Internal Revenue Bulletin 2007-36 (PDF rendition): IRS Revenue Rulings

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

Bulletin No. 200
7-36
September 4, 200
7
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. 2007–57, page 531.
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 September 2007.
T.D. 9340,
page 487.
Final regu
lations provide updated guidance on tax-shelter
annuities
, custodial accounts of public schools and section
501(c)(3)
tax-exempt organizations, and church retirement
income ac
counts, authorized under section 403(b) of the
Code. The
regulations provide the public with the guidance
necessar
y to comply with the law and will affect sponsors
of sectio
n 403(b) contracts, administrators, participants and
benefici
aries. The regulations also provide guidance relating
to the co
ntrolled group rules under section 414(c) for entities
that are
tax-exempt under section 501(a).
T.D. 9343, page 533.
Final regulations under section 1502 of the Code allow the Ser-
vice to appoint a domestic substitute agent for a consolidated
group when the group’s parent is a foreign corporation that is
treated as a domestic corporation under section 7872 or as
the result of a section 953(d) election.
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
T.D. 9345, page 523.
Final regulations under sections 367 and 1248 of the Code
set forth principles for the attribution of earnings and profits to
shares of stock of current or former controlled foreign corpo-
rations that participate in certain nonrecognition transactions.
The final regulations also provide that, for purposes of section
1248, when a foreign partnership sells stock of a corporation,
the partners of the partnership are treated as selling their pro-
portionate shares of such stock.
REG–101001–05, page 548.
Proposed regulations under section 165 of the Code provide
guidance on the availability and character of a deduction for a
loss sustained from abandoned stock or other securities.
REG–128224–06, page 551.
Proposed regulations under section 67 of the Code provide a
uniform standard for identifying the types of costs incurred by
estates or non-grantor trusts that are fully deductible in cal-
culating adjusted gross income under section 67(e)(1). Costs
incurred by estates or non-grantor trusts that are unique to
an estate or trust are not miscellaneous itemized deductions
that are deductible only to the extent they exceed 2 percent
of adjusted gross income. A public hearing is scheduled for
November 14, 2007.
(Continued on the next page)
Announcements of Disbarments and Suspensions begin on page 554.
Fi
nding Lists begin on page ii.

Notice 2007–72, page 544.
Transaction of interest – contribution of successor mem-
ber interest.This notice describes a transaction in which
a taxpayer makes a charitable contribution of an interest in
an entity that holds real property and claims a deduction for
the contribution that is significantly higher than the amount
the taxpayer paid to acquire the interest. This notice identi-
fies the transaction, and substantially similar transactions, as
transactions of interest for purposes of regulations section
1.6011–4(b)(6) and sections 6111 and 6112 of the Code; and
alerts persons involved with these transactions to certain re-
sponsibilities that may arise from their involvement with these
transactions.
Notice 2007–73, page 545.
This notice identifies a transaction that uses a grantor trust,
and the purported termination and subsequent re-creation of
the grantor trust, for the purpose of allowing the grantor to
claim a tax loss greater than any actual economic loss sus-
tained by the taxpayer or to avoid inappropriately the recogni-
tion of gain. The notice also alerts persons involved with these
transactions to certain responsibilities that may arise from their
involvement with these transactions.
EMPLOYEE PLANS
T.D. 9340, page 487.
Final regulations provide updated guidance on tax-shelter
annuities, custodial accounts of public schools and section
501(c)(3) tax-exempt organizations, and church retirement
income accounts, authorized under section 403(b) of the
Code. The regulations provide the public with the guidance
necessary to comply with the law and will affect sponsors
of section 403(b) contracts, administrators, participants and
beneficiaries. The regulations also provide guidance relating
to the controlled group rules under section 414(c) for entities
that are tax-exempt under section 501(a).
EXEMPT ORGANIZATIONS
T.D. 9340, page 487.
Final regulations provide updated guidance on tax-shelter
annuities, custodial accounts of public schools and section
501(c)(3) tax-exempt organizations, and church retirement
income accounts, authorized under section 403(b) of the
Code. The regulations provide the public with the guidance
necessary to comply with the law and will affect sponsors
of section 403(b) contracts, administrators, participants and
beneficiaries. The regulations also provide guidance relating
to the controlled group rules under section 414(c) for entities
that are tax-exempt under section 501(a).
Announcement 2007–76, page 560.
The IRS has revoked its determination that Progressive Ser-
vices, Inc., of Norman, OK; Harold Binstein Humanitarian Fund
ofChicago,IL;SayNotoDrugsof Greenville, TX; Shamrock
Boxing, Inc., of Covington, KY; National Home Foundation, Inc.,
of Rockville, MD; and Business & Nonprofit Center of East-
ern Madera County of Fresno, CA, qualify as organizations de-
scribed in sections 501(c)(3) and 170(c)(2) of the Code.
ESTATE TAX
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
GIFT TAX
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
EMPLOYMENT TAX
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
SELF-EMPLOYMENT TAX
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
(Continued on the next page)
September 4, 20072007–36 I.R.B.

EXCISE TAX
T.D. 9344, page 535.
REG–148951–05, page 550.
Final, temporary, and proposed regulations under section 7425
of the Code relate to discharge of liens and return of wrongfully
levied property under section 6343. The regulations clarify that
notices and claims are to be sent to the IRS office and official
specified in the relevant IRS publications.
TAX CONVENTIONS
Announcement 2007–75, page 540.
This document provides a copy of the Competent Authority
Agreement (CAA) entered into by the Competent Authorities
of the United States and the Netherlands with respect to the
qualification of certain tax-exempt trusts, companies, or other
organizations for benefits under Article 35 of the U.S.–Nether-
lands income tax treaty. The CAA also provides guidelines for
claiming treaty benefits in each country and the methods each
country will use to grant treaty benefits.
ADMINISTRA
TIVE
T.D. 9344,
page 535.
REG–14895
1–05, page 550.
Final, temp
orary, and proposed regulations under section 7425
of the Code
relate to discharge of liens and return of wrongfully
levied pro
perty under section 6343. The regulations clarify that
notices an
d claims are to be sent to the IRS office and official
specified
in the relevant IRS publications.
Rev. Proc. 2007–57, page 547.
This procedure informs taxpayers of their obligations under
section 3402(q) of the Code pertaining to withholding and infor-
mation reporting applicable to certain amounts paid to winners
of poker tournaments. It further sets forth procedures to be
used to comply with the relevant requirements of the Code and
the Treasury regulations thereunder.
2007–36 I.R.B.September 4, 2007

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
September 4, 20072007–36 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2007. See Rev. Rul. 2007-57, page
531.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of September 2007. See
Rev. Rul. 2007-57, page 531.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of September 2007. See Rev.
Rul. 2007-57, page 531.
Section 403.—Taxation of
Employee Annuities
26 CFR 1.403(b)–1: General overview of taxabil-
ity under an annuity contract purchased by a section
501(c)(3) organization or a public school.
T.D. 9340
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, 54 and
602
Revised Regulations
Concerning Section 403(b)
Tax-Sheltered Annuity
Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document promulgates
final regulations under section 403(b) of
the Internal Revenue Code and under re-
lated provisions of sections 402(b), 402(g),
402A, and 414(c). The regulations provide
updated guidance on section 403(b) con-
tracts of public schools and tax-exempt or-
ganizations described in section 501(c)(3).
These regulations will affect sponsors of
section 403(b) contracts, administrators,
participants, and beneficiaries.
DATES:Effective Date:July 26, 2007.
Applicability Date:These regulations
generally apply for taxable years begin-
ning after December 31, 2008. However,
see the “Applicability date” section in
this preamble for additional information
regarding the applicability of these regu-
lations.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
John Tolleris, (202) 622–6060; concerning
the regulations as applied to church-related
entities, Robert Architect (202) 283–9634
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in
§1.403(b)–10(b)(2)(i)(C) of these final
regulations has been approved by the
Office of Management and Budget in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)) under
control number 1545–2068. Responses to
this collection of information are required
in order to provide certain benefits.
The estimated burden per respon-
dent varies among the plan adminis-
trator/payor/recordkeeper,depending
upon individual respondents’ circum-
stances, with an estimated average of
4.1 hours. Comments concerning the
accuracy of this burden estimate and sug-
gestions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
The collection of information in
§1.403(b)–10(b)(2)(i)(C) of these final
regulations was not contained in the prior
notice of proposed rulemaking. For this
reason, this additional collection of infor-
mation has been reviewed and, pending
receipt and evaluation of public com-
ments, approved by the Office of Man-
agement and Budget in accordance with
the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number
1545–2068. Comments concerning this
additional collection of information should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503. Comments on
the collection of information should be re-
ceived by September 24, 2007. Comments
are specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see above);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collections of information may
be minimized, including through the appli-
cation of automated collection techniques
or other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide information.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
The estimated burden per respon-
dent varies among the plan administra-
tor/payor/recordkeeper, depending upon
individual respondents’ circumstances,
with an estimated average of 4.1 hours.
Books or records relating to a collection
of information must be retained as long
as their contents might become material in
2007–36 I.R.B.487September 4, 2007

the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Regulations (T.D. 6783, 1965–1 C.B.
180) under section 403(b) of the Internal
Revenue Code (Code) were originally
published in theFederal Register(29 FR
18356) on December 24, 1964. Those
regulations provided guidance for com-
plying with section 403(b), which had
been enacted in 1958 in section 23(a) of
the Technical Amendments Act of 1958,
Public Law 85–866 (1958), relating to
tax-sheltered annuity arrangements estab-
lished for employees by public schools
and tax-exempt organizations described
in section 501(c)(3). Since 1964, ad-
ditional regulations were issued under
section 403(b) to reflect rules relating
to certain eligible rollover distributions
1
and required minimum distributions under
section 401(a)(9).
2
See §601.601(d)(2)
relating to objectives and standards for
publishing regulations, revenue rulings
and revenue procedures in the Internal
Revenue Bulletin.
On November 16, 2004, a notice of
proposed rulemaking (REG–155608–02,
2004–2 C.B. 924) was published in the
Federal Register(69 FR 67075) that
proposed a comprehensive update of the
regulations under section 403(b) (2004
proposed regulations), including: amend-
ing the 1964 and subsequent regulations
to conform them to the numerous amend-
ments made to section 403(b) by sub-
sequent legislation, including section
1022(e) of the Employee Retirement In-
come Security Act of 1974 (ERISA)
(88 Stat. 829), Public Law 93–406; sec-
tion 251 of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA)
(96 Stat. 324, 529), Public Law 97–248;
section 1120 of the Tax Reform Act of
1986 (TRA ’86) (100 Stat. 2085, 2463),
Public Law 99–514; section 1450(a) of
the Small Business Job Protection Act of
1996 (SBJPA) (110 Stat. 1755, 1814),
Public Law 104–188; and sections 632,
646, and 647 of the Economic Growth
and Tax Relief Reconciliation Act of 2001
(EGTRRA) (115 Stat. 38, 113, 126, 127),
Public Law 107–16. The 2004 proposed
regulations also included controlled group
rules under section 414(c) for entities that
are tax-exempt under section 501(a).
Following publication of the 2004
proposed regulations, comments were re-
ceived and a public hearing was held on
February 15, 2005. After consideration of
the comments received, the 2004 proposed
regulations are adopted by this Treasury
decision, subject to a number of changes,
some of which are summarized below in
this preamble.
Section 403(b) was also amended by
sections 811, 821, 822, 824, 826, and 829
of the Pension Protection Act of 2006
(PPA ’06) (120 Stat. 780), Public Law
109–280. These final regulations reflect
these amendments.
Sections 403(b) and 414(c) Statutory
Provisions
Section 403(b) provides an exclusion
from gross income for certain contribu-
tions made by specific types of employers
for their employees and by certain minis-
ters to specified types of funding arrange-
ments. The employers are limited to pub-
lic schools and section 501(c)(3) organiza-
tions. There are three categories of fund-
ing arrangements to which section 403(b)
applies: (1) annuity contracts (as defined
in section 401(g)) issued by an insurance
company; (2) custodial accounts that are
invested solely in mutual funds; and (3) re-
tirement income accounts, which are only
permitted for church employees and cer-
tain ministers. Except as otherwise indi-
cated, an annuity contract, for purposes of
these final regulations, includes a custodial
account that is invested solely in mutual
funds.
The exclusion applies to employer non-
elective contributions(including match-
ing contributions) and elective deferrals
(other than designated Roth contribu-
tions) within the meaning of section
402(g)(3)(C) (which applies to section
403(b) contributions made pursuant to a
salary reduction agreement). The exclu-
sion applies only if certain requirements
relating to availability, nondiscrimination,
and distribution are satisfied. Section
403(b) arrangements may also include
after-tax employee contributions.
Section 403(b)(1)(C) requires that the
contract be nonforfeitable (except for the
failure to pay future premiums), regardless
of the type of contribution used to purchase
the contract. Section 403(b)(1)(E) requires
a section 403(b) contract purchased under
a salary reduction agreement to satisfy the
requirements of section 401(a)(30) relat-
ing to limitations on elective deferrals un-
der section 402(g)(1). In addition, all con-
tributions to a section 403(b) arrangement,
when expressed as annual additions under
section 415(c)(2), must not exceed the ap-
plicable limit of section 415.
Section 403(b)(5) provides that all
section 403(b) contracts purchased for
an individual by an employer are treated
as purchased under a single contract for
purposes of the requirements of section
403(b). Other aggregation rules apply both
on an individual and aggregate basis. For
example, the section 402(g) limitations
on elective deferrals apply to all elective
deferrals during the year with respect to an
individual and the limitations of section
401(a)(30) apply to all elective deferrals
made by an employer to that employer’s
plans with respect to an individual during
the year. The contribution limitations of
section 415 generally apply on an em-
ployer-by-employer basis.
Section 403(b)(12) requires a section
403(b) contract that provides for elective
deferrals to make elective deferrals avail-
able to all employees (the universal avail-
ability rule) and requires other contribu-
tions to satisfy the general nondiscrimina-
tion requirements applicable to qualified
plans. These rules are discussed further in
this preamble under the heading “Section
403(b) Nondiscrimination and Universal
Availability Rules.”
A section 403(b) contract is also re-
quired to provide that it will satisfy the
required minimum distribution require-
ments of section 401(a)(9), the incidental
benefit requirements of section 401(a),
and the rollover distribution rules of sec-
tion 402(c).
Many section 403(b) arrangements of
employers that are section 501(c)(3) or-
ganizations are subject to the Employee
Retirement Income Security Act of 1974
1
See T.D. 8619, 1995–2 C.B. 41, September 22, 1995 (60 FR 49199).
2
See T.D. 8987, 2002–1 C.B. 852, April 17, 2002 (67 FR 18987).
September 4, 20074882007–36 I.R.B.

(ERISA), which includes rules substan-
tially identical to the rules for qualified
plans, including rules parallel to the sec-
tion 414(l) transfer rules, the section
401(a)(11) qualified joint and survivor
annuity (QJSA) transferee plan rules, and
the anti-cutback rules of section 411(d)(6)
(which apply to transfers). See sections
204(g), 205, and 208 of ERISA. However,
as discussed in this preamble under the
heading “Interaction Between Title I of
ERISA and Section 403(b) of the Code,”
Title I of ERISA does not apply to gov-
ernmental plans, certain church plans, or
a tax-exempt employer’s section 403(b)
program that is not considered to consti-
tute the establishment or maintenance of
an “employee pension benefit plan” under
Title I of ERISA.
Section 414(c) authorizes the Secretary
of the Treasury to issue regulations treat-
ing all employees of trades or businesses
which are under common control as em-
ployed by a single employer.
Explanation of Provisions
Overview
Like the 2004 proposed regulations,
these final regulations are a comprehen-
sive update of the current regulations
under section 403(b). These regulations
replace the existing final regulations that
were adopted in 1964 and reflect the nu-
merous legal changes that have been made
in section 403(b) since then and many
of the positions that have been taken in
interpretive guidance that has been issued
under section 403(b).
As was noted in the preamble to the
2004 proposed regulations, the effect of
the various amendments made to section
403(b) within the past 40 years has been
to diminish the extent to which the rules
governing section 403(b) plans differ from
the rules governing other tax-favored em-
ployer-based retirement plans, including
arrangements that include salary reduc-
tion contributions, such as section 401(k)
plans and section 457(b) plans for state
and local governmental entities. How-
ever, there remain significant differences
between section 403(b) plans and section
401(a) and governmental section 457(b)
plans. For example, section 403(b) is
limited to certain specific employers and
employees (namely, employees of a public
school, employees of a section 501(c)(3)
organization, and certain ministers) and
to certain funding arrangements (namely,
an insurance annuitycontract, a custodial
account that is limited to mutual fund
shares, or a church retirement income ac-
count). Also, section 403(b) contains the
universal availability requirement for sec-
tion 403(b) elective deferrals and provides
consequences for failing to satisfy certain
of the section 403(b) rules (described in
this preamble under the heading “Effect of
a Failure to Satisfy Section 403(b)”)
3
that
differ in significant respects from the con-
sequences applicable to qualified plans.
The final regulations, as did the 2004
proposed regulations, require the section
403(b) contract to satisfy both in form and
operation the applicable requirements for
exclusion. The final regulations also re-
quire that the contract be maintained pur-
suant to a written plan as described in the
next section.
The final regulations, like the proposed
regulations, provide rules under which tax-
exempt entities are aggregated and treated
as a single employer under section 414(c).
These rules apply to plans referenced in
sections 414(b), (c), (m), (o), and (t), such
as plans qualified under section 401(a) or
403(a), as well as section 403(b) plans.
Comments on the 2004 proposed reg-
ulations raised a number of questions and
concerns about:
•The requirement in the 2004 proposed
regulations under which a section
403(b) contract would be required to
be maintained pursuant to a written
plan;
•The elimination of certain non-statu-
tory exclusions that a section 403(b)
plan was permitted to have under No-
tice 89–23, 1989–1 C.B. 654, for pur-
poses of the universal availability rule;
•The elimination of Rev. Rul. 90–24,
1990–1 C.B. 97, which allowed a sec-
tion 403(b) contract to be exchanged
for another contract; and
•The controlled group rules under sec-
tion 414(c) for entities that are tax-ex-
empt under section 501(a).
These final regulations include a num-
ber of revisions to reflect the comments re-
ceived, as described further in this pream-
ble.
Written Plan Requirement
These regulations retain the require-
ment from the 2004 proposed regula-
tions that a section 403(b) contract be
issued pursuant to a written plan which,
in both form and operation, satisfies the
requirements of section 403(b) and these
regulations. This requirement imple-
ments the statutory requirements of sec-
tion 403(b)(1)(D), which provides that
the contract must be purchased “under
a plan” that satisfies the nondiscrimina-
tion requirements delineated in section
403(b)(12).
The existence of a written plan facili-
tates the allocation of plan responsibilities
among the employer, the issuer of the con-
tract, and any other parties involved in im-
plementing the plan. Without such a cen-
tral document for a comprehensive sum-
mary of responsibilities, there is a risk that
many of the important responsibilities re-
quired under the statute and final regula-
tions may not be allocated to any party.
While a section 403(b) contract issued to
an employee can provide for the issuer to
perform many of these functions by itself,
the contract cannot satisfy the function of
setting forth the eligibility criteria for other
employees, nor can the issuer by itself co-
ordinate those Code requirements that de-
pend on other contracts, such as the loan
limitations under section 72(p). The is-
suer must rely on information or repre-
sentations provided by either the employer
or the employee for employment-based in-
formation that is essential for compliance
with section 403(b) provisions, such as
the limitations on elective deferrals in sec-
tion 402(g) and the requirements of section
72(p)(2) for a plan loan that is not a taxable
deemed distribution. In addition to pro-
viding a central locus to coordinate those
functions, the maintenance of a written
plan also benefits participants by provid-
ing a central document setting forth their
rights and enables government agencies to
determine whether the arrangements sat-
isfy applicable law and, in particular, for
3
Other differences between the rules applicable to section 403(b) plans andqualified plans include the following: the definition of compensation (including the five-year rule) in section
403(b)(3); the special section 403(b) catch-up elective deferral in section402(g)(7); and the section 415 aggregation rules. An additional difference relates to when a severance from employ-
ment occurs for purposes of section 403(b) plans maintained by State andlocal government employers. See §1.403(b)–6(h) of these regulations.
2007–36 I.R.B.489September 4, 2007

determining which employees are eligible
to participate in the plan.
The 2004 proposed regulations would
have required that the section 403(b)
plan include all of the material provisions
regarding eligibility, benefits, applica-
ble limitations, the contracts available
under the plan, and the time and form un-
der which benefit distributions would be
made. The proposed regulations would not
have required that there be a single plan
document. However, under the proposed
regulations, the written plan requirement
would be satisfied by complying with the
plan document rules applicable to quali-
fied plans.
Some comments raised concerns that
the written plan requirement would impose
additional administrative burdens. In re-
sponse, the final regulations make a num-
ber of clarifications, including that the plan
ispermittedtoallocatetotheemployeror
another person the responsibility for per-
forming functions to administer the plan,
including functions to comply with section
403(b). Any such allocation must identify
who is responsible for compliance with
the requirements of the Code that apply
based on the aggregatedcontracts issued to
a participant, including loans under section
72(p) and the requirements for obtaining a
hardship withdrawal under §1.403(b)–6 of
these regulations.
Additional comments recommended
that certain responsibilities be permitted
to be allocated to employees. The IRS and
Treasury Department have concluded that
it is generally inappropriate to allocate
these responsibilities to employees for a
number of reasons. First, employees often
lack the expertise to systematically meet
these responsibilities and may not recog-
nize the importance of performing these
actions (including not fully appreciating
the tax consequences of failing to perform
the responsibility). Second, an individual
employee may have a self-interest in a
particular transaction. In addition, while
there are various factors that will often
cause an employer or issuer to have an
interest in procedures that ensure that the
requirements of section 403(b) are satis-
fied (including income tax withholding
requirements), an employee generally
bears the income tax exposure and other
risksoffailingtocomplywithrulesset
forth in the plan. The IRS and Treasury
Department believe it is important to pre-
vent failures in advance so as to minimize
the cases in which the adverse effects of a
failure fall on the employee. See the dis-
cussion in this preamble under the heading
“Contract Exchanges.”
In response to comments, the final regu-
lations clarify the requirement that the plan
include all of the material provisions by
permitting the plan to incorporate by ref-
erence other documents, including the in-
surance policy or custodial account, which
as a result of such reference would become
part of the plan. As a result, a plan may in-
clude a wide variety of documents, but it
is important for the employer that adopts
the plan to ensure that there is no conflict
with other documents that are incorporated
by reference. If a plan does incorporate
other documents by reference, then, in the
event of a conflict with another document,
except in rare and unusual cases, the plan
would govern. In the case of a plan that
is funded through multiple issuers, it is ex-
pected that an employer would adopt a sin-
gle plan document to coordinate adminis-
tration among the issuers, rather than hav-
ing a separate document for each issuer.
Finally, comments also indicated that,
while section 403(b) contracts that are sub-
ject to ERISA are maintained pursuant to
written plans, there may be a potential cost
associated with satisfying the written plan
requirement for those employers that do
not have existing plan documents, such as
public schools. To address this concern,
the IRS and Treasury Department expect
to publish guidance which includes model
plan provisions that may be used by pub-
lic school employers for this purpose. Be-
cause the requirement for a written plan
will not go into effect until 2009 (see the
discussion under the heading “Applicabil-
ity date”), employers would be expected to
adopt a written plan (including applicable
amendments) no later than the applicabil-
ity date of these regulations.
Contract Exchanges, Plan-to-Plan
Transfers, and Purchases of Permissive
Service Credit
The final regulations, like the 2004 pro-
posed regulations, provide for three spe-
cific kinds of non-taxable exchanges or
transfers of amounts in section 403(b) con-
tracts. Specifically, under the final regu-
lations, a non-taxable exchange or trans-
fer is permitted for a section 403(b) con-
tract if either: (1) it is a mere change of
investment within the same plan (contract
exchange); (2) it constitutes a plan-to-plan
transfer, so that there is another employer
plan receiving the exchange; or (3) it is
a transfer to purchase permissive service
credit (or a repayment to a defined ben-
efit governmental plan). If an exchange
or transfer does not constitute a change of
investment within the plan, a plan-to-plan
transfer, or a purchase of permissive ser-
vice credit, the exchange or transfer would
be treated as a taxable distribution of bene-
fits in the form of property if the exchange
occurs after a distributable event (assum-
ing the distribution is not rolled over to
an eligible retirement plan) or as a tax-
able conversion to a section 403(c) non-
qualified annuity contract if a distributable
event has not occurred. See the “Effect of
a Failure to Satisfy Section 403(b)” sec-
tion in this preamble for discussion of sec-
tion 403(c) nonqualified annuity contracts.
In any case in which a distributable event
has occurred, a participant in a section
403(b) plan can always change the invest-
ment through a distribution and non-tax-
able rollover from a section 403(b) con-
tract to an IRA annuity, as long as the dis-
tribution is an eligible rollover distribu-
tion. Note, however, that an IRA annuity
cannot include provisions permitting par-
ticipant loans. See sections 408(e)(3) and
(4) and §§1.408–1(c)(5) and 1.408–3(c).
Any contract exchange, plan-to-plan
transfer, or purchase of permissive service
credit that is permitted under the final reg-
ulations is not treated as a distribution for
purposes of the section 403(b) distribution
restrictions (so that such an exchange or
transfer may be made before severance
from employment or another distribution
event).
Contract Exchanges
Rev. Rul. 73–124, 1973–1 C.B. 200,
and Rev. Rul. 90–24, 1990–1 C.B. 97,
dealt with contract exchanges. Rev. Rul.
73–124 had allowed section 403(b) con-
tracts to be exchanged, without income in-
clusion, if, pursuant to an agreement with
the employer, the employee cashed in the
first contract and immediately transmitted
the cash proceeds for contribution to the
successor contract to which all subsequent
employer contributions would be made.
This ruling was replaced by Rev. Rul.
September 4, 20074902007–36 I.R.B.

