1T(e)(6),
such activity is treated asper senonpas-
sive. Thus, even though the partnership’s
trading activity rose to the level of a trade
or business, its interest expense attribut-
able to such activity and allocable to indi-
vidual partners who did not materially par-
ticipate in the activity was subject to the
§ 163(d) limitation, which is applied at the
partner level.
Since publication of Revenue Ruling
2008–12, a number of taxpayers have in-
quired as to whether the interest deduction
allowable to the nonmaterially participat-
ing limited partner after the application
of the § 163(d) limitation would properly
be reported on Schedule A, “Itemized De-
ductions” of Form 1040, “U.S. Individual
Income Tax Return” or whether instead the
allowable deduction would properly be
taken into account in computing the ordi-
nary business incomeor loss from the trade
or business activities of the partnership on
Schedule E, “Supplemental Income and
Loss.” Revenue Ruling 2008–38, 2008–31
I.R.B. 249, published concurrently with
this announcement, provides that, in the
case of an individual taxpayer, interest
paid or accrued on indebtedness allocable
to property held for investment described
in § 163(d)(5)(A)(ii) is a trade or business
deduction described in § 62(a)(1) that is
deductible (after the application of the
§ 163(d)(1) limitation) in determining the
taxpayer’s adjusted gross income. Ac-
cordingly, the limited partner described in
Revenue Ruling 2008–12 would properly
include the allowable amount of his dis-
tributive share of the trading partnership’s
interest expense in computing the limited
partner’s ordinary business income or loss
on Schedule E. Consistent with the report-
ing requirements of Notice 88–37, 1988–1
C.B. 522, the interest deduction of the
limited partner that is properly reportable
on Schedule E should be identified on a
separate line in Part II, Line 28, column
(a), as “investment interest,” followed by
the name of the trading partnership that
paid or incurred the interest expense, and
the amount of such interest expense should
be entered in column (h).
DRAFTING INFORMATION
The principal author of this announce-
ment is Faith P. Colson of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries).For further informa-
tion regarding this announcement, contact
Faith P. Colson at (202) 622–3060 (not a
toll-free call).
2008–31 I.R.B.279August 4, 2008

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.
August 4, 2008i2008–31 I.R.B.

Numerical Finding List
1
Bulletins 2008–27 through 2008–31
Announcements:
2008-62, 2008-27 I.R.B.74
2008-63, 2008-28 I.R.B.114
2008-64, 2008-28 I.R.B.114
2008-65, 2008-31 I.R.B.279
2008-66, 2008-29 I.R.B.164
2008-67, 2008-29 I.R.B.164
2008-68, 2008-30 I.R.B.244
Notices:
2008-55, 2008-27 I.R.B.11
2008-56, 2008-28 I.R.B.79
2008-57, 2008-28 I.R.B.80
2008-58, 2008-28 I.R.B.81
2008-59, 2008-29 I.R.B.123
2008-60, 2008-30 I.R.B.178
2008-61, 2008-30 I.R.B.180
2008-62, 2008-29 I.R.B.130
2008-63, 2008-31 I.R.B.261
2008-64, 2008-31 I.R.B.268
2008-65, 2008-30 I.R.B.182
2008-66, 2008-31 I.R.B.270
Proposed Regulations:
REG-129243-07, 2008-27 I.R.B.32
REG-149405-07, 2008-27 I.R.B.73
REG-101258-08, 2008-28 I.R.B.111
REG-102122-08, 2008-31 I.R.B.278
REG-121698-08, 2008-29 I.R.B.163
Revenue Procedures:
2008-32, 2008-28 I.R.B.82
2008-33, 2008-28 I.R.B.93
2008-34, 2008-27 I.R.B.13
2008-35, 2008-29 I.R.B.132
2008-37, 2008-29 I.R.B.137
2008-38, 2008-29 I.R.B.139
2008-39, 2008-29 I.R.B.143
2008-40, 2008-29 I.R.B.151
2008-41, 2008-29 I.R.B.155
2008-42, 2008-29 I.R.B.160
2008-43, 2008-30 I.R.B.186
2008-44, 2008-30 I.R.B.187
2008-45, 2008-30 I.R.B.224
2008-46, 2008-30 I.R.B.238
2008-47, 2008-31 I.R.B.272
Revenue Rulings:
2008-32, 2008-27 I.R.B.6
2008-33, 2008-27 I.R.B.8
2008-34, 2008-28 I.R.B.76
2008-35, 2008-29 I.R.B.116
Revenue Rulings— Continued:
2008-36, 2008-30 I.R.B.165
2008-37, 2008-28 I.R.B.77
2008-38, 2008-31 I.R.B.249
2008-39, 2008-31 I.R.B.252
2008-40, 2008-30 I.R.B.166
2008-41, 2008-30 I.R.B.170
2008-42, 2008-30 I.R.B.175
2008-43, 2008-31 I.R.B.258
Treasury Decisions:
9401, 2008-27 I.R.B.1
9402, 2008-31 I.R.B.254
9409, 2008-29 I.R.B.118
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin
2008–26, dated June 30, 2008.
2008–31 I.R.B.iiAugust 4, 2008

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–27 through 2008–31
Notices:
99-48
Superseded by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2000-9
Obsoleted by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
2004-2
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2004-50
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2006-88
Modified and superseded by
Notice 2008-60, 2008-30 I.R.B.178
2007-22
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
Proposed Regulations:
REG-151135-07
Hearing scheduled by
Ann. 2008-64, 2008-28 I.R.B.114
Revenue Procedures:
92-25
Superseded by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
92-83
Obsoleted by
Rev. Proc. 2008-37, 2008-29 I.R.B.137
2001-42
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2002-9
Modified and amplified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
2006-29
Superseded by
Rev. Proc. 2008-34, 2008-27 I.R.B.13
2006-34
Superseded by
Rev. Proc. 2008-44, 2008-30 I.R.B.187
2007-19
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
Revenue Procedures— Continued:
2007-42
Superseded by
Rev. Proc. 2008-32, 2008-28 I.R.B.82
2007-43
Superseded by
Rev. Proc. 2008-33, 2008-28 I.R.B.93
2007-70
Modified by
Ann. 2008-63, 2008-28 I.R.B.114
2007-72
Amplified and superseded by
Rev. Proc. 2008-47, 2008-31 I.R.B.272
2008-12
Modified and superseded by
Rev. Proc. 2008-35, 2008-29 I.R.B.132
Revenue Rulings:
67-213
Amplified by
Rev. Rul. 2008-40, 2008-30 I.R.B.166
71-234
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
77-480
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
91-17
Amplified by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
Rev. Proc. 2008-42, 2008-29 I.R.B.160
Superseded in part by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2005-6
Amplified by
Rev. Proc. 2008-38, 2008-29 I.R.B.139
2008-12
Amplified by
Rev. Rul. 2008-38, 2008-31 I.R.B.249
Clarified by
Ann. 2008-65, 2008-31 I.R.B.279
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.
August 4, 2008iii2008–31 I.R.B.

INTERNAL REVENUE BULLETIN
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