90–24 which does not provide for the first
contract to be cashed in but allows section
403(b) contracts to be exchanged, without
income inclusion, so long as the successor
contract includes distribution restrictions
that are the same or more stringent than the
distribution restrictions in the contract that
is being exchanged.
The 2004 proposed regulations would
have imposed additional restrictions on
contract exchanges by limiting tax-free
contract exchanges to situations in which
the new contract is provided under the
plan. The proposal was intended to
improve compliance with the Code re-
quirements that apply on an aggregated
basis because, withoutcoordination, it
is difficult, if not impossible, for a plan
to comply with those tax requirements.
These requirements include certain dis-
tribution restrictions, including the rule
that requires the suspension of deferrals
for a plan that usesthe hardship with-
drawal suspension safe harbor rules for
elective deferrals, and the section 72(p)
rules for loans. In addition, these changes
make it easier for employers to respond
to an IRS inquiry or audit. For exam-
ple, where assets have been transferred
to an insurance carrier or mutual fund
that has no subsequent connection to the
plan or the employer, IRS audits and re-
lated investigations have revealed that
employers encounter substantial difficulty
in demonstrating compliance with hard-
ship withdrawal and loan rules. These
problems are particularly acute when an
individual’s benefits are held by numerous
carriers. Such multiple contract issuers
are commonly associated with plans in
which Rev. Rul. 90–24 exchanges have
occurred.
Commentators generally objected to
the proposal to limit exchanges allowed
under Rev. Rul. 90–24. They argued
that such exchanges enable participants to
change funding arrangements and claimed
that these exchanges have generally been
responsible for improved efficiency and
lower cost in the section 403(b) mar-
ket. Comments often included specific
suggestions, such as limiting any restric-
tions on exchanges to active employees
and effectuating compliance with loan
restrictions by alternative methods, such
as having the issuer report loans on, for
example, a Form 1099–R (Distributions
From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.), or notify the employer
about loans. Other comments included
a recommendation that the employer be
involved to ensure that the exchange is
within the plan. Comments also suggested
that a grandfather may be necessary for
exchanges made before the applicability
date of the restrictions imposed by the
final regulations.
These final regulations include a num-
ber of changes to reflect these comments.
The regulations allow contract exchanges
with certain characteristics associated with
Rev. Rul. 90–24, but under rules that
are generally similar to those applicable to
qualified plans.
Unlike the 2004 proposed regulations,
these regulations permit an exchange of
one contract for another to constitute a
mere change of investment within the
same plan, but only if certain conditions
are satisfied in order to facilitate compli-
ance with tax requirements. Specifically,
the other contract must include distribu-
tion restrictions that are not less stringent
than those imposed on the contract being
exchanged and the employer must enter
into an agreement with the issuer of the
other contract under which the employer
and the issuer will from time to time in
the future provide each other with certain
information. This includes information
concerning the participant’s employment
and information that takes into account
other section 403(b) contracts or qualified
employer plans, such as whether a sever-
ance from employment has occurred for
purposes of the distribution restrictions
and whether the hardship withdrawal rules
in the regulations are satisfied. Additional
information that is required is information
necessary for the resulting contract or any
other contract to which contributions have
been made by the employer to satisfy other
tax requirements, such as whether a plan
loan constitutes a deemed distribution un-
der section 72(p).
These regulations also authorize the
IRS to issue guidance of general applica-
bility allowing exchanges in other cases.
This authority is limited to cases in which
the resulting contract has procedures that
the IRS determines are reasonably de-
signed to ensure compliance with those
requirementsofsection403(b)orother
tax provisions that depend on either in-
formation concerning the participant’s
employment or information that takes into
account other section 403(b) contracts
or qualified employer plans. For exam-
ple, the procedures must be reasonably
designed to determine whether a sever-
ance from employment has occurred for
purposes of the distribution restrictions,
whether the hardship withdrawal rules are
satisfied, and whether a plan loan consti-
tutes a deemed distribution under section
72(p). By contrast, procedures that rely on
an employee certification, such as whether
a severance from employment has oc-
curred or whether the participant has other
outstanding loans, would generally not be
adequate to meet this standard, because
such a certification is not disinterested,
and also because of the lack of employer
oversight in the certification process to
ensure accuracy.
Plan-to-Plan Transfers
The final regulations expand the rules
in the 2004 proposed regulations under
which plan-to-plan transfers would have
been permitted only if the participant was
an employee of the employer maintain-
ing the receiving plan. Under the final
regulations, plan-to-plan transfers are per-
mitted if the participant whose assets are
being transferred is an employee or for-
mer employee of the employer (or busi-
ness of the employer) that maintains the
receiving plan and certain additional re-
quirements are met. However, the final
regulations retain the rules that were in
the 2004 proposed regulations prohibiting
a plan-to-plan transfer to a qualified plan,
an eligible plan under section 457(b), or
any other type of plan that is not a section
403(b) plan, except as described in the next
paragraph. Similarly, a section 403(b) plan
is not permitted to accept a transfer from a
qualified plan, an eligible plan under sec-
tion 457(b), or any other type of plan that
is not a section 403(b) plan.
Purchases of Permissive Service Credit
and Certain Repayments
The final regulations, like the 2004 pro-
posed regulations, include an exception
permitting a section 403(b) plan to pro-
vide for the transfer of its assets to a quali-
fied plan under section 401(a) to purchase
permissive service credit under a defined
benefit governmental plan or to make a re-
2007–36 I.R.B.491September 4, 2007

payment to a defined benefit governmental
plan.
Limitations on Contributions
The final regulations, like the 2004 pro-
posed regulations, provide that the section
403(b) exclusion applies only to the extent
that all amounts contributed by the em-
ployer for the purchase of an annuity con-
tract for the participant do not exceed the
applicable limits under section 415. The
final regulations retain the rule in the 2004
proposed regulations that if an excess an-
nual addition is made to a contract that oth-
erwise satisfies the requirements of section
403(b), then the portion of the contract that
includes the excess will fail to be a sec-
tion 403(b) contract (and instead will be
a contract to which section 403(c), relat-
ing to nonqualified annuity contracts, ap-
plies) and the remaining portion of the con-
tract that includes the contribution that is
not in excess of the section 415 limitations
is a section 403(b) contract. This rule un-
der which only the excess annual addition
is subject to section 403(c) does not apply
unless, for the year of the excess and each
year thereafter, the issuer of the contract
maintains separate accounts for the portion
that includes the excess and for the section
403(b) portion (which is the portion that
includes the amount that is not in excess
of the section 415 limitations).
With respect to section 403(b) elective
deferrals, section 403(b) applies only if the
contract is purchased under a plan that in-
cludes the elective deferral limits under
section 402(g), including aggregation of
all plans, contracts, or arrangements of the
employer that are subject to the limits of
section 402(g). As in the 2004 proposed
regulations, the final regulations require
a section 403(b) contract to include this
limit on section 403(b) elective deferrals,
as imposed under sections 401(a)(30) and
402(g). For purposes of the final regula-
tions, the term “elective deferral” includes
a designated Roth contribution as well as a
pre-tax elective contribution. These rules
are generally the same as the rules for
qualified cash or deferred arrangements
(CODAs) under section 401(k).
Any contribution made for a participant
to a section 403(b) contract for a taxable
year that exceeds either the section 415
maximum annual contribution limits or the
section 402(g) elective deferral limit con-
stitutes an excess contribution that is in-
cluded in gross income for that taxable
year (or, if later, the taxable year in which
the contract becomes nonforfeitable). The
final regulations, like the 2004 proposed
regulations, provide that the section 403(b)
plan (including contracts under the plan)
may provide that any excess deferral as a
result of a failure to comply with the sec-
tion 402(g) elective deferral limit for the
taxable year with respect to any section
403(b) elective deferral made for a partici-
pant by the employer will be distributed to
the participant, with allocable net income,
no later than April 15 or otherwise in ac-
cordance with section 402(g).
Catch-up Contributions
A section 403(b) plan may provide
for additional catch-up contributions for
a participant who is age 50 by the end
of the year, provided that those age 50
catch-up contributions do not exceed the
catch-up limit under section 414(v) for the
taxable year ($5,000 for 2007). In addi-
tion, a section 403(b) plan may provide
that an employee of a qualified organiza-
tion who has at least 15 years of service
(disregarding any period during which
an individual is not an employee of the
eligible employer) is entitled to a special
section 403(b) catch-up limit. Under the
special section 403(b) catch-up limit, the
section 402(g) limit is increased by the
lowest of the following three amounts: (i)
$3,000; (ii) the excess of $15,000 over
the amount not included in gross income
for prior taxable years by reason of the
special section 403(b) catch-up rules,
plus elective deferrals that are designated
Roth contributions;
4
or (iii) the excess of
(A) $5,000 multiplied by the number of
years of service of the employee with the
qualified organization, over (B) the total
elective deferrals made for the employee
by the qualified organization for prior tax-
able years. For this purpose, a qualified
organization is an eligible employer that
is a school, hospital, health and welfare
service agency (including a home health
service agency), or a church-related or-
ganization.
The 2004 proposed regulations defined
a health and welfare service agency as ei-
ther an organization whose primary activ-
ity is to provide medical care as defined
in section 213(d)(1) (such as a hospice),
or a section 501(c)(3) organization whose
primary activity is the prevention of cru-
elty to individuals or animals or which
provides substantial personal services to
the needy as part of its primary activity
(such as a section 501(c)(3) organization
that provides meals to needy individuals).
In response to several commentators’ re-
quests, the final regulations expand this
definition to include an adoption agency
and an agency that provides either home
health services or assistance to individuals
with substance abuse problems or that pro-
vides help to the disabled.
Like the 2004 proposed regulations, the
final regulations provide that any catch-up
contribution for an employee who is eli-
gible for both an age 50 catch-up and the
special section 403(b) catch-up is treated
first as a special section 403(b) catch-up to
the extent a special section 403(b) catch-up
is permitted, and then as an amount con-
tributed as an age 50 catch-up (to the ex-
tent the age 50 catch-up amount exceeds
the maximum special section 403(b) catch-
up).
Timing of Distributions and Benefits
The final regulations, like the 2004
proposed regulations, contain provisions
reflecting the statutory rules regarding
when distributions can be made from
a section 403(b) plan. Distributions of
amounts attributable to section 403(b)
elective deferrals may not be paid to a par-
ticipant earlier than when the participant
has a severance from employment, has a
hardship, becomes disabled (within the
meaning of section 72(m)(7)), or attains
age 59
1
/2. Hardship is generally defined
under regulations issued under section
401(k). In addition, amounts held in a
custodial account attributable to employer
contributions (that are not section 403(b)
4
A technical correction was made to section 402(g)(7)(A)(ii) by section 407(a) of the Gulf Opportunity Zone Act of 2005 (119 Stat. 2577), P.L. 109–135,to clarify that the aggregate $15,000
limit on such contributions was reduced not only by pre-tax elective deferrals made pursuant to the special section 403(b) catch-up rules, but also bydesignated Roth contributions. Treasury
has recommended that this language be further changed to reflect the intent that the reduction for designated Roth contributions at section 402(g)(7)(A)(ii)(II) be limited to designated Roth
contributions that have been made pursuant to the special section 403(b) catch-up rules.
September 4, 20074922007–36 I.R.B.

elective deferrals) may not be paid to a
participant before the participant has a
severance from employment, becomes
disabled (within the meaning of section
72(m)(7)), or attains age 59
1
/2. This rule
also applies to amounts transferred out of
a custodial account to an annuity contract
or retirement income account, including
earnings thereon.
The final regulations, as did the 2004
proposed regulations, include a number
of exceptions to the timing restrictions.
For example, the rule for elective defer-
rals does not apply to distributions of sec-
tion 403(b) elective deferrals (not includ-
ing earnings thereon) that were contributed
before January 1, 1989.
The final regulations, as did the 2004
proposed regulations, reflect the direct
rollover rules of section 401(a)(31) and
the related requirements of section 402(f)
concerning the written explanation re-
quirement for distributions that qualify as
eligible rollover distributions, including
conforming the timing rule to the rule for
qualified plans.
In addition to the restrictions described
in this preamble, the final regulations
generally retain, with certain modifica-
tions, the additional rules from the 2004
proposed regulations relating to when dis-
tributions are permitted to be made from a
section 403(b) plan, including the restric-
tions described in this preamble imposed
by sections 403(b)(7)(A)(ii) and (11) on
distribution of amounts held in custodial
accounts and elective deferrals, and the
tax treatment of distributions from sec-
tion 403(b) plans. Comments raised no
objections to the various rules that were
proposed in 2004, other than concerning
the general rule requiring the occurrence
of a stated event. The 2004 proposed reg-
ulations generally would have required
the occurrence of a stated event in order
to commence distributions of amounts
attributable to employer contributions to
section 403(b) plans other than elective
deferrals or distributions from custodial
accounts. The stated event rule is substan-
tially the same as the rule applicable to
qualified defined contribution plans that
are not money purchase pension plans
(under §1.401–1(b)(1)(ii)), so that a plan
is permitted to provide for a distribution
upon completion of a fixed number of
years (such as five years of participation),
the attainment of a stated age, or upon the
occurrence of some other identified event
(such as the occurrence of a financial
need,
5
including a need to buy a home).
However, the final regulations make
a number of changes relating to distribu-
tions. First, the final regulations clarify
that after-tax employee contributions are
not subject to any in-service distribu-
tion restrictions. Second, the regulations
address comments that were made re-
garding certain disability arrangements by
clarifying that, if an insurance contract
includes provisions under which contri-
butions will be continued in the event a
participant becomes disabled, then that
benefit is treated as an incidental benefit
that must satisfy the incidental benefit re-
quirement applicable to qualified plans (at
§1.401–1(b)(1)(ii)). Third, changes were
made to reflect elective deferrals that are
designated Roth contributions, discussed
further later in this preamble under the
heading, “Requirement of Certain Sep-
arate Accounts Under Section 403(b).”
Fourth, §1.403(b)–7(b)(5) has been added
referencing the automatic rollover rules
of section 401(a)(31), in accordance with
section 403(b)(10). See Notice 2005–5,
2005–1 C.B. 337, for rules interpreting this
requirement. Fifth, a cross-reference to
certain employment tax rules was added,
discussed under the heading “Employment
Taxes.” Sixth, in response to comments,
the final regulations provide that the gen-
eral rule requiring the occurrence of a
stated event in order for distributions to
commence does not apply to insurance
contracts issued before January 1, 2009,
and a special rule has been added allowing
conforming amendments to be adopted
by plans that are subject to ERISA. Sec-
tion 1.403(b)–10(c) has been clarified to
indicate that in order to be treated as a
distribution under this section, the distri-
bution must be pursuant to a QDRO as
described in section 206(d)(3) of ERISA
and the Department of Labor’s guidance.
Severance From Employment
The final regulations, like the 2004 pro-
posed regulations, define severance from
employment in a manner that is gener-
ally the same as the regulations under sec-
tion 401(k) (see §1.401(k)–1(d)(2)), but
provide that, for purposes of distributions
from a section 403(b) plan, a severance
from employment occurs on any date on
which the employee ceases to be employed
by an eligible employer that maintains the
section 403(b) plan. Thus, a severance
from employment would occur when an
employee ceases to be employed by an eli-
gible employer, even though the employee
may continue to be employed by an entity
that is part of the same controlled group
but that is not an eligible employer, or on
any date on which the employee works in
a capacity that is not employment with an
eligible employer. Examples of the sit-
uations that constitute a severance from
employment include: an employee trans-
ferring from a section 501(c)(3) organiza-
tion to a for-profit subsidiary of the section
501(c)(3) organization; an employee ceas-
ing to work for a public school, but contin-
uing to be employed by the same State; and
an individual employed as a minister for an
entity that is neither a State nor a section
501(c)(3) organization ceasing to perform
services as a minister, but continuing to be
employed by the same entity.
Section 401(a)(9)
The final regulations, like the 2004 pro-
posed regulations, require section 403(b)
plans to comply with rules similar to those
in the existing regulations relating to the
required minimum distribution require-
ments of section 401(a)(9), but with some
minor changes (for example, omitting the
special rules for 5-percent owners). Thus,
section 403(b) contracts must satisfy the
incidental benefit rules. Guidance con-
cerning the application of the incidental
benefit requirements to permissible non-
retirement benefits such as life, accident,
or health benefits is contained in revenue
rulings.
6
5
See, for example, Rev. Rul. 56–693, 1956–2 C.B. 282.
6
See, for example, Rev. Rul. 61–121, 1961–2 C.B. 65; Rev. Rul. 68–304, 1968–1 C.B. 179; Rev. Rul. 72–240, 1972–1 C.B. 108; Rev. Rul. 72–241, 1972–1 C.B. 108; Rev. Rul. 73–239,
1973–1 C.B. 201; and Rev. Rul. 74–115, 1974–1 C.B. 100.
2007–36 I.R.B.493September 4, 2007

Loans
The final regulations adopt the provi-
sions in the 2004 proposed regulations re-
lating to loans to participants from a sec-
tion 403(b) contract.
QDROs
The final regulations also adopt the
2004 proposed regulations’ limited rules
relating to QDROs under section 414(p).
Section 414(p)(9) provides that the QDRO
rules only apply to plans that are sub-
ject to the anti-alienation provisions of
section 401(a)(13), except that section
414(p)(9) also provides that the section
414(p) QDRO rules apply to a section
403(b) contract. The final regulations,
like the proposed regulations, clarify that
the QDRO rules under section 414(p) ap-
ply to section 403(b) plans. The Secretary
of Labor has authority to interpret the
QDRO provisions, section 206(d)(3), and
its parallel provisionat section 414(p) of
the Code, and to issue QDRO regulations
in consultation with the Secretary of the
Treasury. 29 U.S.C. 1056(d)(3)(N). Under
section 401(n) of the Internal Revenue
Code, the Secretary of the Treasury has
authoritytoissuerules and regulations
necessary to coordinate the requirements
of section 414(p) (and the regulations is-
sued by the Secretary of Labor thereunder)
with the other provisions of Chapter I of
Subtitle A of the Code.
Taxation of Distributions and Benefits
From a Section 403(b) Contract
The final regulations, like the 2004 pro-
posed regulations, reflect the statutory pro-
visions regarding the taxation of distribu-
tions and benefits from section 403(b) con-
tracts, including the provision that gen-
erally only amounts actually distributed
from a section 403(b) contract are includi-
ble in the gross income of the recipient un-
der section 72 for the year in which dis-
tributed. The final regulations also reflect
the rule that any payment that constitutes
an eligible rollover distribution is not taxed
in the year distributed to the extent the pay-
ment is rolled over to an eligible retirement
plan. The payor must withhold 20 percent
Federal income tax, however, if an eligible
rollover distribution is not rolled over in a
direct rollover. Another provision requires
the payor to give proper written notice to
the section 403(b) participant or benefi-
ciary concerning the eligible rollover dis-
tribution provision.
Section 403(b) Nondiscrimination and
Universal Availability Rules
Nondiscrimination
Section 403(b)(12)(A)(i) requires that
employer contributions, other than elective
deferrals, and after-tax employee contribu-
tions made under a section 403(b) contract
satisfy a specified series of requirements
(the nondiscrimination requirements) in
the same manner as a qualified plan under
section 401(a). These nondiscrimination
requirements include rules relating to
nondiscrimination in contributions, ben-
efits, and coverage (sections 401(a)(4)
and 410(b)), a limitation on the amount
of compensation that can be taken into
account (section 401(a)(17)), and the av-
erage contribution percentage rules of
section 401(m) (relating to matching and
after-tax employee contributions).
Notice 89–23 discusses these require-
ments and provides a good faith reason-
able standard for satisfying these require-
ments. The 2004 proposed regulations
would have eliminated the good faith
reasonable standard for satisfying the
nondiscrimination requirements of section
403(b)(12)(A)(i) for non-governmental
plans. Comments acknowledged the need
for and the IRS’s authority to make this
change. Accordingly,these final regu-
lations do not include the Notice 89–23
good faith reasonable standard.
However, as discussed in this pre-
amble under the heading “Treatment of
Controlled Groups that Include Certain
Entities,” the Notice 89–23 good faith
reasonable standard will continue to apply
to State and local public schools (and cer-
tain church entities) for determining the
controlled group. Although the general
nondiscrimination requirements do not
apply to governmental plans (within the
meaning of section 414(d)), these plans are
required to limit the amount of compensa-
tion to the amount permitted under section
401(a)(17) for all purposes under the plan,
including, for example the amount of com-
pensation taken into account for employer
contributions, and are required to satisfy
the universal availability rule (described in
this preamble under the heading “Univer-
sal Availability for Elective Deferrals”).
A non-governmental section 403(b) plan
that provides for nonelective employer
contributions must satisfy the coverage
requirements of section 410(b) and the
nondiscrimination requirements of section
401(a)(4) with respect to such contribu-
tions.
These final regulations, like the 2004
proposed regulations, require a section
403(b) plan to comply with the nondis-
crimination requirements for matching
contributions in the same manner as a
qualified plan. Thus, a non-governmen-
tal section 403(b) plan that provides for
matching contribution must satisfy the
nondiscrimination requirements of section
401(m). The nondiscrimination require-
ments are generally tested using compen-
sation as defined in section 414(s) and are
applied on an aggregated basis taking into
account all plans of the employer. See the
discussion under the heading “Treatment
of Controlled Groups that Include Certain
Entities.”
The nondiscrimination requirements do
not apply to section 403(b) elective defer-
rals. Instead, a universal availability re-
quirement, discussed further in the next
section, applies to allsection 403(b) elec-
tive deferrals (including elective deferrals
made under a governmental section 403(b)
plan).
Universal Availability for Elective
Deferrals
The universal availability requirement
of section 403(b)(12)(A)(ii) provides that
all employees of the eligible employer
must be permitted to elect to have sec-
tion 403(b) elective deferrals contributed
on their behalf if any employee of the
eligible employer may elect to have the
organization make section 403(b) elec-
tive deferrals. Under the 2004 proposed
regulations, the universal availability re-
quirement would not have been satisfied
unless the contributions were made pur-
suant to a section 403(b) plan and the plan
permitted all employees of an employer
an opportunity to make elective deferrals
if any employee of that employer has the
right to make elective deferrals.
The rules in the final regulations relat-
ing to the universal availability require-
ment are substantially similar to those in
September 4, 20074942007–36 I.R.B.

the 2004 proposed regulations. The fi-
nal regulations clarify that the employee’s
right to make elective deferrals also in-
cludes the right to designate section 403(b)
elective deferrals as designated Roth con-
tributions (if any employee of the eligible
employer may elect to have the organiza-
tion make section 403(b) elective deferrals
as designated Roth contributions).
The preamble to the 2004 proposed
regulations requested comments regarding
certain exclusions that have been per-
mitted under transitional guidance issued
in 1989. Specifically, Notice 89–23 had
allowed, pending issuance of regulatory
guidance, the exclusion of the follow-
ing classes of employees for purposes
of the universal availability rule: em-
ployees who are covered by a collective
bargaining agreement; employees who
make a one-time election to participate in
a governmental plan described in section
414(d), instead of a section 403(b) plan;
professors who are providing services on
a temporary basis to another public school
for up to one year and for whom section
403(b) contributions are being made at
a rate no greater than the rate each such
professor would receive under the section
403(b) plan of the original public school;
and employees who are affiliated with a
religious order and who have taken a vow
of poverty where the religious order pro-
vides for the support of such employees in
their retirement.
The comments submitted in response
to the request generally requested to have
these exclusions continue to be allowed.
However, after consideration of the com-
ments received, the IRS and Treasury De-
partment have concluded that these ex-
clusions are inconsistent with the statute
and, accordingly, theyare not permitted
under these regulations. Nonetheless, as
described further in the following para-
graphs, other rules may provide relief with
respect to individuals who are under a vow
of poverty and to certain university profes-
sors affected.
Rev. Rul. 68–123, 1968–1 C.B. 35, as
clarified by Rev. Rul. 83–127, 1983–2
C.B. 25, generally excludes from gross
income, and from wage withholding, in-
come of an individual working under a
vowofpovertyforanemployercontrolled
by a church and the individual is treated
as working as an agent of the church, not
as an employee. While these regulations
do not provide an exclusion from the uni-
versal availability requirement for individ-
uals working under a vow of poverty, indi-
viduals who work for an institution that is
controlled by the church organization and
whose compensation from the employer is
not treated as wages for purposes of in-
come tax withholding under Rev. Rul.
68–123 may be excluded from the section
403(b) plan without violating the univer-
sal availability requirement because they
are not treated as employees of the entity
maintaining the section 403(b) plan.
With respect to an exclusion relating to
visiting professors, if an individual is ren-
dering services to a university as a vis-
iting professor, but continues to receive
his or her compensation from his or her
home university and elective deferrals on
his or her behalf are made under the home
university’s section 403(b) plan, the final
regulations do not, for purposes of sec-
tion 403(b) and in any case in which such
treatment is appropriate, preclude the plan
maintained by the home university from
treating the visiting professor as an eligi-
ble employee of the home university.
The discussion in this preamble un-
der the heading “Applicability date” de-
scribes transition relief for any existing
plan that excludes, in accordance with
Notice 89–23, collective bargaining em-
ployees, visiting professors, government
employees who make a one-time election,
or employees who work under a vow of
poverty.
Rules Relating to Funding Arrangements
These regulations retain, with certain
modifications, the rules in the 2004 pro-
posed regulations relating to the permit-
ted investments for a section 403(b) con-
tract. In general, a section 403(b) plan
must be funded either by an annuity con-
tract issued by an insurance company qual-
ified to issue annuities in a State or a cus-
todial account held by a bank (or a per-
son who satisfies the conditions in section
401(f)(2)) where all of the amounts in the
account are held for the exclusive benefit
of plan participants or their beneficiaries in
regulated investmentcompanies (mutual
funds) and certain other conditions are sat-
isfied (including restrictions on distribu-
tions). Additional rules apply with respect
to retirement income accounts for plans of
a church or a convention or association of
churches as discussed in the next section.
Special Rules for Church Plans’
Retirement Income Accounts
The final regulations, like the 2004 pro-
posed regulations, include a number of
special rules for church plans. Under sec-
tion 403(b)(9), a retirement income ac-
count for employees of a church-related
organization is treated as an annuity con-
tract for purposes of section 403(b). Un-
der these regulations, the rules for a re-
tirement income account are based largely
on the provisions of section 403(b)(9) and
the legislative history of TEFRA. The reg-
ulations define a retirement income ac-
count as a defined contribution program
established or maintained by a church-re-
lated organization under which (i) there
is separate accounting for the retirement
income account’s interest in the underly-
ing assets (namely, it must be possible at
all times to determine the retirement in-
come account’s interest in the underlying
assets and to distinguish that interest from
any interest that is not part of the retire-
ment income account), (ii) investment per-
formance is based on gains and losses on
those assets, and (iii) the assets held in the
account cannot be used for, or diverted to,
purposes other than for the exclusive ben-
efit of plan participants or their beneficia-
ries. For this purpose, assets are treated as
diverted to the employer if the employer
borrows assets from the account. A retire-
ment income account must be maintained
pursuant to a program which is a plan and
the plan document must state (or otherwise
evidence in a similarly clear manner) the
intent to constitute a retirement income ac-
count.
If any asset of a retirement income ac-
count is owned or used by a participant or
beneficiary, then that ownership or use is
treated as a distribution to that participant
or beneficiary. The regulations also pro-
vide that a retirement income account that
is treated as an annuity contract is not a
custodial account (even if it is invested in
stock of a regulated investment company).
A life annuity can generally only be
provided from an individual account by the
purchase of an insurance annuity contract.
However, in light of the special rules ap-
plicable to church retirement income ac-
counts, the final regulations, like the 2004
2007–36 I.R.B.495September 4, 2007

proposed regulations, permit a life annu-
ity to be paid from such an account if cer-
tain conditions are satisfied. The condi-
tions are that the distribution from the ac-
count has an actuarial present value, at the
annuity starting date, that is equal to the
participant’s or beneficiary’s accumulated
benefit, based on reasonable actuarial as-
sumptions, including assumptions regard-
ing interest and mortality, and that the plan
sponsor guarantee benefits in the event that
a payment is due that exceeds the partici-
pant’s or beneficiary’s accumulated bene-
fit.
Termination of a Section 403(b) Plan
The final regulations adopt the provi-
sions of the 2004 proposed regulations per-
mitting an employer to amend its section
403(b) plan to eliminate future contribu-
tions for existing participants, and allow-
ingplanprovisionsthatpermitplantermi-
nation and a resulting distribution of accu-
mulated benefits, with the associated right
to roll over eligible rollover distributions
to an eligible retirement plan, such as an
individual retirement account or annuity
(IRA). Comments on the rules in the 2004
proposed regulations regarding plan termi-
nation were favorable. In general, the dis-
tribution of accumulated benefits is per-
mitted under these regulations only if the
employer (taking into account all entities
that are treated as a single employer under
section 414 on the date of the termination)
does not make contributions to any section
403(b) contract that is not part of the plan
during the period beginning on the date of
plan termination and ending 12 months af-
ter distribution of all assets from the ter-
minated plan. However, if at all times dur-
ing the period beginning 12 months before
the termination and ending 12 months af-
ter distribution of all assets from the termi-
nated plan, fewer than 2 percent of the em-
ployees who were eligible under the sec-
tion 403(b) plan as of the date of plan ter-
mination are eligible under the alternative
section 403(b) contract, the other section
403(b) contract is disregarded. In order
for a section 403(b) plan to be considered
terminated, all accumulated benefits under
the plan must be distributed to all partici-
pants and beneficiaries as soon as admin-
istratively practicable after termination of
the plan. A distribution for this purpose
includes delivery of a fully paid individual
insurance annuity contract.
Effect of a Failure to Satisfy Section
403(b)
These regulations include revisions to
the 2004 proposed regulations that address
the effects of a failure to satisfy section
403(b). Section 403(b)(5) provides for all
of the contracts purchased for an employee
by an employer to be treated as a single
contract for purposes of section 403(b).
Thus, if a contract fails to satisfy any of the
section 403(b) requirements, then not only
that contract but also any other contract
purchased for that individual by that em-
ployer would fail to be a contract that qual-
ifies for tax-deferral under section 403(b).
Under these regulations, as under the
2004 proposed regulations, if a contract
includes any amount that fails to satisfy
the requirements of these regulations, then,
except for special rules relating to vesting
conditions and excess contributions (under
section 415 or section 402(g)), that con-
tract and any other contract purchased for
that individual by that employer does not
constitute a section 403(b) contract. In ad-
dition, if a contract is not established pur-
suant to a written plan, then the contract
does not satisfy section 403(b). Thus, if
an employer fails to have a written plan,
any contract purchased by that employer
would not be a section 403(b) contract.
Similarly, if an employer is not an eligible
employer for purposes of section 403(b),
none of the contracts purchased by that
employer is a section 403(b) contract. If
a plan fails to satisfy the nondiscrimina-
tion rules (including a failure to operate the
plan in accordance with its coverage pro-
visions or a failure to operate the plan in
a manner that satisfies the nondiscrimina-
tion rules), none of the contracts issued un-
der the plan would be section 403(b) con-
tracts.
However, under these regulations, any
operational failure, other than those de-
scribed in the preceding paragraph, that
is solely within a specific contract gener-
ally will not adversely affect the contracts
issued to other employees that qualify in
form and operation with section 403(b).
Thus, for example, if an employee’s elec-
tive deferrals under a contract, when ag-
gregated with any other contract, plan, or
arrangement of the employer for that em-
ployee during a calendar year, exceed the
maximum deferral amount permitted un-
der section 402(g)(1)(A) (as made appli-
cable by section 403(b)(1)(E)), the fail-
ure would adversely affect the contracts is-
sued to the employee by that employer, but
would not adversely affect any other em-
ployee’s contracts.
Requirement of Certain Separate Accounts
Under Section 403(b)
The final regulations, like the 2004
proposed regulations, include technical
provisions addressing certain situations
in which a separate account
7
is necessary
under section 403(b). For example, a sep-
arate bookkeeping account is required for
any contract in which only a portion of the
employee’s interest is vested because, in
such a case, separate accounting for each
type of contribution (and earnings thereon)
that is subject to a different vesting sched-
ule is necessary to determine which vested
contributions, including earnings thereon,
are treated as held under a section 403(b)
contract. In addition, the final regula-
tions also clarify that if the section 403(b)
plan fails to establish a separate account
for contributions in excess of the section
415(c) limitation under section 403(c) (re-
lating to nonqualified annuity contracts
whose present values are generally subject
to current taxation), so that such excess
contributions are commingled in a sin-
gle insurance contract with contributions
intended to qualify under section 403(b)
without maintaininga separate account for
each amount, then none of the amounts
held under the insurance contract qualify
for tax deferral under section 403(b). Any
such separate account must be established
by the time the excess contribution is
made to the plan. The separate account for
excess contributions under section 415(c)
is necessary to effectuate differences in
the tax treatment of distributions (for ex-
ample, because of the need to properly
allocate basis under section 72 and sepa-
rately identify amounts that can be rolled
over). Similarly, a separate account is
required for elective deferrals to be treated
7
These rules are not related to segregated asset accounts under section 817(h).
September 4, 20074962007–36 I.R.B.

as held in a designated Roth account, as
described in the following paragraph.
Designated Roth Accounts
These regulations also include final reg-
ulations relating to elective deferrals that
are designated Roth contributions under a
section 403(b) plan.These regulations,
however, do not address the taxation of
a distribution of designated Roth contri-
butions from a section 403(b) plan. See
§1.402A–1 for those rules. The final reg-
ulations relating to elective deferrals un-
der a section 403(b) plan that are desig-
nated Roth contributions are substantially
unchanged from the proposed regulations
that were issued in January of 2006 regard-
ing designated Roth accounts under a sec-
tion 403(b) plan.
8
Interaction Between Title I of ERISA and
Section 403(b) of the Code
The Treasury Department and the IRS
consulted with the Department of Labor in
connection with both the 2004 proposed
regulations and these final regulations con-
cerning the interaction between Title I of
ERISA and section 403(b) of the Internal
Revenue Code. In particular, the consulta-
tion focused on whether the requirements
imposed on employers in these regulations
would exceed the scope of the Department
of Labor’s safe harbor regulation at 29
CFR §2510.3–2(f) and result in all section
403(b) programs sponsored by tax-exempt
employers (other than governmental plans
and certain church plans) falling under the
purview of ERISA.
According to the Department of Labor,
Title I of ERISA generally applies to “any
plan, fund, or program . . . established or
maintained by an employer or by an em-
ployee organization, or by both, to the ex-
tentthat...suchplan,fund,orprogram
. . . provides retirement income to em-
ployees, or . . . results in a deferral of
income by employees for periods extend-
ing to the termination of covered employ-
ment or beyond.” ERISA section 3(2)(A).
However, governmental plans and church
plans are generally excluded from cover-
age under Title I of ERISA. ERISA section
4(b)(1) and (2). Therefore, contracts pur-
chased or provided under a program that
is either a “governmental plan” under sec-
tion 3(32) of ERISA or a “church plan” un-
der section 3(33) of ERISA are not gener-
ally covered under Title I. However, sec-
tion 403(b) of the Internal Revenue Code
is also available with respect to contracts
purchased or provided by employers for
employees of a section 501(c)(3) organ-
ization, and many programs for the pur-
chase of section 403(b) contracts offered
by such employers are covered under Ti-
tle I of ERISA as part of an “employee
pension benefit plan” within the meaning
of section 3(2)(A) of ERISA. The Depart-
ment of Labor promulgated a regulation
in 1975, 29 CFR §2510.3–2(f), describing
circumstances under which an employer’s
program for the purchase of section 403(b)
contracts for its employees, which is not
otherwise excluded from coverage under
Title I, will not be considered to consti-
tute the establishment or maintenance of
an “employee pension benefit plan” under
TitleIofERISA.
As described in the preamble to the
2004 proposed regulations, the Depart-
ment of Labor advised the Treasury De-
partment and the IRS that the proposed
regulations did not appear to require, but
left open the possibility that an employer
may undertake, responsibilities in connec-
tion with a section 403(b) program that
would exceed the limits in the safe harbor
and constitute establishing and maintain-
ing an ERISA-covered plan. Comments
submitted on the proposal supported the
continued availability of non-Title I sec-
tion 403(b) programs to employees of
tax-exempt employers and asked for addi-
tional guidance for employers who offer
their employees access to such programs.
According to the Department of La-
bor, review of the final section 403(b)
regulations has not led the Department of
Labor to change its view on the principles
that apply in determining whether any
given section 403(b) program is covered
by Title I of ERISA. Even though the
differences between the tax rules for sec-
tion 403(b) programs and those governing
other ERISA-covered pension plans may
have diminished as a result of the final sec-
tion 403(b) regulations, the Department
of Labor continues to be of the view that
tax-exempt employers can comply with
the requirements in the section 403(b) reg-
ulations and remain within the Department
of Labor’s safe harbor for tax-sheltered
annuity programs funded solely by salary
deferrals. The Department of Labor notes,
however, that the new section 403(b)
regulations offer employers considerable
flexibility in shaping the extent and na-
ture of their involvement. The question
of whether any particular employer, in
complying with the section 403(b) reg-
ulations, has established or maintained
a plan covered under Title I of ERISA
must be analyzed on a case-by-case basis
applying the criteria set forth in 29 CFR
§2510.3–2(f) and section 3(2) of ERISA.
To assist employers interested in offering
their employees access to a tax sheltered
annuity program that would not be an
ERISA-covered plan, the Department of
Labor is issuing, in conjunction with the
final publication of this regulation, a Field
Assistance Bulletin to provide additional
guidance on the interaction of the safe
harbor and the requirements in these final
regulations. The Field Assistance Bulletin
can be found atwww.dol.gov/ebsa.
Treatment of Controlled Groups that
Include Tax-Exempt Entities
The final regulations retain the basic
rules in the 2004 proposed regulations re-
garding controlled groups for entities that
are tax-exempt under section 501(a), but
with a number of modifications to reflect
the comments that were made. As in the
2004 proposed regulations, these rules
are not limited to section 403(b) plans,
but apply more broadly for purposes of
determining when tax-exempt entities are
treated as a single employer under sec-
tions 414(b), (c), (m), and (o). Thus, for
example, these rules apply for purposes of
plans maintained by a tax-exempt entity
that are intended to be qualified under
section 401(a). These rules can apply
to treat two section 501(c) organizations
as a single employer, or a section 501(c)
organization and a non-section 501(c)
organization as a single employer, if the
organizations are under common control.
For a section 501(c)(3) organization that
makes contributions to a section 403(b)
plan, these rules would be generally rele-
vant for purposes of the nondiscrimination
requirements, as well as for the section
415 contribution limitations, the special
8
REG–146459–05, 2006–1 C.B. 504, published in theFederal Register(71 FR 4320) on January 26, 2006.
2007–36 I.R.B.497September 4, 2007

section 403(b) catch-up contributions, and
the section 401(a)(9) minimum distribu-
tion rules.
Under the rules in the 2004 proposed
regulations, the employer for a plan main-
tained by a section 501(c) organization
would include not only the organization
whose employees participate in the plan,
but also any other organization that is un-
der common control with the tax-exempt
organization. Under the 2004 proposed
regulations, the existence of control would
be determined based on the facts and cir-
cumstances. For this purpose, common
control would exist between a tax-exempt
organization and another organization if at
least 80 percent of the directors or trustees
of one organization were either representa-
tives of, or directly orindirectly controlled
by, the other organization.
9
The 2004 pro-
posed regulations permitted tax-exempt
organizations to choose to be aggregated
(permissive aggregation) if they main-
tained a single plan covering one or more
employees from each organization and the
organizations regularly coordinated their
day-to-day exempt activities. These rules
were subject to an overall anti-abuse rule.
The final regulations retain the basic rules
in the 2004 proposed regulations and the
anti-abuse rule, and add an example to
illustrate when the anti-abuse rule might
apply.
Comments on the 2004 proposed reg-
ulations generally approved of the pro-
posed controlled group rules, but some
comments argued for expanding the cat-
egory of entities that can use the permis-
sive aggregation rules. These comments
typically did not recommend an overall
standard for when permissive aggregation
should be permitted, but identified cer-
tain specific practices which would be fa-
cilitated by permissive aggregation. In
response, these regulations authorize the
IRS to issue published guidance permitting
other types of combinations of entities that
include tax-exempt entities to elect to be
treated as under common control for one
or more specified purposes. This author-
ity is limited to situations in which there
are substantial business reasons for main-
taining each entity in a separate trust, cor-
poration, or other form, and under which
common control treatment would be con-
sistent with the anti-abuse standards in the
regulations. It is expected that this author-
ity would not be exercised unless the IRS
determines that the organizations are so in-
tegrated in their operations as to effectively
constitute a single coordinated employer
for purposes of sections 414(b), (c), (m),
and (o), including common employee ben-
efit plans.
A comment was also received stating
that a legally required trusteeship for a la-
bor union that has been imposed in order
to correct corruption or financial malprac-
tice
10
should not constitute control. In re-
sponse, a change was made to the regula-
tions to reflect the intent that whether a per-
son has the power to appoint and replace
a trustee or director is based on facts and
circumstances. For example, that power
would generally not exist if that power was
extremely limited due to the application of
other laws, such as where a labor union
was put under trusteeship pursuant to a
court order, the trusteeship is for the sole
purpose of correcting corruption, financial
malpractice, or similar circumstances, and
the replacement trustees were permitted to
serve only for the time necessary for that
purpose.
These controlled group rules for tax-ex-
empt entities generally do not apply
to certain church entities under section
3121(w)(3). These rules also do not apply
to a State or local government or a federal
government entity. Until further guidance
is issued, church entities under section
3121(w)(3)(A)and(B)andStateorlocal
government public schools that sponsor
section 403(b) plans can continue to rely
on the rules in Notice 89–23 for determin-
ing the controlled group.
Employment Taxes
These regulations include several new
cross-references to certain rules concern-
ing the application of employment taxes.
For example, the definition of an elective
deferral at §1.403(b)–2(a)(7) of these reg-
ulations refers to §1.402(g)(3)–1 of these
regulations, which in turn refers to section
3121(a)(5)(D). See §31.3121(a)(5)–2T of
the temporary regulations for additional
guidance on section 3121(a)(5)(D) (defin-
ing salary reduction agreement for pur-
poses of the Federal Insurance Contribu-
tions Act (FICA)).
As another example, §1.403(b)–7(f) of
these regulations generally references the
special income tax withholding rules un-
der section 3405 for purposes of income
tax withholding on distributions from sec-
tion 403(b) contracts and also references
the special rules at §1.72(p)–l, Q&A–15,
and §35.3405(c)–1, Q&A–11, relating to
income tax withholding for loans deemed
distributed from qualified employer plans,
including section 403(b) contracts. How-
ever, the general income tax withholding
rules apply for purposes of income tax
withholding for annuity contracts or cus-
todial accounts that arenot section 403(b)
contracts, as well as for cases in which
an annuity contract orcustodial account
ceases to qualify as a section 403(b) con-
tract. See section 3401 and §§1.83–8(a)
and 35.3405–1T, Q&A–18.
Effect of These Regulations on Other
Guidance
Since the existing regulations were is-
sued in 1964, a number of revenue rulings
and other items of guidance under section
403(b) have become outdated as a result of
changes in law. In addition, as a result of
the inclusion in these regulations of much
of the guidance that the IRS has issued re-
garding section 403(b), these regulations
effectively supersede or substantially mod-
ify a number of revenue rulings and notices
that have been issued under section 403(b).
Thus, as indicated in the preamble to the
2004 proposed regulations, the IRS antici-
pates taking action in the future to obsolete
9
Treas. Reg. §1.512(b)–1(l)(4)(i)(b) uses a similar test to determine control of a non-stock organization. Note that those regulations do not reflect amendments that were made in section
512(b)(13) by section 1041(a) of the Taxpayer Relief Act of 1997 (111 Stat. 788).
10
See 29 U.S.C. 462.
September 4, 20074982007–36 I.R.B.

many revenue rulings, notices, and other
guidance under section 403(b).
11
However, the positions taken in certain
rulings and other outstanding guidance are
expected to be retained. For example, it is
intended that the existing rules
12
for deter-
mining when employees are performing
services for a public school will continue
to apply. Further, as discussed above in
the preamble under the heading, “Treat-
ment of Controlled Groups that Include
Tax-Exempt Entities,” church entities un-
der section 3121(w)(3)(A) and (B) and
public schools that sponsor section 403(b)
plans can continue to rely on the rules
in Notice 89–23 for determining the con-
trolled group. In addition, certain positions
taken in prior guidance are expected to be
reevaluated in light of these regulations,
such as Rev. Rul. 2004–67, 2004–2 C.B.
28, which revised the group trust rules
of Rev. Rul. 81–100, 1981–1 C.B. 326.
With the issuance of these regulations, a
number of conforming changes will be
considered for the compliance programs
maintained by the IRS, as most recently
published in Rev. Proc. 2006–27, 2006–1
C.B. 945 (EPCRS), including, for exam-
ple, to reflect the written plan requirement
and the positions described above in this
preamble under the heading, “Effect of a
Failure to Satisfy Section 403(b).”
The prior regulations under section
403(b) had included certain rules for de-
termining the amount of the contributions
made for an employee under a defined
benefit plan, based on the employee’s
pension under the plan. These rules are
generally no longer applicable for section
403(b) because the limitations on contri-
butions to a section 403(b) contract under
section 415(c) are no longer coordinated
with accruals under a defined benefit
plan.
13
However, the rules for determining
the amount of contributions made for an
employee under a defined benefit plan in
the prior regulations under section 403(b)
had also been used for purposes of sec-
tion 402(b) (relating to nonqualified plans
funded through trusts). These regulations
replace those rules with regulations under
section 402(b) that provide for the same
rules (those in the section 403(b) regu-
lations that were in effect prior to these
regulations) to continue to apply for pur-
poses of section 402(b). However, these
section 402(b) regulations also authorize
the Commissioner to issue guidance for
determining the amount of the contri-
butions made for an employee under a
defined benefit plan under section 402(b).
Applicability Date
These regulations are generally applica-
ble for taxable years beginning after De-
cember 31, 2008. Thus,because individu-
als will almost uniformly be on a calendar
taxable year, these regulations will gener-
ally apply on January 1, 2009. However,
these regulations include a number of ex-
plicit transition rules.
For a section 403(b) plan maintained
pursuant to one or more collective bargain-
ing agreements that have been ratified and
are in effect on July 26, 2007, the regu-
lations do not apply until the earlier of:
(1) the date on which the last of such col-
lective bargaining agreements terminates
(determined without regard to any exten-
sion thereof after July 26, 2007; or (2)
July 26, 2010. For a section 403(b) plan
maintained by a church-related organiza-
tion for which the authority to amend the
plan is held by a church convention (within
the meaning of section 414(e)), the regula-
tions do not apply before the beginning of
the first plan year following December 31,
2009.
There are also special applicability
dates for several of the specific provi-
sions in these regulations. First, special
rules apply to plans which may have in-
cluded one or more of the exclusions that
Notice 89–23 permitted for the universal
availability rule, but which are no longer
permitted under these regulations. Specif-
ically, a special rule applies if a plan has
eligibility conditions for elective defer-
rals relating to employees who make a
one-time election to participate in a gov-
ernmental plan described in section 414(d)
instead of a section 403(b) plan, professors
who are providing services on a temporary
basis to another school for up to one year
and for whom section 403(b) contributions
are being made at a rate no greater than the
rate each such professor would receive un-
der the section 403(b) plan of the original
school, or employees who are affiliated
with a religious order and who have taken
a vow of poverty where the religious order
provides for the support of such employ-
ees in their retirement. If, as permitted by
Notice 89–23, a plan excludes any of these
three classes of employees from eligibil-
ity to make elective deferrals on July 26,
2007, the plan is permitted to continue that
exclusion until taxable years beginning on
or after January 1, 2010. In addition, if
a plan excludes employees covered by a
collective bargaining agreement from eli-
gibility to make elective deferrals on July
26, 2007, the plan is permitted to continue
that exclusion until the later of (i) the first
day of the first taxable year that begins
after December 31, 2008, or (ii) the earlier
of (I) the date that such agreement termi-
nates (determined without regard to any
extension thereof after July 26, 2007) or
(II) July 26, 2010. In the case of a govern-
mental plan (as defined in section 414(d))
for which the authority to amend the plan
is held by a legislative body that meets in
legislative session, the plan is permitted to
continue the exclusion until the earlier of:
(i) the close of the first regular legislative
session of the legislative body with the
authority to amend the plan that begins on
or after January 1, 2009; or (ii) January 1,
2011.
These regulations (at §1.403(b)–6(b))
also provide that a section 403(b) con-
tract is permitted to distribute retirement
benefits to the participant no earlier than
11
When these regulations go into effect, the following guidance will be outdated or superseded by these regulations and it is expected that guidance will be issued in the future to formally
supersede these items: Rev. Rul. 64–333, 1964–2 C.B. 114; Rev. Rul. 65–200, 1965–2 C.B. 141; Rev. Rul. 66–254, 1966–2 C.B. 125; Rev. Rul. 66–312, 1966–2 C.B. 127; Rev. Rul. 67–78,
1967–1 C.B. 94; Rev. Rul. 67–69, 1967–1 C.B. 93; Rev. Rul. 67–361, 1967–2 C.B. 153; Rev. Rul. 67–387, 1967–2 C.B. 153; Rev. Rul. 67–388, 1967–2 C.B. 153;Rev. Rul. 68–179,
1968–1 C.B. 179; Rev. Rul. 68–482, 1968–2 C.B. 186; Rev. Rul. 68–487, 1968–2 C.B. 187; Rev. Rul. 68–488, 1968–2 C.B. 188; Rev. Rul. 69–629, 1969–2 C.B. 101; Rev. Rul. 70–243,
1970–1 C.B. 107; Rev. Rul. 87–114, 1987–2 C.B. 116; Rev. Rul. 90–24, 1990–1 C.B. 97; Notice 90–73, 1990–2 C.B. 353; Notice 92–36, 1992–2 C.B. 364; and Announcement 95–48,
1995–23 I.R.B. 13. In addition, Notice 89–23, 1989–1 C.B. 654, is likewise superseded as a result of these regulations, except to the extent describedabove under the heading “Treatment of
Controlled Groups that Include Tax-Exempt Entities.” It is expected that the following guidance will not be superseded when these regulations are issued in final form: Rev. Rul. 66–254,
1966–2 C.B. 125; Rev. Rul. 68–33, 1968–1 C.B. 175; Rev. Rul 68–58, 1968–1 C.B. 176; Rev. Rul. 68–116, 1968–1 C.B. 177; Rev. Rul. 68–648, 1968–2 C.B. 49; Rev. Rul. 68–488, 1968–2
C.B. 188; and Rev. Rul. 69–146, 1969–1 C.B. 132.
12
Rev. Rul. 73–607, 1973–2 C.B. 145, and Rev. Rul. 80–139, 1980–1 C.B. 88.
13
However, see §1.403(b)–10(f)(2) of these regulations for a special rule applicable to certainchurch defined benefit plans that were in effect on September 3, 1982.
2007–36 I.R.B.499September 4, 2007

the earliest of the participant’s severance
from employment or upon the prior oc-
currence of some event, subject to a num-
ber of exceptions (relating to distributions
from custodial accounts, distributions at-
tributable to section 403(b) elective defer-
rals, correction of excess deferrals, distri-
butions at plan termination, and payment
of after-tax employee contributions). This
rule does not apply for contracts issued
before January 1, 2009. In addition, in
order to permit plans to comply with the
rules relating to in-service distributions for
contracts issued before January 1, 2009,
the regulations provide that an amendment
adopted before January 1, 2009, to comply
with these rules does not violate the anti-
cutback rules of section 204(g) of ERISA.
These regulations (at §1.403(b)–
8(c)(2)) also do not permit a life insur-
ance contract, an endowment contract, a
health or accident insurance contract, or
a property, casualty, or liability insurance
contract to constitute an annuity contract
for purposes of section 403(b). This rule
does not apply for contracts issued before
September 24, 2007.
These regulations also include specific
rules relating to contract exchanges that
were permitted under Rev. Rul. 90–24.
These new rules do not apply to contracts
received in an exchange that occurred on
or before September 24, 2007, assuming
that the exchange (including the contract
received in the exchange) satisfies appli-
cable pre-existing legal requirements (in-
cluding Rev. Rul. 90–24).
Finally, these regulations include spe-
cial applicability date rules to coordinate
with recently issued regulations under sec-
tions 402A and 415.
For periods following July 26, 2007,
and before the applicable date, taxpayers
can rely on these regulations, except that
(1) such reliance must be on a consistent
and reasonable basis and (2) the special
rule at §1.403(b)–10(a) of these regula-
tions permitting accumulated benefits to
be distributed on plan termination can be
relied upon only if all of the contracts is-
sued under the plan at that time satisfy
all of the applicable requirements of these
regulations (other than the requirement at
§1.403(b)–3(b)(3)(i) of these regulations
that there be a written plan).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that the collection of infor-
mation in these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. This cer-
tification is based upon the determination
that respondents will need to spend mini-
mal time (an average of 4.1 hours per year)
complying with the contract exchange re-
quirements in these regulations, and small
entities are generally expected to spend
much less time. Thus, the cost of com-
plying with this statutory requirement is
small, even for small entities. Therefore,
a Regulatory Flexibility Analysis is not
required under the Regulatory Flexibility
Act (5 U.S.C. chapter 6).
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
ing these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.
Drafting Information
The principal authors of these reg-
ulations are R. Lisa Mojiri-Azad and
John Tolleris, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), IRS.
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 31, 54
and 602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.403(b)–3 and adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.403(b)–6 also issued under 26
U.S.C. 403(b)(10). * * *
§1.414(c)–5 also issued under 26
U.S.C. 414(b), (c), and (o). * * *
Par. 2. Section 1.402(b)–1 is amended
by revising paragraphs (a)(2) and (b)(2)(ii)
to read as follows:
§1.402(b)–1 Treatment of beneficiary of a
trust not exempt under section 501(a).
(a) * * *
(2)Determination of amount of em-
ployer contributions. If, for an employee,
the actual amount of employer contribu-
tions referred to in paragraph (a)(1) of this
section for any taxable year of the em-
ployee is not determinable or for any other
reason is not known, then, except as set
forth in rules prescribed by the Commis-
sioner in revenue rulings, notices, or other
guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b)
of this chapter), such amount shall be ei-
ther—
(i) The excess of—
(A) The amount determined as of
the end of such taxable year in accor-
dance with the formula described in
§1.403(b)–1(d)(4), as it appeared in the
April1,2006,editionof26CFRPart1;
over
(B) The amount determined as of the
end of the prior taxable year in accordance
with the formula described in paragraph
(a)(2)(i)(A) of this section; or
(ii) The amount determined under any
other method utilizing recognized actuar-
ial principles that are consistent with the
provisions of the plan under which such
contributions are made and the method
adopted by the employer for funding the
benefits under the plan.
(b) * * *
(2) * * *
(ii) If a separate account in a trust for
the benefit of two or more employees is not
maintained for each employee, the value
of the employee’s interest in such trust is
determined in accordance with rules pre-
scribed by the Commissioner under the au-
thority in paragraph (a)(2) of this section.
*****
Par. 3. Section 1.402(g)(3)–1 is added
to read as follows:
September 4, 20075002007–36 I.R.B.

§1.402(g)(3)–1 Employer contributions to
purchase a section 403(b) contract under
a salary reduction agreement.
(a)General rule. With respect to an an-
nuity contract under section 403(b), except
as provided in paragraph (b) of this section,
an elective deferral means an employer
contribution to purchase an annuity con-
tract under section 403(b) under a salary
reduction agreement within the meaning of
section 3121(a)(5)(D).
(b)Special rule. Notwithstanding para-
graph (a) of this section, for purposes of
section 403(b), an elective deferral only
includes a contribution that is made pur-
suant to a cash or deferred election (as
defined at §1.401(k)–1(a)(3)). Thus, for
purposes of section 402(g)(3)(C), an elec-
tive deferral does not include a contribu-
tion that is made pursuant to an employee’s
one-time irrevocable election made on or
before the employee’s first becoming eli-
gible to participate under the employer’s
plans or a contribution made as a condi-
tion of employment that reduces the em-
ployee’s compensation.
(c)Applicable date.Thissectionisap-
plicable for taxable years beginning after
December 31, 2008.
Par. 4. Section 1.402A–1, A–1 is re-
vised to read as follows:
§1.402A–1 Designated Roth Accounts.
*****
A–1. A designated Roth account is
a separate account under a qualified cash
or deferred arrangement under a section
401(a) plan, or under a section 403(b) plan,
to which designated Roth contributions are
permitted to be made in lieu of elective
contributions and that satisfies the require-
ments of §1.401(k)–1(f) (in the case of a
section 401(a) plan) or §1.403(b)–3(c) (in
the case of a section 403(b) plan).
*****
Par. 5. Section 1.403(b)–0 is added to
read as follows:
§1.403(b)–0 Taxability under an
annuity purchased by a section 501(c)(3)
organization or a public school
This section lists the headings that ap-
pear in §§1.403(b)–1 through 1.403(b)–11.
§1.403(b)–1 General overview of
taxability under an annuity contract
purchased by a section 501(c)(3)
organization or a public school.
§1.403(b)–2 Definitions.
(a) Application of definitions.
(b) Definitions.
§1.403(b)–3 Exclusion for contributions
to purchase section 403(b) contracts.
(a) Exclusion for section 403(b) con-
tracts.
(b) Application of requirements.
(c) Special rules for designated Roth
section 403(b) contributions.
(d) Effect of failure.
§1.403(b)–4 Contribution limitations.
(a) Treatment of contributions in excess
of limitations.
(b) Maximum annual contribution.
(c) Section 403(b) elective deferrals.
(d) Employer contributions for former
employees.
(e) Special rules for determining years
of service.
(f) Excess contributions of deferrals.
§1.403(b)–5 Nondiscrimination rules.
(a) Nondiscrimination rules for contri-
butions other than section 403(b) elective
deferrals.
(b) Universal availability required for
section 403(b) elective deferrals.
(c) Plan required.
(d) Church plans exception.
(e) Other rules.
§1.403(b)–6 Timing of distributions and
benefits.
(a) Distributions generally.
(b) Distributions from contracts other
than custodial accounts or amounts attrib-
utable to section 403(b) elective deferrals.
(c) Distributions from custodial ac-
counts that are not attributable to section
403(b) elective deferrals.
(d) Distribution of section 403(b) elec-
tive deferrals.
(e) Minimum required distributions for
eligible plans.
(f) Loans.
(g) Death benefits and other incidental
benefits.
(h) Special rule regarding severance
from employment.
§1.403(b)–7 Taxation of distributions and
benefits.
(a) General rules for when amounts are
included in gross income.
(b) Rollovers to individual retirement
arrangements and other eligible retirement
plans.
(c) Special rules for certain corrective
distributions.
(d) Amounts taxable under section
72(p)(1).
(e) Special rules relating to distributions
from a designated Roth account.
(f) Certain rules relating to employment
taxes.
§1.403(b)–8 Funding.
(a) Investments.
(b) Contributions to the plan.
(c) Annuity contracts.
(d) Custodial accounts.
(e) Retirement income accounts.
(f) Combining assets.
§1.403(b)–9 Special rules for church
plans.
(a) Retirement income accounts.
(b) Retirement income account defined.
(c) Special deduction rule for self-em-
ployed ministers.
§1.403(b)–10 Miscellaneous provisions.
(a) Plan terminations and frozen plans.
(b) Contract exchanges and plan-to-
plan transfers.
(c) Qualified domestic relations orders.
(d) Rollovers to a section 403(b) con-
tract.
(e) Deemed IRAs.
(f) Defined benefit plans.
(g) Other rules relating to section
501(c)(3) organizations.
§1.403(b)–11 Applicable date.
(a) General rule.
(b) Collective bargaining agreements.
(c) Church conventions.
(d) Special rules for plans that exclude
certain types of employees from elective
deferrals.
(e) Special rules for plans that permit
in-service distributions.
(f) Special rule for life insurance con-
tracts.
2007–36 I.R.B.501September 4, 2007

(g) Special rule for contracts received in
an exchange.
Par.6.Sections 1.403(b)–1,
1.403(b)–2, and 1.403(b)–3 are revised
to read as follows:
§1.403(b)–1 General overview of
taxability under an annuity contract
purchased by a section 501(c)(3)
organization or a public school.
Section 403(b) and §§1.403(b)–2
through 1.403(b)–10 provide rules for
the Federal income tax treatment of an
annuity purchased for an employee by an
employer that is either a tax-exempt entity
under section 501(c)(3)(relating to certain
religious, charitable, scientific, or other
types of organizations) or a public school,
or for a minister described in section
414(e)(5)(A). See section 403(a) (relating
to qualified annuities) for rules regarding
the taxation of an annuity purchased under
a qualified annuity plan that meets the
requirements of section 404(a)(2), and see
section 403(c) (relating to nonqualified
annuities) for rules regarding the taxation
of other types of annuities.
§1.403(b)–2 Definitions.
(a)Application of definitions.The
definitions set forth in this section are
applicable for purposes of §1.403(b)–1,
this section and §§1.403(b)–3 through
1.403(b)–11.
(b)Definitions—(1)Accumulated ben-
efitmeans the total benefit to which a
participant or beneficiary is entitled under
a section 403(b) contract, including all
contributions made to the contract and all
earnings thereon.
(2)Annuity contractmeans a contract
that is issued by an insurance company
qualified to issue annuities in a State and
that includes payment in the form of an
annuity. See §1.401(f)–1(d)(2) and (e)
for the definition of an annuity, and see
§1.403(b)–8(c)(3) for a special rule for cer-
tain State plans. See also §§1.403(b)–8(d)
and 1.403(b)–9(a) for additional rules re-
garding the treatment of custodial accounts
and retirement income accounts as annuity
contracts.
(3)Beneficiarymeans a person who is
entitled to benefits in respect of a partic-
ipant following the participant’s death or
an alternate payee pursuant to a qualified
domestic relations order, as described in
§1.403(b)–10(c).
(4)Catch-upamount orcatch-uplim-
itation for a participant for a taxable
year means a section 403(b) elective de-
ferral permitted under section 414(v)
(as described in §1.403(b)–4(c)(2))
or section 402(g)(7) (as described in
§1.403(b)–4(c)(3)).
(5)Churchmeans a church as defined
in section 3121(w)(3)(A) and a qualified
church-controlled organization as defined
in section 3121(w)(3)(B).
(6)Church-related organizationmeans
a church or a convention or association
of churches, including an organization de-
scribed in section 414(e)(3)(A).
(7)Elective deferralmeans an elective
deferral under §1.402(g)–1 (with respect
to an employer contribution to a section
403(b) contract) andany other amount that
constitutes an elective deferral under sec-
tion 402(g)(3).
(8) (i)Eligible employermeans—
(A) A State, but only with respect to an
employee of the State performing services
for a public school;
(B) A section 501(c)(3) organization
with respect to any employee of the sec-
tion 501(c)(3) organization;
(C) Any employer of a minister de-
scribed in section 414(e)(5)(A), but only
with respect to the minister; or
(D) A minister described in section
414(e)(5)(A), but only with respect to a
retirement income account established for
the minister.
(ii) An entity is not an eligible employer
under paragraph (a)(8)(i)(A) of this sec-
tion if it treats itself as not being a State
for any other purpose of the Internal Rev-
enue Code, and a subsidiary or other affil-
iate of an eligible employer is not an eligi-
ble employer under paragraph (a)(8)(i) of
this section if the subsidiary or other affil-
iate is not an entity described in paragraph
(a)(8)(i) of this section.
(9)Employeemeans a common-law
employee performing services for the
employer, and does not include a former
employee or an independent contrac-
tor. Subject to any rules in §1.403(b)–1,
this section, and §§1.403(b)–3 through
1.403(b)–11 that are specifically appli-
cable to ministers, an employee also in-
cludes a minister described in section
414(e)(5)(A) when performing services in
the exercise of his or her ministry.
(10)Employee performing services for
a public schoolmeans an employee per-
forming services as an employee for a pub-
lic school of a State. This definition is not
applicable unless the employee’s compen-
sation for performing services for a pub-
lic school is paid by the State. Further, a
person occupying an elective or appointive
public office is not an employee perform-
ing services for a public school unless such
office is one to which an individual is
elected or appointed only if the individual
has received training, or is experienced, in
the field of education. The termpublic of-
ficeincludes any elective or appointive of-
fice of a State.
(11)Includible compensationmeans
the employee’s compensation received
from an eligible employer that is in-
cludible in the participant’s gross income
for Federal income tax purposes (com-
puted without regard to section 911) for
the most recent period that is a year of
service. Includible compensation for a
minister who is self-employed means the
minister’s earned income as defined in
section 401(c)(2) (computed without re-
gard to section 911) for the most recent
period that is a year of service. Includible
compensation does not include any com-
pensation received during a period when
the employer is not an eligible employer.
Includible compensation also includes
any elective deferral or other amount
contributed or deferred by the eligible em-
ployer at the election of the employee that
would be includible in the gross income of
the employee but for the rules of sections
125, 132(f)(4), 402(e)(2), 402(h)(1)(B),
402(k), or 457(b). The amount of includi-
ble compensation is determined without
regard to any community property laws.
See section 415(c)(3)(A) through (D) for
additional rules, and see §1.403(b)–4(d)
for a special rule regarding former em-
ployees.
(12)Participantmeans an employee
for whom a section 403(b) contract is cur-
rently being purchased, or an employee
or former employee for whom a sec-
tion 403(b) contract has previously been
purchased and who has not received a dis-
tribution of his or her entire accumulated
benefit under the contract.
(13)Planmeans a plan as described in
§1.403(b)–3(b)(3).
(14)Public schoolmeans a State-spon-
sored educational organization described
September 4, 20075022007–36 I.R.B.

in section 170(b)(1)(A)(ii) (relating to edu-
cational organizations that normally main-
tain a regular faculty and curriculum and
normally have a regularly enrolled body of
pupils or students in attendance at the place
where educational activities are regularly
carried on).
(15)Retirement income accountmeans
a defined contribution program estab-
lished or maintained by a church-related
organization to provide benefits under
section 403(b) for its employees or their
beneficiaries as described in §1.403(b)–9.
(16)Section 403(b) contract; section
403(b) plan—(i)Section 403(b) contract
means a contract that satisfies the require-
ments of §1.403(b)–3. If for any taxable
year an employer contributes to more than
one section 403(b) contract for a partic-
ipant or beneficiary, then, under section
403(b)(5), all such contracts are treated
as one contract for purposes of section
403(b) and §1.403(b)–1, this section, and
§§1.403(b)–3 through 1.403(b)–11. See
also §1.403(b)–3(b)(1).
(ii)Section 403(b) planmeans the plan
of the employer under which the section
403(b) contracts for its employees are
maintained.
(17)Section 403(b) elective deferral;
designated Roth contribution—(i)Section
403(b) elective deferralmeans an elective
deferral that is an employer contribution to
a section 403(b) plan for an employee. See
§1.403(b)–5(b) for additional rules with
respect to a section 403(b) elective defer-
ral.
(ii)Designated Roth contributionun-
der a section 403(b) plan means a sec-
tion 403(b) elective deferral that satisfies
§1.403(b)–3(c).
(18)Section 501(c)(3) organization
means an organization that is described
in section 501(c)(3) (relating to certain
religious, charitable, scientific, or other
types of organizations) and exempt from
tax under section 501(a).
(19)Severance from employmentmeans
that the employee ceases to be employed
by the employer maintaining the plan. See
§1.401(k)–1(d) for additional guidance
concerning severance from employment.
See also §1.403(b)–6(h) for a special rule
under which severance from employment
is determined by reference to employment
with the eligible employer.
(20)Statemeans a State, a political
subdivision of a State, or any agency or
instrumentality of a State. For this pur-
pose, the District of Columbia is treated
as a State. In addition, for purposes of
determining whether an individual is an
employee performing services for a pub-
lic school, an Indian tribal government
is treated as a State, as provided under
section 7871(a)(6)(B). See also section
1450(b) of the Small Business Job Protec-
tion Act of 1996 (110 Stat. 1755, 1814)
for special rules treating certain contracts
purchased in a plan year beginning before
January 1, 1995, that include contributions
by an Indian tribal government as section
403(b) contracts, whether or not those
contributions are for employees perform-
ing services for a public school.
(21)Year of servicemeans each full
year during which an individual is a full-
time employee of an eligible employer,
plus fractional credit for each part of a
year during which the individual is either
a full-time employee of an eligible em-
ployer for a part of the year or a part-time
employee of an eligible employer. See
§1.403(b)–4(e) for rules for determining
years of service.
§1.403(b)–3 Exclusion for contributions
to purchase section 403(b) contracts.
(a)Exclusion for section 403(b) con-
tracts. Amounts contributed by an eligible
employer for the purchase of an annuity
contract for an employee are excluded
from the gross income of the employee
under section 403(b) only if each of the
requirements in paragraphs (a)(1) through
(9) of this section is satisfied. In addi-
tion, amounts contributed by an eligible
employer for the purchase of an annuity
contract for an employee pursuant to a
cash or deferred election (as defined at
§1.401(k)–1(a)(3)) are not includible in
an employee’s gross income at the time
the cash would have been includible in
the employee’s gross income (but for the
cash or deferred election) if each of the
requirements in paragraphs (a)(1) through
(9) of this section is satisfied. However,
the preceding two sentences generally do
not apply to designated Roth contribu-
tions; see paragraph (c) of this section and
§1.403(b)–7(e) for special taxation rules
that apply with respect to designated Roth
contributions under a section 403(b) plan.
(1)Not a contract issued under qual-
ified plan or eligible governmental plan.
The annuity contract is not purchased un-
der a qualified plan (under section 401(a)
or 403(a)) or an eligible governmental plan
under section 457(b).
(2)Nonforfeitability. The rights of
the employee under the annuity contract
(disregarding rights to future premiums)
are nonforfeitable. An employee’s rights
under a contract fail to be nonforfeitable
unless the employee for whom the con-
tract is purchased has at all times a fully
vested and nonforfeitable right (as defined
in regulations under section 411) to all
benefits provided under the contract. See
paragraph (d)(2) of this section for addi-
tional rules regarding the nonforfeitability
requirement of this paragraph (a)(2).
(3)Nondiscrimination. In the case of
an annuity contract purchased by an eligi-
ble employer other than a church, the con-
tract is purchased under a plan that satisfies
section 403(b)(12) (relating to nondiscrim-
ination requirements, including universal
availability). See §1.403(b)–5.
(4)Limitations on elective deferrals.In
the case of an elective deferral, the contract
satisfies section 401(a)(30) (relating to
limitations on elective deferrals). A con-
tract does not satisfy section 401(a)(30) as
required under this paragraph (a)(4) un-
less the contract requires that all elective
deferrals for an employee not exceed the
limits of section 402(g)(1), including elec-
tive deferrals for the employee under the
contract and any other elective deferrals
under the plan under which the contract is
purchased and under all other plans, con-
tracts, or arrangements of the employer.
See §1.401(a)–30.
(5)Nontransferability. The contract is
not transferable. This paragraph (a)(5)
does not apply to a contract issued before
January 1, 1963. See section 401(g).
(6)Minimum required distributions.
The contract satisfies the requirements of
section 401(a)(9) (relating to minimum re-
quired distributions). See §1.403(b)–6(e).
(7)Rollover distributions. The con-
tract provides that, if the distributee of
an eligible rollover distribution elects to
have the distribution paid directly to an el-
igible retirement plan, as defined in sec-
tion 402(c)(8)(B), and specifies the eligi-
ble retirement plan to which the distribu-
tion is to be paid, then the distribution will
be paid to that eligible retirement plan in a
direct rollover. See §1.403(b)–7(b)(2).
2007–36 I.R.B.503September 4, 2007

(8)Limitation on incidental benefits.
The contract satisfies the incidental ben-
efit requirements ofsection 401(a). See
§1.403(b)–6(g).
(9)Maximum annual additions.The
annual additions to the contract do not
exceed the applicable limitations of sec-
tion 415(c) (treating contributions and
other additions as annual additions).
See paragraph (b) of this section and
§1.403(b)–4(b) and (f).
(b)Application of requirements—(1)
Aggregation of contracts. In accordance
with section 403(b)(5), for purposes of de-
termining whether this section is satisfied,
all section 403(b) contracts purchased for
an individual by an employer are treated
as purchased under a single contract. Ad-
ditional aggregation rules apply under
section 402(g) for purposes of satisfying
paragraph (a)(4) of this section and un-
der section 415 for purposes of satisfying
paragraph (a)(9) of this section.
(2)Disaggregation for excess annual
additions. In accordance with the last sen-
tence of section 415(a)(2), if an excess an-
nual addition is made to a contract that
otherwise satisfies the requirements of this
section, then the portion of the contract
that includes such excess annual addition
fails to be a section 403(b) contract (as fur-
ther described in paragraph (d)(1) of this
section) and the remaining portion of the
contract is a section 403(b) contract. This
paragraph (b)(2) is not satisfied unless, for
the year of the excess and each year there-
after, the issuer of the contract maintains
separate accounts for each such portion.
Thus, the entire contract fails to be a sec-
tion 403(b) contractif an excess annual ad-
dition is made and a separate account is not
maintained with respect to the excess.
(3)Plan in form and operation.(i)
A contract does not satisfy paragraph
(a) of this section unless it is main-
tained pursuant to a plan. For this pur-
pose, a plan is a written defined con-
tribution plan, which, in both form and
operation, satisfies the requirements of
§1.403(b)–1, §1.403(b)–2, this section,
and §§1.403(b)–4 through 1.403(b)–11.
For purposes of §1.403(b)–1, §1.403(b)–2,
this section, and §§1.403(b)–4 through
1.403(b)–11, the plan must contain all the
material terms and conditions for eligi-
bility, benefits, applicable limitations, the
contracts available under the plan, and the
time and form under which benefit dis-
tributions would be made. For purposes
of §1.403(b)–1, §1.403(b)–2, this section,
and §§1.403(b)–4 through 1.403(b)–11,
a plan may contain certain optional fea-
tures that are consistent with but not
required under section 403(b), such as
hardship withdrawal distributions, loans,
plan-to-plan or annuity contract-to-annu-
ity contract transfers, and acceptance of
rollovers to the plan. However, if a plan
contains any optional provisions, the op-
tional provisions must meet, in both form
and operation, the relevant requirements
under section 403(b),this section, and
§§1.403(b)–4 through 1.403(b)–11.
(ii) The plan may allocate responsibility
for performing administrative functions,
including functions to comply with the re-
quirements of section 403(b) and other tax
requirements. Any such allocation must
identify responsibility for compliance with
the requirements of the Internal Revenue
Code that apply on the basis of the ag-
gregated contracts issuedtoaparticipant
under a plan, including loans under sec-
tion 72(p) and the conditions for obtaining
a hardship withdrawal under §1.403(b)–6.
A plan is permitted to assign such respon-
sibilities to parties other than the eligible
employer, but not to participants (other
than employees of the employer a substan-
tial portion of whose duties are adminis-
tration of the plan), and may incorporate
by reference other documents, including
the insurance policy or custodial account,
which thereupon become part of the plan.
(iii) This paragraph (b)(3) applies to
contributions to an annuity contract by a
church only if the annuity is part of a
retirement income account, as defined in
§1.403(b)–9.
(4)Exclusion limited for former em-
ployees—(i)General rule. Except as pro-
vided in paragraph (b)(4)(ii) of this section
and in §1.403(b)–4(d), the exclusion from
gross income provided by section 403(b)
does not apply to contributions made for
former employees. For this purpose, a
contribution is not made for a former em-
ployee if the contribution is with respect
to compensation that would otherwise be
paid for a payroll period that begins before
severance from employment.
(ii)Exceptions. The exclusion from
gross income provided by section 403(b)
applies to contributions made for former
employees with respect to compensation
described in §1.415(c)–2(e)(3)(i) (relating
to certain compensation paid by the later of
2
1
/2months after severance from employ-
ment or the end of the limitation year that
includes the date of severance from em-
ployment), and compensation described
in §1.415(c)–2(e)(4), §1.415(c)–2(g)(4),
or §1.415(c)–2(g)(7) (relating to com-
pensation paid to participants who are
permanently and totally disabled or re-
lating to qualified military service under
section 414(u)).
(c)Special rules for designated Roth
section 403(b) contributions.(1)Therules
of §1.401(k)–1(f)(1) and (2) for designated
Roth contributions under a qualified cash
or deferred arrangement apply to desig-
nated Roth contributions under a section
403(b) plan. Thus, a designated Roth con-
tribution under a section 403(b) plan is a
section 403(b) elective deferral that is des-
ignated irrevocably by the employee at the
time of the cash or deferred election as
a designated Roth contribution that is be-
ingmadeinlieuofalloraportionofthe
section 403(b) elective deferrals the em-
ployee is otherwise eligible to make under
the plan; that is treated by the employer as
includible in the employee’s gross income
at the time the employee would have re-
ceived the amount in cash if the employee
had not made the cash or deferred elec-
tion (such as by treating the contributions
as wages subject to applicable withhold-
ing requirements); and that is maintained
in a separate account (within the meaning
of §1.401(k)–1(f)(2)).
(2) A designated Roth contribution un-
der a section 403(b) plan must satisfy the
requirements applicable to section 403(b)
elective deferrals. Thus, for example, des-
ignated Roth contributions under a section
403(b) plan must satisfy the requirements
of §1.403(b)–6(d). Similarly, a desig-
nated Roth account under a section 403(b)
plan is subject to the rules of sections
401(a)(9)(A) and (B) and §1.403(b)–6(e).
(d)Effect of failure—(1)General rules.
(i) If a contract includes any amount that
fails to satisfy the requirements of sec-
tion 403(b), §1.403(b)–1, §1.403(b)–2,
this section, or §§1.403(b)–4 through
1.403(b)–11, then, except as otherwise
provided in paragraph (d)(2) of this sec-
tion (relating to failure to satisfy nonfor-
feitability requirements) or §1.403(b)–4(f)
(relating to excess contributions under
section 415 and excess deferrals under
section 402(g)), the contract is not a sec-
September 4, 20075042007–36 I.R.B.

tion 403(b) contract. In addition, section
403(b)(5) and paragraph (b)(1) of this
section provide that, for purposes of de-
termining whether a contract satisfies
section 403(b), all section 403(b) con-
tracts purchased for an individual by an
employer are treated as purchased under a
single contract. Thus, except as provided
in paragraph (b)(2) of this section or as
otherwise provided in this paragraph (d),
a failure to satisfy section 403(b) with
respect to any contract issued to an indi-
vidual by an employer adversely affects
all contracts issued to that individual by
that employer.
(ii) In accordance with paragraph (b)(3)
of this section, a failure to operate in accor-
dance with the terms of a plan adversely
affects all of the contracts issued by the
employer to the employee or employ-
ees with respect to whom the operational
failure occurred. Such a failure does
not adversely affect any other contract if
the failure is neither a failure to satisfy
the nondiscrimination requirements of
§1.403(b)–5 (a nondiscrimination failure)
nor a failure of the employer to be an eli-
gible employer as defined in §1.403(b)–2
(an employer eligibility failure). How-
ever, any failure that is not an operational
failure adversely affects all contracts is-
sued under the plan, including: a failure
to have contracts issued pursuant to a
written defined contribution plan which,
in form, satisfies the requirements of
§1.403(b)–1, §1.403(b)–2, this section,
and §§1.403(b)–4 through 1.403(b)–11 (a
written plan failure); a nondiscrimination
failure; or an employer eligibility failure.
(iii) See other applicable Internal Rev-
enue Code provisions for the treatment of
a contract that is not a section 403(b) con-
tract, such as sections 61, 83, 402(b), and
403(c). Thus, for example, section 403(c)
(relating to nonqualified annuities) applies
if any annuity contract issued by an in-
surance company fails to satisfy section
403(b), based on the value of the contract
at the time of the failure. However, see
paragraph (d)(2) of this section for special
rules with respect to the nonforfeitability
requirement of paragraph (a)(2) of this sec-
tion.
(2)Failure to satisfy nonforfeitabil-
ity requirement—(i)Treatment before
contract becomes nonforfeitable.Ifan
annuity contract issued by an insurance
company would qualify as a section 403(b)
contract but for the failure to satisfy the
nonforfeitability requirement of paragraph
(a)(2) of this section, then the contract
is treated as a contract to which section
403(c) applies. See §1.403(b)–8(d)(4) for
a rule under which a custodial account
that fails to satisfy the nonforfeitability
requirement of paragraph (a)(2) of this
section is treated as a section 401(a) qual-
ified plan for certain purposes.
(ii)Treatment when contract becomes
nonforfeitable—(A)In general. Notwith-
standing paragraph (d)(2)(i) of this section,
on or after the date on which the partic-
ipant’s interest in a contract described in
paragraph (d)(2)(i) of this section becomes
nonforfeitable, the contract may be treated
as a section 403(b) contract if no election
has been made under section 83(b) with re-
spect to the contract, the participant’s in-
terest in the contract has been subject to
a substantial risk of forfeiture (as defined
in section 83) before becoming nonfor-
feitable, each contribution under the con-
tract that is subject to a different vesting
schedule is maintained in a separate ac-
count, and the contract has at all times sat-
isfied the requirements of paragraph (a) of
this section other than the nonforfeitabil-
ity requirement of paragraph (a)(2) of this
section. Thus, for example, for the cur-
rent year and each prior year, no contri-
bution can have been made to the con-
tract that would cause the contract to fail
to be a section 403(b) contract as a result
of contributions exceeding the limitations
of section 415 (except to the extent per-
mitted under paragraph (b)(2) of this sec-
tion) or to fail to satisfy the nondiscrimi-
nation rules described in §1.403(b)–5. See
also §1.403(b)–10(a)(1) for a special rule
in connection with termination of a section
403(b) plan.
(B)Partial vesting. For purposes of ap-
plying this paragraph (d), if only a por-
tion of a participant’s interest in a con-
tract becomes nonforfeitable in a year, then
the portion that is nonforfeitable and the
portion that fails to be nonforfeitable are
each treated as separate contracts. In ad-
dition, for purposes of applying this para-
graph (d), if a contribution is made to an
annuity contract in excess of the limita-
tions of section 415(c) and the excess is
maintained in a separate account, then the
portion of the contract that includes the ex-
cess contributions account and the remain-
der are each treated as separate contracts.
Thus, if an annuity contract that includes
an excess contributions account changes
from forfeitable to nonforfeitable during
a year, then the portion that is not attrib-
utable to the excess contributions account
constitutes a section 403(b) contract (as-
suming it otherwise satisfies the require-
ments to be a section 403(b) contract) and
is not included in gross income, and the
portion that is attributable to the excess
contributions account is included in gross
income in accordance with section 403(c).
See §1.403(b)–4(f) for additional rules.
Par.7.Sections 1.403(b)–4,
1.403(b)–5, 1.403(b)–6, 1.403(b)–7,
1.403(b)–8, 1.403(b)–9, 1.403(b)–10, and
1.403(b)–11 are added to read as follows:
§1.403(b)–4 Contribution limitations.
(a)Treatment of contributions in excess
of limitations. The exclusion provided
under §1.403(b)–3(a) applies to a par-
ticipant only if the amounts contributed
by the employer for the purchase of an
annuity contract for the participant do
not exceed the applicable limit under
sections 415 and 402(g), as described in
this section. Under §1.403(b)–3(a)(4),
a section 403(b) contract is required to
include the limits on elective deferrals
imposed by section 402(g), as described
in paragraph (c) of this section. See para-
graph (f) of this section for special rules
concerning excess contributions and de-
ferrals. Rollover contributions made to
a section 403(b) contract, as described in
§1.403(b)–10(d), are not taken into ac-
count for purposes of the limits imposed
by section 415, §1.403(b)–3(a)(9), section
402(g), §1.403(b)–3(a)(4), and this sec-
tion, but after-tax employee contributions
are taken into account under section 415,
§1.403(b)–3(a)(9), and paragraph (b) of
this section.
(b)Maximum annual contribution—(1)
General rule. In accordance with sec-
tion 415(a)(2) and §1.403(b)–3(a)(9),
the contributions for any participant un-
der a section 403(b) contract (namely,
employer nonelective contributions (in-
cluding matching contributions), section
403(b) elective deferrals, and after-tax
employee contributions) are not permit-
ted to exceed the limitations imposed
by section 415. Under section 415(c),
contributions are permitted to be made
for participants in a defined contribution
2007–36 I.R.B.505September 4, 2007

plan, subject to the limitations set forth
therein(whicharegenerallythelesser
of a dollar limit for a year or the partic-
ipant’s compensation for the year). For
purposes of section 415, contributions
made for a participant are aggregated to
the extent applicable under section 414(b),
(c), (m), (n), and (o). For purposes of
sections 415(a)(2), §§1.403(b)–1 through
1.403(b)–3, this section, and §§1.403(b)–5
through 1.403(b)–11, a contribution means
any annual addition, as defined in section
415(c).
(2)Special rules. See section 415(k)(4)
for a special rule under which contri-
butions to section 403(b) contracts are
generally aggregated with contributions
under other arrangements in applying sec-
tion 415. For purposes of applying section
415(c)(1)(B) (relating to compensation)
with respect to a section 403(b) contract,
except as provided in section 415(c)(3)(C),
a participant’s includible compensation (as
defined in §1.403(b)–2) is substituted for
the participant’s compensation, as de-
scribed in section 415(c)(3)(E). Any age
50 catch-up contributions under paragraph
(c)(2) of this section are disregarded in
applying section 415.
(c)Section 403(b) elective defer-
rals—(1)Basic limit under section
402(g)(1). In accordance with section
402(g)(1)(A), the section 403(b) elective
deferrals for any individual are included in
the individual’s gross income to the extent
the amount of such deferrals, plus all other
elective deferrals for the individual, for the
taxable year exceeds the applicable dollar
amount under section 402(g)(1)(B). The
applicable annual dollar amount under
section 402(g)(1)(B) is $15,000, adjusted
for cost-of-living after 2006 in the man-
ner described in section 402(g)(4). See
§1.403(b)–5(b) for a universal availability
rule that applies if any employee is per-
mitted to have any section 403(b) elective
deferrals made on his or her behalf.
(2)Age 50 catch-up—(i)In general.
In accordance with section 414(v) and the
regulations thereunder, a section 403(b)
contract may providefor catch-up con-
tributions for a participant who is age
50 by the end of the year, provided that
such age 50 catch-up contributions do
not exceed the catch-up limit under sec-
tion 414(v)(2) for the taxable year. The
maximum amount of additional age 50
catch-up contributions for a taxable year
under section 414(v) is $5,000, adjusted
for cost-of-living after 2006 in the man-
ner described in section 414(v)(2)(C). For
additional requirements, see regulations
under section 414(v).
(ii)Coordination with special section
403(b) catch-up. In accordance with sec-
tions 414(v)(6)(A)(ii) and 402(g)(7)(A),
the age 50 catch-up described in this para-
graph (c)(2) may apply for any taxable
year in which a participant also qualifies
for the special section 403(b) catch-up
under paragraph (c)(3) of this section.
(3)Special section 403(b) catch-up for
certain organizations—(i)Amount of the
special section 403(b) catch-up.Inthe
case of a qualified employee of a qualified
organization for whom the basic section
403(b) elective deferrals for any year are
not less than the applicable dollar amount
under section 402(g)(1)(B), the section
403(b) elective deferral limitation of sec-
tion 402(g)(1) for the taxable year of the
qualified employee is increased by the
least of—
(A) $3,000;
(B) The excess of—
(1) $15,000, over
(2) The total elective deferrals de-
scribed in section 402(g)(7)(A)(ii) made
for the qualified employee by the qualified
organization for prior years; or
(C) The excess of—
(1) $5,000 multiplied by the number of
years of service of the employee with the
qualified organization, over
(2) The total elective deferrals (as de-
fined at §1.403(b)–2) made for the em-
ployee by the qualified organization for
prior years.
(ii)Qualified organization.(A)For
purposes of this paragraph (c)(3),qualified
organizationmeans an eligible employer
that is—
(1) An educational organization de-
scribed in section 170(b)(1)(A)(ii);
(2)Ahospital;
(3) A health and welfare service agency
(including a home health service agency);
(4) A church-related organization; or
(5) Any organization described in sec-
tion 414(e)(3)(B)(ii).
(B) All entities thatare in a church-re-
lated organization or an organization con-
trolled by a church-related organization
under section 414(e)(3)(B)(ii) are treated
as a single qualified organization (so that
years of service and any special section
403(b) catch-up elective deferrals previ-
ously made for a qualified employee for a
church or other entity within a church-re-
lated organization or an organization con-
trolled by the church-related organization
are taken into account for purposes of
applying this paragraph (c)(3) to the em-
ployee with respect to any other entity
within the same church-related organ-
ization or organization controlled by a
church-related organization).
(C) For purposes of this paragraph
(c)(3)(ii), ahealth and welfare service
agencymeans—
(1
) An organization whose primary
activity is to provide services that con-
stitute medical care as defined in section
213(d)(1) (such as a hospice);
(2) A section 501(c)(3) organization
whose primary activity is the prevention
of cruelty to individuals or animals;
(3) An adoption agency; or
(4) An agency that provides substan-
tial personal services to the needy as part
of its primary activity (such as a section
501(c)(3) organization that either provides
meals to needy individuals, is a home
health service agency, provides services
to help individuals who have substance
abuse, or provides help to the disabled).
(iii)Qualified employee.Forpur-
poses of this paragraph (c)(3),qualified
employeemeans an employee who has
completed at least 15 years of service (as
defined under paragraph (e) of this sec-
tion) taking into account only employment
with the qualified organization. Thus,
an employee who has not completed at
least 15 years of service (as defined un-
der paragraph (e) of this section) taking
into account only employment with the
qualified organization is not a qualified
employee.
(iv)Coordination with age 50 catch-up.
In accordance with sections 402(g)(1)(C)
and 402(g)(7), any catch-up amount con-
tributed by an employee who is eligible
for both an age 50 catch-up and a special
section 403(b) catch-up is treated first as
an amount contributed as a special section
403(b) catch-up to the extent a special
section 403(b) catch-up is permitted, and
then as an amount contributed as an age
50 catch-up (to the extent the catch-up
amount exceeds the maximum special
section 403(b) catch-up after taking into
account sections 402(g) and 415(c), this
paragraph (c)(3), and any limitations on
September 4, 20075062007–36 I.R.B.

the special section403(b) catch-up that
are imposed by the terms of the plan).
(4)Coordination with designated Roth
contributions. See regulations under
section 402A for rules for determining
whether an elective deferral is a pre-tax
elective deferral or a designated Roth con-
tribution.
(5)Examples. The provisions of this
paragraph (c) are illustrated by the follow-
ing examples:
Example 1.(i)Facts illustrating application of
the basic dollar limit. Participant B, who is 45, is eli-
gible to participate in a State university section 403(b)
plan in 2006. B is not a qualified employee, as de-
fined in paragraph (c)(3)(iii) of this section. The plan
permits section 403(b) elective deferrals, but no other
employer contributions are made under the plan. The
plan provides limitations on section 403(b) elective
deferrals up to the maximum permitted under para-
graphs (c)(1) and (3) of this section and the additional
age 50 catch-up amount described in paragraph (c)(2)
of this section. For 2006, B will receive includible
compensation of $42,000 from the eligible employer.
B desires to elect to have the maximum section 403(b)
elective deferral possible contributed in 2006. For
2006, the basic dollar limit for section 403(b) elec-
tive deferrals under paragraph (c)(1) of this section is
$15,000 and the additional dollar amount permitted
under the age 50 catch-up is $5,000.
(ii)Conclusion. B is not eligible for the age 50
catch-up in 2006 because B is 45 in 2006. B is also
not eligible for the special section 403(b) catch-up
under paragraph (c)(3) of this section because B is
not a qualified employee. Accordingly, the maximum
section 403(b) elective deferral that B may elect for
2006 is $15,000.
Example 2.(i)Facts illustrating application of
the includible compensation limitation. The facts are
thesameasinExample 1, except B’s includible com-
pensation is $14,000.
(ii)Conclusion. Under section 415(c), contribu-
tions may not exceed 100 percent of includible com-
pensation. Accordingly, the maximum section 403(b)
elective deferral that B may elect for 2006 is $14,000.
Example 3.(i)Facts illustrating application of
the age 50 catch-up. Participant C, who is 55, is eli-
gible to participate in a State university section 403(b)
plan in 2006. The plan permits section 403(b) elec-
tive deferrals, but no other employer contributions are
made under the plan. The plan provides limitations
on section 403(b) elective deferrals up to the max-
imum permitted under paragraphs (c)(1) and (c)(3)
of this section and the additional age 50 catch-up
amount described in paragraph (c)(2) of this section.
For 2006, C will receive includible compensation of
$48,000 from the eligible employer. C desires to elect
to have the maximum section 403(b) elective defer-
ral possible contributed in 2006. For 2006, the basic
dollar limit for section 403(b) elective deferrals un-
der paragraph (c)(1) of this section is $15,000 and the
additional dollar amount permitted under the age 50
catch-up is $5,000. C does not have 15 years of ser-
vice and thus is not a qualified employee, as defined
in paragraph (c)(3)(iii) of this section.
(ii)Conclusion. C is eligible for the age 50
catch-up in 2006 because C is 55 in 2006. C is
not eligible for the special section 403(b) catch-up
under paragraph (c)(3) of this section because C is
not a qualified employee (as defined in paragraph
(c)(3)(iii) of this section). Accordingly, the max-
imum section 403(b) elective deferral that C may
elect for 2006 is $20,000 ($15,000 plus $5,000).
Example 4.(i)Facts illustrating application of
both the age 50 and the special section 403(b) catch-
up. ThefactsarethesameasinExample 3, except
that C is a qualified employee for purposes of the
special section 403(b) catch-up provisions in para-
graph (c)(3) of this section. For 2006, the maximum
additional section 403(b) elective deferral for which
C qualifies under the special section 403(b) catch-up
under paragraph (c)(3) of this section is $3,000.
(ii)Conclusion. The maximum section 403(b)
elective deferrals that C may elect for 2006 is
$23,000. This is the sum of the basic limit on sec-
tion 403(b) elective deferrals under paragraph (c)(1)
of this section equal to $15,000, plus the $3,000
additional special section 403(b) catch-up amount
for which C qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up amount
of $5,000.
Example 5.(i)Facts illustrating calculation of
years of service with a predecessor organization for
purposes of the special section 403(b) catch-up.Par-
ticipant A is an employee of hospital H and is eligible
to participate in a section 403(b) plan of H in 2006.
A does not have 15 years of service with H, but A has
previously made special section 403(b) catch-up de-
ferrals to a section 403(b) plan maintained by hospital
P which has since been acquired by H.
(ii)Conclusion. The special section 403(b)
catch-up amount for which A qualifies under para-
graph (c)(3) of this section must be calculated taking
into account A’s prior years of service and section
403(b) elective deferrals with the predecessor hospi-
tal if and only if A did not have any severance from
service in connection with the acquisition.
Example 6.(i)Facts illustrating application of
the age 50 catch-up and the section 415(c) dollar lim-
itation. The facts are the same as inExample 4, except
that the employer makes a nonelective contribution
for each employee equal to 20 percent of C’s com-
pensation (which is $48,000). Thus, the employer
makes a nonelective contribution for C for 2006 equal
to $9,600. The plan provides that a participant is not
permitted to make section 403(b) elective deferrals to
the extent the section 403(b) elective deferrals would
result in contributions in excess of the maximum per-
mitted under section 415 and provides that contri-
butions are reduced in the following order: the spe-
cial section 403(b) catch-up elective deferrals under
paragraph (c)(3) of this section are reduced first; the
age 50 catch-up elective deferrals under paragraph
(c)(2) of this section are reduced second; and then
the basic section 403(b) elective deferrals under para-
graph (c)(1) of this section are reduced. For 2006, the
applicable dollar limit under section 415(c)(1)(A) is
$44,000.
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $23,000.
This is the sum of the basic limit on section 403(b)
elective deferrals under paragraph (c)(1) of this sec-
tion equal to $15,000, plus the $3,000 additional spe-
cial section 403(b) catch-up amount for which C qual-
ifies under paragraph (c)(3) of this section, plus the
additional age 50 catch-up amount of $5,000. The
limit in paragraph (b) of this section would not be
exceeded because the sum of the $9,600 nonelective
contribution and the $23,000 section 403(b) elective
deferrals does not exceed the lesser of $49,000 (which
is the sum of $44,000 plus the $5,000 additional age
50 catch-up amount) or $53,000 (which is the sum of
C’s includible compensation for 2006 ($48,000) plus
the $5,000 additional age 50 catch-up amount).
Example 7.(i)Facts further illustrating applica-
tion of the age 50 catch-up and the section 415(c) dol-
lar limitation. The facts are the same as inExample
6, except that C’s includible compensation for 2006 is
$58,000 and the plan provides for a nonelective con-
tribution equal to 50 percent of includible compen-
sation, so that the employer nonelective contribution
for C for 2006 is $29,000 (50 percent of $58,000).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $20,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in section
415(c)(1)(A) plus the additional age 50 catch-up
amount, because the sum of the employer’s nonelec-
tive contribution of $29,000 plus a section 403(b)
elective deferral in excess of $20,000 would exceed
$49,000 (the sum of the $44,000 limit in section
415(c)(1)(A) plus the $5,000 additional age 50
catch-up amount). (Note that a section 403(b) elec-
tive deferral in excess of $20,000 would also exceed
the limitations of section 402(g) unless a special
section 403(b) catch-up were permitted.)
Example 8.(i)Facts further illustrating applica-
tion of the age 50 catch-up and the section 415(c) dol-
lar limitation. The facts are the same as inExample
7, except that the plan provides for a nonelective con-
tribution for C equal to $44,000 (which is the limit in
section 415(c)(1)(A)).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $5,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in sec-
tion 415(c)(1)(A) plus the additional age 50 catch-up
amount ($5,000), because the sum of the employer’s
nonelective contribution of $44,000 plus a section
403(b) elective deferral in excess of $5,000 would
exceed $49,000 (the sum of the $44,000 limit in sec-
tion 415(c)(1)(A) plus the $5,000 additional age 50
catch-up amount).
Example 9.(i)Facts illustrating application of
the age 50 catch-up and the section 415(c) includible
compensation limitation. The facts are the same as in
Example 7, except that C’s includible compensation
for 2006 is $28,000, so that the employer nonelective
contribution for C for 2006 is $14,000 (50 percent of
$28,000).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $19,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in section
415(c)(1)(B) plus the additional age 50 catch-up
amount, because C’s includible compensation is
$28,000 and the sum of the employer’s nonelective
contribution of $14,000 plus a section 403(b) elective
deferral in excess of $19,000 would exceed $33,000
(which is the sum of 100 percent of C’s includible
compensation plus the $5,000 additional age 50
catch-up amount).
Example 10.(i)Facts illustrating that section
403(b) elective deferrals cannot exceed compensa-
tion otherwise payable. Employee D is age 60, has in-
2007–36 I.R.B.507September 4, 2007

cludible compensation of $14,000, and wishes to con-
tribute section 403(b) elective deferrals of $20,000
for the year. No nonelective contributions are made
for Employee D.
(ii)Conclusion. Because a contribution is a
section 403(b) elective deferral only if it relates to
an amount that would otherwise be included in the
participant’s compensation, the effective limitation
on section 403(b) elective deferrals for a participant
whose compensation is less than the basic dollar
limit for section 403(b) elective deferrals is the
participant’s compensation. Thus, D cannot make
section 403(b) elective deferrals in excess of D’s
actual compensation, which is $14,000, even though
the basic dollar limit exceeds that amount.
Example 11.(i)Facts illustrating calculation of
the special section 403(b) catch-up. For 2006, em-
ployee E, who is age 53, is eligible to participate in
a section 403(b) plan of hospital H, which is a sec-
tion 501(c)(3) organization. H’s plan permits sec-
tion 403(b) elective deferrals and provides for an em-
ployer contribution of 10 percent of a participant’s
compensation. The plan provides limitations on sec-
tion 403(b) elective deferrals up to the maximum per-
mitted under paragraphs (c)(1), (2), and (3) of this
section. For 2006, E’s includible compensation is
$50,000. E wishes to elect to have the maximum
section 403(b) elective deferral possible contributed
in 2006. E has previously made $62,000 of section
403(b) elective deferrals under the plan, but has never
made an election for a special section 403(b) catch-up
elective deferral. For 2006, the basic dollar limit
for section 403(b) elective deferrals under paragraph
(c)(1) of this section is $15,000, the additional dol-
lar amount permitted under the age 50 catch-up is
$5,000, E’s employer will make a nonelective con-
tribution of $5,000 (10% of $50,000 compensation),
and E is a qualified employee of a qualified employer
as defined in paragraph (c)(3) of this section.
(ii)Conclusion. The maximum section 403(b)
elective deferrals that E may elect under H’s section
403(b) plan for 2006 is $23,000. This is the sum of
the basic limit on section 403(b) elective deferrals for
2006 under paragraph (c)(1) of this section equal to
$15,000, plus the $3,000 maximum additional special
section 403(b) catch-up amount for which D qualifies
in 2006 under paragraph (c)(3) of this section, plus
the additional age 50 catch-up amount of $5,000. The
limitation on the additional special section 403(b)
catch-up amount is not less than $3,000 because the
limitation at paragraph (c)(3)(i)(B) of this section
is $15,000 ($15,000 minus zero) and the limitation
at paragraph (c)(3)(i)(C) of this section is $13,000
($5,000 times 15, minus $62,000 of total deferrals in
prior years). These conclusions would be unaffected
if H were an eligible governmental employer under
section 457(b) that has a section 457(b) eligible gov-
ernmental plan and E were in the past to have made
annual deferrals to that plan, because contributions
to a section 457(b) eligible governmental plan do not
constitute elective deferrals; and these conclusions
would also be the same if H had a section 401(k) plan
andEwereinthepasttohavemadeelectivedeferrals
to that plan, assuming that those elective deferrals
did not exceed $10,000 ($5,000 times 15, minus the
sum of $62,000 plus $10,000, equals $3,000), so as
to result in the limitation at paragraph (c)(3)(i)(C) of
this section being less than $3,000.
Example 12.(i)Facts illustrating calculation
of the special section 403(b) catch-up in the next
calendar year. The facts are the same as inExample
11, except that, for 2007, E has includible compen-
sation of $60,000. For 2007, E now has previously
made $85,000 of section 403(b) elective deferrals
($62,000 deferred before 2006, plus the $15,000 in
basic section 403(b) elective deferrals in 2006, the
$3,000 maximum additional special section 403(b)
catch-up amount in 2006, plus the $5,000 age 50
catch-up amount in 2006). However, the $5,000 age
50 catch-up amount deferred in 2006 is disregarded
for purposes of applying the limitation at paragraph
(c)(3)(i)(B) of this section to determine the special
section 403(b) catch-up amount. Thus, for 2007,
only $80,000 of section 403(b) elective deferrals
are taken into account in applying the limitation at
paragraph (c)(3)(i)(B) of this section. For 2007,
the basic dollar limit for section 403(b) elective
deferrals under paragraph (c)(1) of this section is
assumed to be $16,000, the additional dollar amount
permitted under the age 50 catch-up is assumed to be
$5,000, and E’s employer contributes $6,000 (10%
of $60,000) as a non-elective contribution.
(ii)Conclusion. The maximum section 403(b)
elective deferral that D may elect under H’s section
403(b) plan for 2007 is $21,000. This is the sum
of the basic limit on section 403(b) elective defer-
rals under paragraph (c)(1) of this section equal to
$16,000, plus the additional age 50 catch-up amount
of $5,000. E is not entitled to any additional special
section 403(b) catch-up amount for 2007 under para-
graph (c)(3) of this section due to the limitation at
paragraph (c)(3)(i)(C) of this section (16 times $5,000
equals $80,000, minus D’s total prior section 403(b)
elective deferrals of $80,000 equals zero).
(d)Employer contributions for former
employees—(1)Includible compensation
deemed to continue for nonelective contri-
butions. For purposes of applying para-
graph (b) of this section, a former em-
ployee is deemed to have monthly includi-
ble compensation for the period through
the end of the taxable year of the employee
in which he or she ceases to be an em-
ployee and through the end of each of the
next five taxable years. The amount of the
monthly includible compensation is equal
to one twelfth of the former employee’s in-
cludible compensation during the former
employee’s most recent year of service.
Accordingly, nonelective employer contri-
butions for a former employee must not ex-
ceed the limitation of section 415(c)(1) up
to the lesser of the dollar amount in section
415(c)(1)(A) or the former employee’s an-
nual includible compensation based on the
former employee’s average monthly com-
pensation during his or her most recent
year of service.
(2)Examples. The provisions of para-
graph (d)(1) of this section are illustrated
by the following examples:
Example 1.(i)Facts.PrivatecollegeMisasec-
tion 501(c)(3) organization operated on the basis of
a June 30 fiscal year that maintains a section 403(b)
plan for its employees. In 2004, M amends the plan
to provide for a temporary early retirement incentive
under which the college will make a nonelective con-
tribution for any participant who satisfies certain min-
imum age and service conditions and who retires be-
fore June 30, 2006. The contribution will equal 110
percent of the participant’s rate of pay for one year
and will be payable over a period ending no later than
the end of the fifth fiscal year that begins after retire-
ment. It is assumed for purposes of thisExample 1
that, in accordance with §1.401(a)(4)–10(b) and un-
der the facts and circumstances, the post-retirement
contributions made for participants who satisfy the
minimum age and service conditions and retire be-
fore June 30, 2006, do not discriminate in favor of
former employees who are highly compensated em-
ployees. Employee A retires under the early retire-
ment incentive on March 12, 2006, and A’s annual
includible compensation for the period from March 1,
2005, through February 28, 2006 (which is A’s most
recent one year of service) is $30,000. The applicable
dollar limit under section 415(c)(1)(A) is assumed to
be $44,000 for 2006 and $45,000 for 2007. The col-
lege contributes $30,000 for A for 2006 and $3,000
for A for 2007 (totaling $33,000 or 110 percent of
$30,000). No other contributions are made to a sec-
tion 403(b) contract for A for those years.
(ii)Conclusion. The contributions made for A do
not exceed A’s includible compensation for 2006 or
2007.
Example 2.(i)Facts. Private college N is a sec-
tion 501(c)(3) organization that maintains a section
403(b) plan for its employees. The plan provides
for N to make monthly nonelective contributions
equal to 20 percent of the monthly includible com-
pensation for each eligible employee. In addition,
the plan provides for contributions to continue for
5 years following the retirement of any employee
after age 64 and completion of at least 20 years of
service (based on the employee’s average annual
rate of base salary in the preceding 3 calendar years
ended before the date of retirement). It is assumed
for purposes of thisExample 2that, in accordance
with §1.401(a)(4)–10(b) and under the facts and cir-
cumstances, the post-retirement contributions made
for participants who satisfy the minimum age and
service conditions do not discriminate in favor of
former employees who are highly compensated em-
ployees. Employee B retires on July 1, 2006, at age
64 after completion of 20 or more years of service.
At that date, B’s annual includible compensation for
the most recently ended fiscal year of N is $72,000
and B’s average monthly rate of base salary for 2003
through 2005 is $5,000. N contributes $1,200 per
month (20 percent of 1/12th of $72,000) from Jan-
uary of 2006 through June of 2006 and contributes
$1,000 (20 percent of $5,000) per month for B from
July of 2006 through June of 2011. The applicable
dollar limit under section 415(c)(1)(A) is $44,000 for
2006 through 2011. No other contributions are made
to a section 403(b) contract for B for those years.
(ii)Conclusion. The contributions made for B do
not exceed B’s includible compensation for any of the
years from 2006 through 2010.
Example 3.(i)Facts. A public university main-
tains a section 403(b) plan under which it contributes
September 4, 20075082007–36 I.R.B.

annually 10% of compensation for participants, in-
cluding for the first 5 calendar years following the
date on which the participant ceases to be an em-
ployee. The plan provides that if a participant who
is a former employee dies during the first 5 calen-
dar years following the date on which the participant
ceases to be an employee, a contribution is made that
is equal to the lesser of —
(A) The excess of the individual’s includible
compensation for that year over the contributions
previously made for the individual for that year; or
(B) The total contributions that would have been
made on the individual’s behalf thereafter if he or she
had survived to the end of the 5-year period.
(ii) Individual C’s annual includible compensa-
tion is $72,000 (so that C’s monthly includible com-
pensation is $6,000). A $600 contribution is made
for C for January of the first taxable year following
retirement (10% of individual C’s monthly includi-
ble compensation of $6,000). Individual C dies dur-
ing February of that year. The university makes a
contribution for individual C for February equal to
$11,400 (C’s monthly includible compensation for
January and February, reduced by $600).
(iii)Conclusion. The contribution does not ex-
ceed the amount of individual C’s includible com-
pensation for the taxable year for purposes of sec-
tion 415(c), but any additional contributions would
exceed C’s includible compensation for purposes of
section 415(c).
(3)Disabled employees. See also sec-
tion 415(c)(3)(C) which sets forth a spe-
cial rule under which compensation may
be treated as continuing for purposes of
section 415 for certain former employees
who are disabled.
(e)Special rules for determining years
of service—(1)In general. For purposes
of determining a participant’s includible
compensation under paragraph (b)(2) of
this section and a participant’s years of ser-
vice under paragraphs (c)(3) (special sec-
tion 403(b) catch-up for qualified employ-
ees of certain organizations) and (d) (em-
ployer contributions for former employ-
ees) of this section, an employee must be
credited with a full year of service for
each year during which the individual is
a full-time employee of the eligible em-
ployer for the entire work period, and a
fraction of a year for each part of a work
period during which the individual is a
full-time or part-time employee of the el-
igible employer. An individual’s number
of years of service equals the aggregate of
the annual work periods during which the
individual is employed by the eligible em-
ployer.
(2)Work period. A year of service is
based on the employer’s annual work pe-
riod, not the employee’s taxable year. For
example, in determining whether a univer-
sity professor is employed full time, the an-
nual work period is the school’s academic
year. However, in no case may an em-
ployee accumulate more than one year of
service in a twelve-month period.
(3)Service with more than one eligible
employer—(i)General rule. With respect
to any section 403(b) contract of an eligi-
ble employer, except as provided in para-
graph (e)(3)(ii) of this section, any period
during which an individual is not an em-
ployee of that eligible employer is disre-
garded for purposes of this paragraph (e).
(ii)Special rule for church employ-
ees. With respect to any section 403(b)
contract of an eligible employer that is a
church-related organization, any period
during which an individual is an employee
of that eligible employer and any other
eligible employer that is a church-related
organization that has an association (as
definedinsection414(e)(3)(D))withthat
eligible employer is taken into account on
an aggregated basis, but any period during
which an individual is not an employee
of a church-related organization or is an
employee of a church-related organization
that does not have an association with
that eligible employer is disregarded for
purposes of this paragraph (e).
(4)Full-time employee for full year.
Each annual work period during which an
individual is employed full time by the eli-
gible employer constitutes one year of ser-
vice. In determining whether an individual
is employed full-time, the amount of work
which he or she actually performs is com-
pared with the amount of work that is nor-
mally required of individuals performing
similar services fromwhich substantially
all of their annual compensation is derived.
(5)Other employees. (i) An individual
is treated as performing a fraction of a year
of service for each annual work period dur-
ing which he or she is a full-time employee
for part of the annual work period and for
each annual work period during which he
or she is a part-time employee either for the
entire annual work period or for a part of
the annual work period.
(ii) In determining the fraction that rep-
resents the fractional year of service for an
individual employed full time for part of an
annual work period, the numerator is the
period of time (such as weeks or months)
during which the individual is a full-time
employee during that annual work period,
and the denominator is the period of time
that is the annual work period.
(iii) In determining the fraction that rep-
resents the fractional year of service of an
individual who is employed part time for
the entire annual work period, the numer-
ator is the amount of work performed by
the individual, and the denominator is the
amount of work normally required of indi-
viduals who perform similar services and
who are employed full time for the entire
annual work period.
(iv) In determining the fraction repre-
senting the fractional year of service of an
individual who is employed part time for
part of an annual work period, the frac-
tional year of service that would apply if
the individual were a part-time employee
for a full annual work period is multiplied
by the fractional year of service that would
apply if the individual were a full-time em-
ployee for the part of an annual work pe-
riod.
(6)Work performed. For purposes
of this paragraph (e), in measuring the
amount of work of an individual per-
forming particular services, the work
performed is determined based on the
individual’s hours of service (as defined
under section 410(a)(3)(C)), except that
aplanmayuseadifferentmeasureof
work if appropriate under the facts and
circumstances. For example, a plan may
provide for a university professor’s work
to be measured by the number of courses
taught during an annual work period in
any case in which that individual’s work
assignment is generally based on a speci-
fied number of courses to be taught.
(7)Most recent one-year period of ser-
vice. For purposes of paragraph (d) of this
section, in the case of a part-time employee
or a full-time employee who is employed
for only part of the year determined on the
basis of the employer’s annual work pe-
riod, the employee’s most recent periods
of service are aggregated to determine his
or her most recent one-year period of ser-
vice. In such a case, there is first taken
into account his or her service during the
annual work period for which the last year
of service’s includible compensation is be-
ing determined; thenthere is taken into ac-
count his or her service during his or her
next preceding annual work period based
on whole months; and so forth, until the
employee’s service equals, in the aggre-
gate, one year of service.
(8)Less than one year of service con-
sidered as one year.If,atthecloseofa
2007–36 I.R.B.509September 4, 2007

taxable year, an employee has, after ap-
plication of all of the other rules in this
paragraph (e), some portion of one year of
service (but has accumulated less than one
year of service), the employee is deemed
to have one year of service. Except as pro-
vided in the previous sentence, fractional
years of service are not rounded up.
(9)Examples. The provisions of this
paragraph (e) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. Individual G is employed
half-time in 2004 and 2005 as a clerk by H, a hospital
which is a section 501(c)(3) organization. G earns
$20,000 from H in each of those years, and retires on
December 31, 2005.
(ii)Conclusion. For purposes of determining G’s
includible compensation during G’s last year of ser-
vice under paragraph (d) of this section, G’s most re-
cent periods of service are aggregated to determine
G’s most recent one-year period of service. In this
case, since D worked half-time in 2004 and 2005,
the compensation D earned in those two years are ag-
gregated to produce D’s includible compensation for
D’s last full year in service. Thus, in this case, the
$20,000 that D earned in 2004 and 2005 for D’s half-
time work are aggregated, so that D has $40,000 of in-
cludible compensation forD’s most recent one-year
of service for purposes of applying paragraphs (b)(2),
(c)(3), and (d) of this section.
Example 2.(i)Facts. Individual H is employed
as a part-time professor by public University U dur-
ing the first semester of its two-semester 2004-2005
academic year. While H teaches one course gener-
ally for 3 hours a week during the first semester of the
academic year, U’s full-time faculty members gener-
ally teach for 9 hours a week during the full academic
year.
(ii)Conclusion. For purposes of calculating how
much of a year of service H performs in the 2004-
2005 academic year (before application of the spe-
cial rules of paragraphs (e)(7)and(8)ofthissection
concerning less than one year of service), paragraph
(e)(5)(iv) of this section is applied as follows: since
H teaches one course at U for 3 hours per week for
1 semester and other faculty members at U teach 9
hours per week for 2 semesters, H is considered to
have completed 3/18 or 1/6 of a year of service during
the 2004-2005 academic year, determined as follows:
(A) The fractional year of service if H were a part-
time employee for a full year is 3/9 (number of hours
employed divided by the usual number of hours of
work required for that position).
(B) The fractional year of service if H were a full-
time employee for half of a year is
1
/2(one semester,
divided by the usual 2-semester annual work period).
(C) These fractions are multiplied to obtain the
fractional year of service: 3/9 times
1
/2,or3/18,
equals 1/6 of a year of service.
(f)Excess contributions or defer-
rals—(1)Inclusion in gross income.Any
contribution made for a participant to a
section 403(b) contract for the taxable
year that exceeds either the maximum
annual contribution limit set forth in para-
graph (b) of this section or the maximum
annual section 403(b) elective deferral
limit set forth in paragraph (c) of this
section constitutes an excess contribution
that is included in gross income for that
taxable year. See §1.403(b)–3(d)(1)(iii)
and (2)(i) for additional rules, including
special rules relating to contracts that fail
to be nonforfeitable. See also section
4973 for an excise tax applicable with re-
spect to excess contributions to a custodial
account and section 4979(f)(2)(B) for a
special rule applicable if excess matching
contributions, excess after-tax employee
contributions, and excess section 403(b)
elective deferrals do not exceed $100.
(2)Separate account required for cer-
tain excess contributions; distribution of
excess elective deferrals. A contract to
which a contribution is made that exceeds
the maximum annual contribution limit
set forth in paragraph (b) of this section
is not a section 403(b) contract unless the
excess contribution is held in a separate
account which constitutes a separate ac-
count for purposes of section 72. See also
§1.403(b)–3(a)(4) and paragraph (f)(4)
of this section for additional rules with
respect to the requirements of section
401(a)(30) and any excess deferral.
(3)Ability to distribute excess contribu-
tions. A contract does not fail to satisfy the
requirements of §1.403(b)–3, the distribu-
tion rules of §1.403(b)–6 or 1.403(b)–9, or
the funding rules of §1.403(b)–8 solely by
reason of a distribution made from a sepa-
rate account under paragraph (f)(2) of this
section or made under paragraph (f)(4) of
this section.
(4)Excess section 403(b) elective defer-
rals. A section 403(b) contract may pro-
vide that any excess deferral as a result
of a failure to comply with the limitation
under paragraph (c) of this section for a
taxable year with respect to any section
403(b) elective deferral made for a partici-
pant by the employer will be distributed to
the participant, with allocable net income,
no later than April 15 of the following tax-
able year or otherwise in accordance with
section 402(g). See section 402(g)(2)(A)
for rules permitting the participant to al-
locate excess deferrals among the plans in
which the participant has made elective de-
ferrals, and see section 402(g)(2)(C) for
special rules to determine the tax treatment
of such a distribution.
(5)Examples. The provisions of this
paragraph (f) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. Individual D’s employer
makes a $46,000 contribution for 2006 to an indi-
vidual annuity insurance policy for Individual D
that would otherwise be a section 403(b) contract.
The contribution does not include any elective de-
ferrals and the applicable limit under section 415(c)
is $44,000 for 2006. The $2,000 section 415(c)
excess is put into a separate account under the policy.
Employer includes $2,000 in D’s gross income as
wages for 2006 and, to the extent of the amount held
in the separate account for the section 415(c) excess
contribution, does not treat the account as a contract
to which section 403(b) applies.
(ii)Conclusion. The separate account for the sec-
tion 415(c) excess contribution is a contract to which
section 403(c) applies, but the excess contribution
does not cause the rest of the contract to fail section
403(b).
Example 2.(i)Facts. Same facts asExample 1,
except that the contribution is made to purchase mu-
tual funds that are held in acustodial account, instead
of an individual annuity insurance policy.
(ii)Conclusion. The conclusion is the same as
inExample 1, except that the purchase constitutes a
transfer described in section 83.
Example 3.(i)Facts. Same facts asExample 1,
except that the amount heldin the separate account
for the section 415(c) excess contribution is subse-
quently distributed to D.
(ii)Conclusion. The distribution is included in
gross income to the extent provided under section 72
relating to distributions from a section 403(c) con-
tract.
Example 4.(i)Facts. Individual E makes section
403(b) elective deferrals totaling $15,500 for 2006,
when E is age 45 and the applicable limit on section
403(b) elective deferrals is $15,000. On April 14,
2007, the plan refunds the $500 excess along with
applicable earnings of $65.
(ii)Conclusion. The $565 payment constitutes
a distribution of an excess deferral under paragraph
(f)(4) of this section. Under section 402(g), the $500
excess deferral is included in E’s gross income for
2006. The additional $65 is included in E’s gross
income for 2007 and, becausethe distribution is made
by April 15, 2007 (as provided in section 402(g)(2)),
the $65 is not subject to the additional 10 percent
income tax on early distributions under section 72(t).
§1.403(b)–5 Nondiscrimination rules.
(a)Nondiscrimination rules for contri-
butions other than section 403(b) elective
deferrals—(1)General rule. Under sec-
tion 403(b)(12)(A)(i), employer contribu-
tions and after-tax employee contributions
to a section 403(b) plan must satisfy all
of the following requirements (the nondis-
crimination requirements) in the same
manner as a qualified plan under section
401(a):
(i) Section 401(a)(4) (relating to
nondiscrimination in contributions and
September 4, 20075102007–36 I.R.B.

benefits), taking section 401(a)(5) into
account.
(ii) Section 401(a)(17) (limiting the
amount of compensation that can be taken
into account).
(iii) Section 401(m) (relating to match-
ing and after-tax employee contributions).
(iv) Section 410(b) (relating to mini-
mum coverage).
(2)Nonapplication to section 403(b)
elective deferrals. The requirements of
this paragraph (a) do not apply to section
403(b) elective deferrals.
(3)Compensation for testing. Except
as may otherwise be specifically permitted
under the provisions referenced in para-
graph (a)(1) of this section, compliance
with those provisions is tested using com-
pensation as defined in section 414(s) (and
without regard to section 415(c)(3)(E)). In
addition, for purposes of paragraph (a)(1)
of this section, there may be excluded em-
ployees who are permitted to be excluded
under paragraph (b)(4)(ii)(D) and (E) of
this section. However, as provided in para-
graph (b)(4)(i) of this section, the exclu-
sion of any employee listed in paragraph
(b)(4)(ii)(D) or (E) of this section is sub-
ject to the conditionsapplicable under sec-
tion 410(b)(4).
(4)Employer aggregation rules.See
regulations under section 414(b), (c), (m),
and (o) for rules treating entities as a single
employer for purposes of the nondiscrimi-
nation requirements.
(5)Special rules for governmental
plans. Paragraphs (a)(1)(i), (iii), and (iv)
of this section do not apply to a govern-
mental plan as defined in section 414(d)
(but contributions to a governmental plan
must comply with paragraphs (a)(1)(ii)
and (b) of this section).
(b)Universal availability required
for section 403(b) elective defer-
rals—(1)General rule. Under section
403(b)(12)(A)(ii), all employees of the
eligible employer must be permitted to
have section 403(b) elective deferrals con-
tributed on their behalf if any employee of
the eligible employer may elect to have the
organization make section 403(b) elective
deferrals. Further, the employee’s right to
make elective deferrals also includes the
right to designate section 403(b) elective
deferrals as designated Roth contributions.
(2)Effective opportunity required.For
purposes of paragraph (b)(1) of this sec-
tion, an employee is not treated as being
permitted to have section 403(b) elective
deferrals contributed on the employee’s
behalf unless the employee is provided
an effective opportunity that satisfies the
requirements of this paragraph (b)(2).
Whether an employee has an effective
opportunity is determined based on all
the relevant facts and circumstances, in-
cluding notice of the availability of the
election, the period of time during which
an election may be made, and any other
conditions on elections. A section 403(b)
plan satisfies the effective opportunity
requirement of this paragraph (b)(2) only
if, at least once during each plan year,
the plan provides an employee with an
effective opportunity to make (or change)
a cash or deferred election (as defined
at §1.401(k)–1(a)(3)) between cash or a
contribution to the plan. Further, an effec-
tive opportunity includes the right to have
section 403(b) elective deferrals made on
his or her behalf up to the lesser of the
applicable limits in §1.403(b)–4(c) (in-
cluding any permissible catch-up elective
deferrals under §1.403(b)–4(c)(2) and (3))
or the applicable limits under the contract
with the largest limitation, and applies to
part-time employees as well as full-time
employees. An effective opportunity is not
considered to exist if there are any other
rights or benefits (other than rights or ben-
efits listed in §1.401(k)–1(e)(6)(i)(A), (B),
or (D)) that are conditioned (directly or
indirectly) upon a participant making or
failing to make a cash or deferred election
with respect to a contribution to a section
403(b) contract.
(3)Special rules. (i) In the case of
a section 403(b) plan that covers the em-
ployees of more than one section 501(c)(3)
organization, the universal availability re-
quirement of this paragraph (b) applies
separately to each common law entity
(that is, applies separately to each sec-
tion 501(c)(3) organization). In the case
of a section 403(b) plan that covers the
employees of more than one State entity,
this requirement applies separately to each
entity that is not part of a common payroll.
An eligible employer may condition the
employee’s right to have section 403(b)
elective deferrals made on his or her behalf
on the employee electing a section 403(b)
elective deferral of more than $200 for a
year.
(ii) For purposes of this paragraph
(b)(3), an employer that historically has
treated one or more of its various geo-
graphically distinct units as separate for
employee benefit purposes may treat each
unit as a separate organization if the unit
is operated independently on a day-to-day
basis. Units are not geographically dis-
tinct if such units are located within the
same Standard Metropolitan Statistical
Area (SMSA).
(4)Exclusions—(i)Exclusions for spe-
cial types of employees. A plan does not
fail to satisfy the universal availability
requirement of this paragraph (b) merely
because it excludes one or more of the
types of employees listed in paragraph
(b)(4)(ii) of this section. However, the
exclusion of any employee listed in para-
graph (b)(4)(ii)(D) or (E) of this section
is subject to the conditions applicable
under section 410(b)(4). Thus, if any em-
ployee listed in paragraph (b)(4)(ii)(D) of
this section has the right to have section
403(b) elective deferrals made on his or
her behalf, then no employee listed in that
paragraph (b)(4)(ii)(D) of this section may
be excluded under this paragraph (b)(4)
and, if any employee listed in paragraph
(b)(4)(ii)(E) of this section has the right
to have section 403(b) elective deferrals
made on his or her behalf, then no em-
ployee listed in that paragraph (b)(4)(ii)(E)
of this section may be excluded under this
paragraph (b)(4).
(ii)List of special types of excludi-
ble employees. The following types of
employees are listed in this paragraph
(b)(4)(ii):
(A) Employees who are eligible under
another section 403(b) plan, or a section
457(b) eligible governmental plan, of the
employer which permits an amount to be
contributed or deferred at the election of
the employee.
(B) Employees who are eligible to make
a cash or deferred election (as defined at
§1.401(k)–1(a)(3)) under a section 401(k)
plan of the employer.
(C) Employees who are non-resident
aliens described in section 410(b)(3)(C).
(D) Subject to the conditions applica-
ble under section 410(b)(4) (including sec-
tion 410(b)(4)(B) permitting separate test-
ing for employees not meeting minimum
age and service requirements), employees
who are students performing services de-
scribed in section 3121(b)(10).
(E) Subject to the conditions applicable
under section 410(b)(4), employees who
2007–36 I.R.B.511September 4, 2007

normally work fewer than 20 hours per
week (or such lower number of hours per
week as may be set forth in the plan).
(iii)Special rules. (A) A section 403(b)
plan is permitted to take into account cov-
erage under another plan, as permitted in
paragraphs (b)(4)(ii)(A) and (B) of this
section, only if the rights to make elec-
tive deferrals with respect to that coverage
would satisfy paragraphs (b)(2) and (4)(i)
of this section if that coverage were pro-
vided under the section 403(b) plan.
(B) For purposes of paragraph
(b)(4)(ii)(E) of this section, an employee
normally works fewer than 20 hours per
week if and only if—
(1) For the 12-month period beginning
on the date the employee’s employment
commenced, the employer reasonably ex-
pects the employee to work fewer than
1,000 hours of service (as defined in sec-
tion 410(a)(3)(C)) in such period; and
(2) For each plan year ending after the
close of the 12-month period beginning
on the date the employee’s employment
commenced (or, if the plan so provides,
each subsequent 12-month period), the
employee worked fewer than 1,000 hours
of service in the preceding 12-month pe-
riod. (See, however, section 202(a)(1) of
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA) (88 Stat. 829)
Public Law 93–406, and regulations under
section 410(a) of the Internal Revenue
Code applicable with respect to plans that
are subject to Title I of ERISA.)
(c)Plan required. Contributions to an
annuity contract do not satisfy the require-
ments of this section unless the contribu-
tions are made pursuant to a plan, as de-
fined in §1.403(b)–3(b)(3), and the terms
of the plan satisfy this section.
(d)Church plans exception. This sec-
tion does not apply to a section 403(b) con-
tract purchased by a church (as defined in
§1.403(b)–2).
(e)Other rules. This section only re-
flects requirements of the Internal Rev-
enue Code applicable for purposes of sec-
tion 403(b) and does not include other re-
quirements. Specifically, this section does
not reflect the requirements of ERISA that
may apply with respect to section 403(b)
arrangements, such as the vesting require-
ments at 29 U.S.C. 1053.
§1.403(b)–6 Timing of distributions and
benefits.
(a)Distributions generally. This sec-
tion provides special rules regarding the
timing of distributions from, and the ben-
efits that may be provided under, a section
403(b) contract, including limitations on
when early distributions can be made (in
paragraphs (b) through (d) of this section),
required minimum distributions (in para-
graph (e) of this section), and special rules
relating to loans (in paragraph (f) of this
section) and incidental benefits (in para-
graph (g) of this section).
(b)Distributions from contracts other
than custodial accounts or amounts attrib-
utable to section 403(b) elective deferrals.
Except as provided in paragraph (c) of
this section relating to distributions from
custodial accounts, paragraph (d) of this
section relating to distributions attribut-
able to section 403(b) elective deferrals,
§1.403(b)–4(f) (relating to correction
of excess deferrals), or §1.403(b)–10(a)
(relating to plan termination), a section
403(b) contract is permitted to distribute
retirement benefits to the participant no
earlier than upon the earlier of the par-
ticipant’s severance from employment or
upon the prior occurrence of some event,
such as after a fixed number of years, the
attainment of a stated age, or disability.
See §1.401–1(b)(1)(ii) for additional guid-
ance. This paragraph (b) does not apply to
after-tax employee contributions or earn-
ings thereon.
(c)Distributions from custodial ac-
counts that are not attributable to sec-
tion 403(b) elective deferrals. Except
as provided in §1.403(b)–4(f) (relat-
ing to correction of excess deferrals)
or §1.403(b)–10(a) (relating to plan ter-
mination), distributions from a custodial
account, as defined in §1.403(b)–8(d)(2),
may not be paid to a participant before the
participant has a severance from employ-
ment, dies, becomes disabled (within the
meaning of section 72(m)(7)), or attains
age 59
1
/2. Any amounts transferred out of
a custodial account toan annuity contract
or retirement income account, including
earnings thereon, continue to be subject to
this paragraph (c). This paragraph (c) does
not apply to distributions that are attribut-
able to section 403(b)elective deferrals.
(d)Distribution of section 403(b) elec-
tive deferrals—(1)Limitation on dis-
tributions—(i)General rule. Except
as provided in §1.403(b)–4(f) (relat-
ing to correction of excess deferrals) or
§1.403(b)–10(a) (relating to plan termina-
tion), distributions of amounts attributable
to section 403(b) elective deferrals may
not be paid to a participant earlier than the
earliest of the date on which the partici-
pant has a severance from employment,
dies, has a hardship, becomes disabled
(within the meaning of section 72(m)(7)),
or attains age 59
1
/2.
(ii)Special rule for pre-1989 section
403(b) elective deferrals. For special rules
relating to amounts held as of the close
of the taxable year beginning before Jan-
uary 1, 1989 (which does not apply to
earnings thereon), see section 1123(e)(3)
of the Tax Reform Act of 1986 (100 Stat.
2085, 2475) Public Law 99–514, and sec-
tion 1011A(c)(11) of the Technical and
Miscellaneous Revenue Act of 1988 (102
Stat. 3342, 3476) Public Law 100–647.
(2)Hardship rules. A hardship dis-
tribution under this paragraph (d) has the
same meaning as a distribution on account
of hardship under §1.401(k)–1(d)(3) and
is subject to the rules and restrictions set
forth in §1.401(k)–1(d)(3) (including lim-
iting the amount of a distribution in the
case of hardship to the amount necessary
to satisfy the hardship). In addition, a hard-
ship distribution is limited to the aggregate
dollar amount of the participant’s section
403(b) elective deferrals under the contract
(and may not include any income thereon),
reduced by the aggregate dollar amount of
the distributions previously made to the
participant from the contract.
(3)Failure to keep separate accounts.
If a section 403(b) contract includes both
section 403(b) elective deferrals and other
contributions and thesection 403(b) elec-
tive deferrals are not maintained in a sepa-
rate account, then distributions may not be
made earlier than the later of—
(i) Any date permitted under paragraph
(d)(1) of this section; and
(ii) Any date permitted under paragraph
(b) or (c) of this section with respect to
contributions that are not section 403(b)
elective deferrals (whichever applies to the
contributions that are not section 403(b)
elective deferrals).
(e)Minimum required distributions for
eligible plans—(1)In general. Under sec-
tion 403(b)(10), a section 403(b) contract
must meet the minimum distribution re-
September 4, 20075122007–36 I.R.B.

quirements of section 401(a)(9) (in both
form and operation). See section 401(a)(9)
for these requirements.
(2)Treatment as IRAs. For purposes
of applying the distribution rules of sec-
tion 401(a)(9) to section 403(b) contracts,
the minimum distribution rules appli-
cable to individual retirement annuities
described in section 408(b) and individual
retirement accounts described in section
408(a) apply to section 403(b) contracts.
Consequently, except as otherwise pro-
vided in paragraphs (e)(3) through (e)(5)
of this section, the distribution rules in
section 401(a)(9) are applied to section
403(b) contracts in accordance with the
provisions in §1.408–8 for purposes of
determining required minimum distribu-
tions.
(3)Required beginning date.There-
quired beginning date for purposes of sec-
tion 403(b)(10) is April 1 of the calen-
dar year following the later of the calen-
dar year in which the employee attains age
70
1
/2or the calendar year in which the em-
ployee retires from employment with the
employer maintaining the plan. However,
for any section 403(b) contract that is not
part of a governmental plan or church plan,
the required beginning date for a 5-percent
owner is April 1 of the calendar year fol-
lowing the calendar year in which the em-
ployee attains age 70
1
/2.
(4)Surviving spouse rule does not ap-
ply. The special rule in §1.408–8, A–5 (re-
lating to spousal beneficiaries), does not
apply to a section 403(b) contract. Thus,
the surviving spouse of a participant is not
permitted to treat a section 403(b) contract
as the spouse’s own section 403(b) con-
tract, even if the spouse is the sole bene-
ficiary.
(5)Retirement income accounts.For
purposes of §1.401(a)(9)–6, A–4 (relating
to annuity contracts), annuity payments
provided with respect to retirement in-
come accounts do not fail to satisfy the
requirements of section 401(a)(9) merely
because the payments are not made un-
der an annuity contract purchased from
an insurance company, provided that the
relationship between the annuity pay-
ments and the retirement income accounts
is not inconsistent with any rules pre-
scribed by the Commissioner in revenue
rulings, notices, or other guidance pub-
lished in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b) of this chapter).
See also §1.403(b)–9(a)(5) for additional
rules relating to annuities payable from a
retirement income account).
(6)Special rules for benefits accruing
before December 31, 1986. (i) The distri-
bution rules provided in section 401(a)(9)
do not apply to the undistributed portion
of the account balance under the section
403(b) contract valued as of December 31,
1986, exclusive of subsequent earnings
(pre-’87 account balance). The distribu-
tion rules provided in section 401(a)(9)
apply to all benefits under section 403(b)
contracts accruing after December 31,
1986 (post-’86 account balance), includ-
ing earnings after December 31, 1986.
Consequently, the post-’86 account bal-
ance includes earnings after December
31, 1986, on contributions made before
January 1, 1987, in addition to the con-
tributions made after December 31, 1986,
and earnings thereon.
(ii) The issuer or custodian of the sec-
tion 403(b) contractmust keep records
that enable it to identify the pre-’87 ac-
count balance and subsequent changes
as set forth in paragraph (d)(6)(iii) of
this section and provide such information
upon request to the relevant employee or
beneficiaries with respect to the contract.
If the issuer or custodian does not keep
such records, the entire account balance is
treated as subject to section 401(a)(9).
(iii) In applying the distribution rules
in section 401(a)(9), only the post-’86 ac-
count balance is used to calculate the re-
quired minimum distribution for a calen-
dar year. The amount of any distribution
from a contract is treated as being paid
from the post-’86 account balance to the
extent the distribution is required to sat-
isfy the minimum distribution requirement
with respect to that contract for a calendar
year. Any amount distributed in a calen-
dar year from a contract in excess of the
required minimum distribution for a cal-
endar year with respect to that contract is
treated as paid from the pre-’87 account
balance, if any, of that contract.
(iv) If an amount is distributed from the
pre-’87 account balance and rolled over
to another section 403(b) contract, the
amount is treated as part of the post-’86
account balance in that second contract.
However, if the pre-’87 account bal-
ance under a section 403(b) contract
is directly transferred to another sec-
tion 403(b) contract (as permitted under
§1.403(b)–10(b)), the amount transferred
retains its character as a pre-’87 account
balance, provided the issuer of the trans-
feree contract satisfies the recordkeeping
requirements of paragraph (e)(6)(ii) of this
section.
(v) The distinction between the pre-’87
account balance and the post-’86 account
balance provided for under this paragraph
(e)(6) of this section has no relevance for
purposes of determining the portion of a
distribution that is includible in income un-
der section 72.
(vi) The pre-’87 account balance
must be distributed in accordance with
the incidental benefit requirement of
§1.401–1(b)(1)(i). Distributions attrib-
utable to the pre-’87 account balance are
treated as satisfying this requirement if all
distributions from the section 403(b) con-
tract (including distributions attributable
to the post-’86 account balance) satisfy the
requirements of §1.401–1(b)(1)(i) without
regard to this section, and distributions
attributable to the post-’86 account bal-
ance satisfy the rules of this paragraph (e)
(without regard to this paragraph (e)(6)).
Distributions attributable to the pre-’87
account balance are treated as satisfying
the incidental benefit requirement if all
distributions from the section 403(b) con-
tract (including distributions attributable
to both the pre-’87 account balance and
the post-’86 account balance) satisfy the
rules of this paragraph (e) (without regard
to this paragraph (e)(6)).
(7)Application to multiple contracts
for an employee. The required minimum
distribution must be separately determined
for each section 403(b) contract of an em-
ployee. However, because, as provided in
paragraph (e)(2) of this section, the dis-
tribution rules in section 401(a)(9) apply
to section 403(b) contracts in accordance
with the provisions in §1.408–8, the re-
quired minimum distribution from one
section 403(b) contract of an employee
is permitted to be distributed from an-
other section 403(b) contract in order to
satisfy section 401(a)(9). Thus, as pro-
vided in §1.408–8, A–9, with respect to
IRAs, the required minimum distribution
amount from each contract is then totaled
and the total minimum distribution taken
from any one or more of the individual
section 403(b) contracts. However, con-
sistent with the rules in §1.408–8, A–9,
only amounts in section 403(b) contracts
2007–36 I.R.B.513September 4, 2007

that an individual holds as an employee
may be aggregated. Amounts in section
403(b) contracts that an individual holds
as a beneficiary of the same decedent may
be aggregated, but such amounts may not
be aggregated with amounts held in sec-
tion 403(b) contracts that the individual
holds as the employee or as the beneficiary
of another decedent. Distributions from
section 403(b) contracts do not satisfy
the minimum distribution requirements
for IRAs, nor do distributions from IRAs
satisfy the minimum distribution require-
ments for section 403(b) contracts.
(f)Loans. The determination of
whether the availability of a loan, the
making of a loan, or a failure to repay
a loan made from an issuer of a section
403(b) contract to a participant or benefi-
ciary is treated as a distribution (directly or
indirectly) for purposes of this section, and
the determination of whether the availabil-
ity of the loan, the making of the loan, or
a failure to repay the loan is in any other
respect a violation of the requirements of
section 403(b) and §§1.403(b)–1 through
1.403(b)–5, this section and §§1.403(b)–7
through 1.403(b)–11 depends on the facts
and circumstances. Among the facts and
circumstances are whether the loan has
a fixed repayment schedule and bears a
reasonable rate of interest, and whether
there are repayment safeguards to which
a prudent lender would adhere. Thus, for
example, a loan must bear a reasonable
rate of interest in order to be treated as
not being a distribution. However, a plan
loan offset is a distribution for purposes
of this section. See §1.72(p)–1, Q&A–13.
See also §1.403(b)–7(d) relating to the
application of section 72(p) with respect
to the taxation of a loan made under a sec-
tion 403(b) contract. (Further, see section
408(b)(1) of Title I of ERISA and 29 CFR
2550.408b–1 of the Department of Labor
regulations concerning additional require-
ments applicable with respect to plans that
are subject to Title I of ERISA.)
(g)Death benefits and other inci-
dental benefits. An annuity is not a
section 403(b) contract if it fails to sat-
isfy the incidental benefit requirement
of §1.401–1(b)(1)(ii) (in form or in op-
eration). For purposes of this paragraph
(g), to the extent the incidental benefit re-
quirement of §1.401–1(b)(1)(ii) requires a
distribution of the participant’s or benefi-
ciary’s accumulated benefit, that require-
ment is deemed to be satisfied if distri-
butions satisfy the minimum distribution
requirements of section 401(a)(9). In ad-
dition, if a contract issued by an insurance
company qualified to issue annuities in a
State includes provisions under which, in
the event a participant becomes disabled,
benefits will be provided by the insur-
ance carrier as if employer contributions
were continued until benefit distribution
commences, then that benefit is treated
as an incidental benefit (as insurance for
a deferred annuity benefit in the event of
disability) that must satisfy the incidental
benefit requirement of §1.401–1(b)(1)(ii)
(taking into account any other incidental
benefits provided under the plan).
(h)Special rule regarding severance
from employment. For purposes of this
section, severance from employment oc-
curs on any date on which an employee
ceases to be an employee of an eligible
employer, even though the employee may
continue to be employed either by another
entity that is treated as the same employer
where either that other entity is not an en-
tity that can be an eligible employer (such
as transferring froma section 501(c)(3)
organization to a for-profit subsidiary of
the section 501(c)(3) organization) or in a
capacity that is not employment with an
eligible employer (for example, ceasing to
be an employee performing services for a
public school but continuing to work for
the same State employer). Thus, this para-
graph (h) does not apply if an employee
transfers from one section 501(c)(3) or-
ganization to another section 501(c)(3)
organization that is treated as the same
employer or if an employee transfers from
one public school to another public school
of the same State employer.
(i)Certain limitations do not apply
to rollover contributions. The limita-
tions on distributions in paragraphs (b)
through (d) of this section do not apply
to amounts held in a separate account for
eligible rollover distributions as described
in §1.403(b)–10(d).
§1.403(b)–7 Taxation of distributions and
benefits.
(a)General rules for when amounts are
included in gross income. Except as pro-
vided in this section (or in §1.403(b)–10(c)
relating to payments pursuant to a qual-
ified domestic relations order), amounts
actually distributed from a section 403(b)
contract are includible in the gross income
of the recipient participant or beneficiary
(in the year in which so distributed) un-
der section 72 (relating to annuities). For
an additional income tax that may apply to
certain early distributions that are includi-
ble in gross income, see section 72(t).
(b)Rollovers to individual retire-
ment arrangements and other eligible
retirement plans—(1)Timing of taxation
of rollovers. In accordance with sec-
tions 402(c), 403(b)(8), and 403(b)(10),
a direct rollover in accordance with sec-
tion 401(a)(31) is not includible in the
gross income of a participant or benefi-
ciary in the year rolled over. In addition,
any payment made in the form of an el-
igible rollover distribution (as defined
in section 402(c)(4)) is not includible
in gross income in the year paid to the
extent the payment is contributed to an
eligible retirement plan (as defined in sec-
tion 402(c)(8)(B)) within 60 days, includ-
ing the contribution to the eligible retire-
ment plan of any property distributed. For
this purpose, the rules of section 402(c)(2)
through (7) and (c)(9) apply. Thus, to the
extent that a portion of a distribution (in-
cluding a distribution from a designated
Roth account) would be excluded from
gross income if it were not rolled over,
if that portion of the distribution is to be
rolled over into an eligible retirement plan
that is not an IRA, the rollover must be
accomplished through a direct rollover of
the entire distribution to a plan qualified
under section 401(a) or section 403(b)
plan and that plan must agree to separately
account for the amount not includible in
income (so that a 60-day rollover to a plan
qualified under section 401(a) or another
section 403(b) plan is not available for this
portion of the distribution). Any direct
rollover under this paragraph (b)(1) is a
distribution that is subject to the distribu-
tion requirements of §1.403(b)–6.
(2)Requirement that contract provide
rollover options for eligible rollover distri-
butions. As required in §1.403(b)–3(a)(7),
an annuity contract is not a section 403(b)
contract unless the contract provides that if
the distributee of an eligible rollover distri-
bution elects to have the distribution paid
directly to an eligible retirement plan (as
defined in section 402(c)(8)(B)) and spec-
ifies the eligible retirement plan to which
the distribution is to be paid, then the dis-
September 4, 20075142007–36 I.R.B.

tribution will be paid to that eligible retire-
ment plan in a direct rollover. For pur-
poses of determining whether a contract
satisfies this requirement, the provisions of
section 401(a)(31) apply to the annuity as
though it were a plan qualified under sec-
tion 401(a) unless otherwise provided in
section 401(a)(31). Thus, the special rule
in §1.401(k)–1(f)(3)(ii) with respect to dis-
tributions from a designated Roth account
that are expected to total less than $200
during a year applies to designated Roth
accounts under a section 403(b) plan. In
applying the provisions of this paragraph
(b)(2), the payor of the eligible rollover
distribution from the contract is treated as
the plan administrator.
(3)Requirement that contract payor
provide notice of rollover option to dis-
tributees. To ensure that the distributee of
an eligible rollover distribution from a sec-
tion 403(b) contract has a meaningful right
to elect a direct rollover, section 402(f) re-
quires that the distributee be informed of
the option. Thus, within a reasonable time
period before making the initial eligible
rollover distribution, the payor must pro-
vide an explanation to the distributee of his
or her right to elect a direct rollover and the
income tax withholding consequences of
not electing a direct rollover. For purposes
of satisfying the reasonable time period
requirement, the plan timing rule provided
in section 402(f)(1) and §1.402(f)–1 ap-
plies to section 403(b) contracts.
(4)Mandatory withholding upon cer-
tain eligible rollover distributions from
contracts. If a distributee of an eligible
rollover distribution from a section 403(b)
contract does not elect to have the eli-
gible rollover distribution paid directly
to an eligible retirement plan in a direct
rollover, the eligible rollover distribution
is subject to 20-percent income tax with-
holding imposed under section 3405(c).
See section 3405(c) and §31.3405(c)–1
of this chapter for provisions regarding
the withholding requirements relating to
eligible rollover distributions.
(5)Automatic rollover for certain
mandatory distributions under section
401(a)(31). In accordance with section
403(b)(10), a section 403(b) plan is re-
quired to comply withsection 401(a)(31)
(including automatic rollover for certain
mandatory distributions) in the same man-
ner as a qualified plan.
(c)Special rules.See section
402(g)(2)(C) for special rules to determine
the tax treatment of a distribution of excess
deferrals, and see §1.401(m)–1(e)(3)(v)
for the tax treatment of corrective distribu-
tions of after-tax employee contributions
and matching contributions to comply
with section 401(m). See sections 402(l)
and 403(b)(2) for a special rule regard-
ing distributions for certain retired public
safety officers made from a governmen-
tal plan for the direct payment of certain
premiums.
(d)Amounts taxable under section
72(p)(1). In accordance with section
72(p), the amount of any loan from a
section 403(b) contract to a participant
or beneficiary (including any pledge or
assignment treated as a loan under section
72(p)(1)(B)) is treated as having been re-
ceived as a distribution from the contract
under section 72(p)(1), except to the ex-
tent set forth in section 72(p)(2) (relating
to loans that do not exceed a maximum
amount and that are repayable in accor-
dance with certain terms) and §1.72(p)–1.
See generally §1.72(p)–1. Thus, except to
the extent a loan satisfies section 72(p)(2),
any amount loaned from a section 403(b)
contract to a participant or beneficiary (in-
cluding any pledge or assignment treated
as a loan under section 72(p)(1)(B)) is
includible in the gross income of the par-
ticipant or beneficiary for the taxable year
in which the loan is made. A deemed
distribution is not an actual distribution
for purposes of §1.403(b)–6, as provided
at §1.72(p)–1, Q&A–12 and Q&A–13.
(Further, see section 408(b)(1) of Title I of
ERISA concerning the effect of noncom-
pliance with Title I loan requirements for
plans that are subject to Title I of ERISA.)
(e)Special rules relating to distribu-
tions from a designated Roth account.If
an amount is distributed from a desig-
nated Roth account under a section 403(b)
plan, the amount, if any, that is includi-
ble in gross income and the amount, if
any, that may be rolled over to another
section 403(b) plan is determined under
§1.402A–1. Thus, the designated Roth
account is treated as a separate contract
for purposes of section 72. For example,
the rules of section 72(b) must be applied
separately to annuity payments with re-
spect to a designated Roth account under
a section 403(b) plan and separately to
annuity payments with respect to amounts
attributable to any other contributions to
the section 403(b) plan.
(f)Aggregation of contracts. In ac-
cordance with section 403(b)(5), the rules
of this section are applied as if all annu-
ity contracts for the employee by the em-
ployer are treated as a single contract.
(g)Certain rules relating to employ-
ment taxes. With respect to contributions
under the Federal Insurance Contributions
Act (FICA) under Chapter 21, see section
3121(a)(5)(D) for a special rule relating
to section 403(b) contracts. With respect
to income tax withholding on distribu-
tions from section 403(b) contracts, see
section 3405 generally. However, see
section 3401 for income tax withholding
applicable to annuity contracts or custo-
dial accounts that are not section 403(b)
contracts or for cases in which an annu-
ity contract or custodial account ceases
to be a section 403(b) contract. See also
§1.72(p)–1, Q&A–15, and §35.3405(c)–1,
Q&A–11 of this chapter, for special rules
relating to income tax withholding for
loans made from certain employer plans,
including section 403(b) contracts.
§1.403(b)–8 Funding.
(a)Investments. Section 403(b) and
§1.403(b)–3(a) only apply to amounts
held in an annuity contract (as defined in
§1.403(b)–2), including a custodial ac-
count that is treated as an annuity contract
under paragraph (d) of this section, or a
retirement income account that is treated
as an annuity contract under §1.403(b)–9.
(b)Contributions to the plan. Contri-
butions to a section 403(b) plan must be
transferred to the insurance company issu-
ing the annuity contract (or the entity hold-
ing assets of any custodial or retirement in-
come account that is treated as an annuity
contract) within a period that is not longer
than is reasonable for the proper adminis-
tration of the plan. For purposes of this re-
quirement, the plan may provide for sec-
tion 403(b) elective deferrals for a partici-
pant under the plan to be transferred to the
annuity contract within a specified period
after the date the amounts would otherwise
have been paid to the participant. For ex-
ample, the plan could provide for section
403(b) elective deferrals under the plan to
be contributed within 15 business days fol-
lowing the month in which these amounts
2007–36 I.R.B.515September 4, 2007

would otherwise have been paid to the par-
ticipant.
(c)Annuity contracts—(1)Generally.
As defined in §1.403(b)–2, and except as
otherwise permitted under this section, an
annuity contract means acontract that is is-
sued by an insurance company qualified to
issue annuities in a State and that includes
payment in the form of an annuity. This
paragraph (c) sets forth additional rules re-
garding annuity contracts.
(2)Certain insurance contracts.Nei-
ther a life insurance contract, as defined
in section 7702, an endowment contract,
a health or accident insurance contract,
nor a property, casualty, or liability insur-
ance contract meets the definition of an
annuity contract. See §1.401(f)–4(e). If a
contract issued by an insurance company
qualified to issue annuities in a State pro-
vides death benefits as part of the contract,
then that coverage is permitted, assuming
that those death benefits do not cause the
contract to fail to satisfy any requirement
applicable to section 403(b) contracts,
for example, assuming that those benefits
satisfy the incidental benefit require-
ment of §1.401–1(b)(1)(i), as required by
§1.403(b)–6(g).
(3)Special rule for certain contracts.
This paragraph (c)(3) applies in the case
of a contract issued under a State section
403(b) plan established on or before May
17, 1982, or for an employee who becomes
covered for the first time under the plan
after May 17, 1982, unless the Commis-
sioner had before that date issued any writ-
ten communication (either to the employer
or financial institution) to the effect that
the arrangement under which the contract
was issued did not meet the requirements
of section 403(b). The requirement that the
contract be issued by an insurance com-
pany qualified to issue annuities in a State
does not apply to a contract described in
the preceding sentence if one of the fol-
lowing two conditions is satisfied and that
condition has been satisfied continuously
since May 17, 1982—
(i) Benefits under the contract are pro-
vided from a separately funded retirement
reserve that is subject to supervision of the
State insurance department; or
(ii) Benefits under the contract are pro-
vided from a fund that is separate from
thefundusedtoprovidestatutorybene-
fits payable under a state retirement sys-
tem and that is part of a State teachers re-
tirement system (including a state univer-
sity retirement system) to purchase bene-
fits that are unrelated to the basic benefits
provided under the retirement system, and
the death benefit provided under the con-
tract does not at any time exceed the larger
of the reserve or the contribution made for
the employee.
(d)Custodial accounts—(1)Treat-
ment as a section 403(b) contract.Under
section 403(b)(7), a custodial account is
treated as an annuity contract for purposes
of §§1.403(b)–1 through 1.403(b)–7,
this section and §§1.403(b)–9 through
1.403(b)–11. See section 403(b)(7)(B) for
special rules regarding the tax treatment
of custodial accounts and section 4973(c)
for an excise tax that applies to excess
contributions to a custodial account.
(2)Custodial account defined.Acus-
todial account means a plan, or a separate
account under a plan, in which an amount
attributable to section 403(b) contributions
(or amounts rolled over to a section 403(b)
contract, as described in §1.403(b)–10(d))
is held by a bank or a person who satisfies
the conditions in section 401(f)(2), if—
(i) All of the amounts held in the ac-
count are invested in stock of a regulated
investment company (as defined in section
851(a) relating to mutual funds);
(ii) The requirements of §1.403(b)–6(c)
(imposing restrictions on distributions
with respect to a custodial account) are
satisfied with respect to the amounts held
in the account;
(iii) The assets held in the account
cannot be used for, or diverted to, pur-
poses other than for the exclusive benefit
of plan participants or their beneficiaries
(for which purpose, assets are treated as
diverted to the employer if the employer
borrows assets from the account); and
(iv) The account is not part of a retire-
ment income account.
(3)Effect of definition. The require-
ment in paragraph (d)(2)(i) of this section
is not satisfied if the account includes any
assets other than stock of a regulated in-
vestment company.
(4)Treatment of custodial account.A
custodial account is treated as a section
401 qualified plan solely for purposes of
subchapter F of subtitle A and subtitle F
of the Internal Revenue Code with respect
to amounts received by it (and income
from investment thereof). This treatment
only applies to a custodial account that
constitutes a section 403(b) contract un-
der §§1.403(b)–1 through 1.403(b)–7,
this section and §§1.403(b)–9 through
1.403(b)–11 or that would constitute a sec-
tion 403(b) contract under §§1.403(b)–1
through 1.403(b)–7, this section and
§§1.403(b)–9 through 1.403(b)–11 if the
amounts held in the account were to sat-
isfy the nonforfeitability requirement of
§1.403(b)–3(a)(2).
(e)Retirement income accounts.See
§1.403(b)–9 for special rules under which
a retirement income account for em-
ployees of a church-related organization
is treated as a section 403(b) contract
for purposes of §§1.403(b)–1 through
1.403(b)–7, this section and §§1.403(b)–9
through 1.403(b)–11.
(f)Combining assets.Totheextent
permitted by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b) of this chap-
ter), trust assets held under a custodial
account and trust assets held under a re-
tirement income account, as described in
§1.403(b)–9(a)(6), may be invested in a
group trust with trust assets held under
a qualified plan or individual retirement
plan. For this purpose, a trust includes a
custodial account that is treated as a trust
under section 401(f).
§1.403(b)–9 Special rules for church
plans.
(a)Retirement income accounts—(1)
Treatment as a section 403(b) contract.
Under section 403(b)(9), a retirement
income account for employees of a
church-related organization (as defined in
§1.403(b)–2) is treated as an annuity con-
tract for purposes of §§1.403(b)–1 through
1.403(b)–8, this section, §1.403(b)–10 and
§1.403(b)–11.
(2)Retirement income account de-
fined—(i)In general.Aretirementin-
come account means a defined contribu-
tion program established or maintained
by a church-related organization under
which—
(A) There is separate accounting for the
retirement income account’s interest in the
underlying assets (namely, there must be
sufficient separate accounting in order for
it to be possible at all times to determine
the retirement income account’s interest
in the underlying assets and to distinguish
September 4, 20075162007–36 I.R.B.

that interest from any interest that is not
part of the retirement income account);
(B) Investment performance is based on
gains and losses on those assets; and
(C) The assets held in the account can-
not be used for, or diverted to, purposes
other than for the exclusive benefit of plan
participants or their beneficiaries (and for
this purpose, assets are treated as diverted
to the employer if there is a loan or other
extension of credit from assets in the ac-
count to the employer).
(ii)Plan required. A retirement income
account must be maintained pursuant to
a program which is a plan (as defined in
§1.403(b)–3(b)(3)) and the plan document
must state (or otherwise evidence in a sim-
ilarly clear manner) the intent to constitute
a retirement income account.
(3)Ownership or use constitutes distri-
bution. Any asset of a retirement income
account that is owned or used by a par-
ticipant or beneficiary is treated as having
been distributed to thatparticipant or ben-
eficiary. See §§1.403(b)–6 and 1.403(b)–7
for rules relating to distributions.
(4)Coordination of retirement income
account with custodial account rules.A
retirement income account that is treated
as an annuity contractis not a custodial
account (as defined in §1.403(b)–8(d)(2)),
even if it is invested solely in stock of a
regulated investment company.
(5)Life annuities. A retirement income
account may distribute benefits in a form
that includes a life annuity only if—
(i) The amount of the distribution form
has an actuarial present value, at the
annuity starting date, equal to the par-
ticipant’s or beneficiary’s accumulated
benefit, based on reasonable actuarial as-
sumptions, including regarding interest
and mortality; and
(ii) The plan sponsor guarantees bene-
fits in the event that a payment is due that
exceeds the participant’s or beneficiary’s
accumulated benefit.
(6)Combining retirement income ac-
count assets with other assets. For pur-
poses of §1.403(b)–8(f) relating to com-
bining assets, retirement income account
assets held in trust (including a custodial
account that is treated as a trust under sec-
tion 401(f)) are subject to the same rules
regarding combining of assets as custodial
account assets. In addition, retirement
income account assets are permitted to
be commingled in a common fund with
amounts devoted exclusively to church
purposes (such as a fund from which un-
funded pension payments are made to
former employees of the church). How-
ever, unless otherwise permitted by the
Commissioner, no assets of the plan spon-
sor, other than retirement income account
assets, may be combined with custodial
account assets or any other assets permit-
ted to be combined under §1.403(b)–8(f).
This paragraph (a)(6) is subject to any ad-
ditional rules issued by the Commissioner
in revenue rulings, notices, or other guid-
ance published in the Internal Revenue
Bulletin (see §601.601(d)(2)(ii)(b)ofthis
chapter).
(7)Trust treated as tax exempt.A
trust (including a custodial account that is
treated as a trust under section 401(f)) that
includes no assets other than assets of a
retirement income account is treated as an
organization that is exempt from taxation
under section 501(a).
(b)No compensation limitation up to
$10,000. See section 415(c)(7) for spe-
cial rules regardingcertain annual addi-
tions not exceeding $10,000.
(c)Special deduction rule for self-em-
ployed ministers. See section 404(a)(10)
for a special rule regarding the deductibil-
ityofacontributionmadebyaself-em-
ployed minister.
§1.403(b)–10 Miscellaneous provisions.
(a)Plan terminations and frozen
plans—(1)In general.Anemployeris
permitted to amend its section 403(b) plan
to eliminate future contributions for ex-
isting participants or to limit participation
to existing participants and employees (to
the extent consistent with §1.403(b)–5). A
section 403(b) plan is permitted to contain
provisions that provide for plan termina-
tion and that allow accumulated benefits
to be distributed on termination. However,
in the case of a section 403(b) contract that
is subject to the distribution restrictions in
§1.403(b)–6(c) or (d) (relating to custo-
dial accounts and section 403(b) elective
deferrals), termination of the plan and
the distribution of accumulated benefits
is permitted only if the employer (taking
into account all entitiesthat are treated as
the same employer under section 414(b),
(c), (m), or (o) on the date of the termina-
tion) does not make contributions to any
section 403(b) contract that is not part of
the plan during the period beginning on
the date of plan termination and ending
12 months after distribution of all assets
from the terminated plan. However, if at
all times during the period beginning 12
months before the termination and ending
12 months after distribution of all assets
from the terminated plan, fewer than 2
percent of the employees who were eligi-
ble under the section 403(b) plan as of the
date of plan termination are eligible under
the alternative section 403(b) contract,
the alternative section 403(b) contract is
disregarded. To the extent a contract fails
to satisfy the nonforfeitability requirement
of §1.403(b)–3(a)(2) at the date of plan
termination, the contact is not, and cannot
later become, a section 403(b) contract.
In order for a section 403(b) plan to be
considered terminated, all accumulated
benefits under the plan must be distributed
to all participants and beneficiaries as
soon as administratively practicable after
termination of the plan. For this pur-
pose, delivery of a fully paid individual
insurance annuity contract is treated as a
distribution. The mere provision for, and
making of, distributions to participants or
beneficiaries upon plan termination does
not cause a contract to cease to be a section
403(b) contract. See §1.403(b)–7 for rules
regarding the tax treatment of distribu-
tions, including §1.403(b)–7(b)(1) under
which an eligible rollover distribution is
not included in gross income if paid in
a direct rollover to an eligible retirement
plan or if transferred to an eligible retire-
ment plan within 60 days.
(2)Employers that cease to be eligible
employers. An employer that ceases to be
an eligible employer may no longer con-
tribute to a section 403(b) contract for any
subsequent period, and the contract will
fail to satisfy §1.403(b)–3(a) if any further
contributions are made with respect to a
period after the employer ceases to be an
eligible employer.
(b)Contract exchanges and plan-to-
plan transfers—(1)Contract exchanges
and transfers—(i)General rule.Ifthe
conditions in paragraph (b)(2) of this sec-
tion are met, a section 403(b) contract
held under a section 403(b) plan is permit-
ted to be exchanged for another section
403(b) contract held under that section
403(b) plan. Further, if the conditions
in paragraph (b)(3) of this section are
met, a section 403(b) plan is permitted
2007–36 I.R.B.517September 4, 2007

to provide for the transfer of its assets
(including any assets held in a custodial
account or retirement income account that
are treated as section 403(b) contracts) to
another section 403(b) plan. In addition,
if the conditions in paragraph (b)(4) of
this section (relating to permissive ser-
vice credit and repayments under section
415) are met, a section 403(b) plan is per-
mitted to provide for the transfer of its
assets to a qualified plan under section
401(a). However, neither a qualified plan
nor an eligible governmental plan under
section 457(b) may transfer assets to a
section 403(b) plan, and a section 403(b)
plan may not accept such a transfer. In
addition, a section403(b) contract may
not be exchanged for an annuity contract
that is not a section 403(b) contract. Nei-
ther a plan-to-plan transfer nor a contract
exchange permitted under this paragraph
(b) is treated as a distribution for pur-
poses of the distribution restrictions at
§1.403(b)–6. Therefore, such a transfer or
exchange may be made before severance
from employment or another distribution
event. Further, no amount is includible in
gross income by reason of such a transfer
or exchange.
(ii)ERISA rules. See §1.414(l)–1 for
other rules that are applicable to section
403(b) plans that are subject to section 208
of the Employee Retirement Income Secu-
rity Act of 1974 (88 Stat. 829, 865).
(2)Requirements for contract exchange
within the same plan—(i)General rule.A
section 403(b) contract of a participant or
beneficiary may be exchanged under para-
graph (b)(1) of this section for another sec-
tion 403(b) contract of that participant or
beneficiary under the same section 403(b)
plan if each of the following conditions are
met:
(A) The plan under which the contract
is issued provides for the exchange.
(B) The participant or beneficiary has
an accumulated benefit immediately af-
ter the exchange that is at least equal to
the accumulated benefit of that participant
or beneficiary immediately before the ex-
change (taking into account the accumu-
lated benefit of that participant or benefi-
ciary under both section 403(b) contracts
immediately before the exchange).
(C) The other contract is subject to dis-
tribution restrictions with respect to the
participantthatarenotlessstringentthan
those imposed on the contract being ex-
changed, and the employer enters into an
agreement with the issuer of the other con-
tract under which the employer and the is-
suer will from time to time in the future
provide each other with the following in-
formation:
(1) Information necessary for the re-
sulting contract, or any other contract to
which contributions have been made by
the employer, to satisfy section 403(b),
including information concerning the
participant’s employment and informa-
tion that takes intoaccount other section
403(b) contracts or qualified employer
plans (such as whether a severance from
employment has occurred for purposes of
the distribution restrictions in §1.403(b)–6
and whether the hardship withdrawal rules
of §1.403(b)–6(d)(2) are satisfied).
(2) Information necessary for the result-
ing contract, or any other contract to which
contributions have been made by the em-
ployer, to satisfy other tax requirements
(suchaswhetheraplanloansatisfiesthe
conditions in section 72(p)(2) so that the
loan is not a deemed distribution under
section 72(p)(1)).
(ii)Accumulated benefit. The condition
in paragraph (b)(2)(i)(B) of this section is
satisfied if the exchange would satisfy sec-
tion 414(l)(1) if the exchange were a trans-
ferofassets.
(iii)Authority for future guidance.
Subject to such conditions as the Com-
missioner determines to be appropri-
ate, the Commissioner may issue rules
of general applicability, in revenue rul-
ings, notices, or other guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2)(ii)(b)ofthischapter),per-
mitting an exchange of one section 403(b)
contract for anothersection 403(b) con-
tract for an exchange that does not satisfy
paragraph (b)(2)(i)(C) of this section.
Anysuchrulesmustrequiretheresult-
ing contract to set forth procedures that
the Commissioner determines are reason-
ably designed to ensure compliance with
those requirements of section 403(b) or
other tax provisions that depend on either
information concerning the participant’s
employment or information that takes into
account other section 403(b) contracts or
other employer plans (such as whether a
severance from employment has occurred
for purposes of the distribution restric-
tions in §1.403(b)–6, whether the hardship
withdrawal rules of §1.403(b)–6(d)(2) are
satisfied, and whether a plan loan consti-
tutes a deemed distribution under section
72(p)).
(3)Requirements for plan-to-plan
transfers. (i) A plan-to-plan transfer under
paragraph (b)(1) of this section from a sec-
tion 403(b) plan to another section 403(b)
plan is permitted if each of the following
conditions are met—
(A) In the case of a transfer for a par-
ticipant, the participant is an employee or
former employee of the employer (or the
business of the employer) for the receiv-
ing plan.
(B) In the case of a transfer for a bene-
ficiary of a deceased participant, the par-
ticipant was an employee or former em-
ployee of the employer (or business of the
employer) for the receiving plan.
(C) The transferor plan provides for
transfers.
(D) The receiving plan provides for the
receipt of transfers.
(E) The participant or beneficiary
whose assets are being transferred has
an accumulated benefit immediately after
thetransferthatisatleastequaltothe
accumulated benefit of that participant or
beneficiary immediately before the trans-
fer.
(F) The receiving plan provides that, to
the extent any amount transferred is sub-
ject to any distribution restrictions under
§1.403(b)–6, the receiving plan imposes
restrictions on distributions to the partici-
pant or beneficiary whose assets are being
transferred that are not less stringent than
those imposed on the transferor plan.
(G)Ifaplan-to-plantransfer does not
constitute a complete transfer of the partic-
ipant’s or beneficiary’s interest in the sec-
tion 403(b) plan, the transferee plan treats
the amount transferred as a continuation of
apro rataportion of the participant’s or
beneficiary’s interest in the section 403(b)
plan (for example, apro rataportion of
the participant’s or beneficiary’s interest in
any after-tax employee contributions).
(ii)Accumulated benefit. The condition
in paragraph (b)(3)(i)(D) of this section is
satisfied if the transfer would satisfy sec-
tion 414(l)(1).
(4)Purchases of permissive service
credit by contract-to-plan transfers from
a section 403(b) contract to a qualified
plan—(i)General rule. If the conditions
in paragraph (b)(4)(ii) of this section are
met, a section 403(b) plan may provide
September 4, 20075182007–36 I.R.B.

for the transfer of assets held in the plan
to a qualified defined benefit plan that is a
governmental plan (as defined in section
414(d)).
(ii)Conditions for plan-to-plan trans-
fers. A transfer may be made under this
paragraph (b)(4) only if the transfer is ei-
ther—
(A) For the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under the receiving de-
fined benefit plan; or
(B) A repayment to which section
415 does not apply by reason of section
415(k)(3).
(c)Qualified domestic relations orders.
In accordance with the second sentence of
section 414(p)(9), any distribution from an
annuity contract under section 403(b) (in-
cluding a distribution from a custodial ac-
count or retirement income account that is
treated as a section 403(b) contract) pur-
suant to a qualified domestic relations or-
der is treated in the same manner as a
distribution from a plan to which section
401(a)(13) applies. Thus, for example, a
section 403(b) plan does not fail to sat-
isfy the distribution restrictions set forth
in §1.403(b)–6(b), (c), or (d) merely as
a result of distribution made pursuant to
a qualified domestic relations order under
section 414(p), so that such a distribution
is permitted without regard to whether the
employee from whose contract the distri-
bution is made has had a severance from
employment or another event permitting
a distribution to be made under section
403(b). In the case of a plan that is sub-
ject to Title I of ERISA, see also section
206(d)(3) of ERISA under which the pro-
hibition against assignment or alienation
of plan benefits under section 206(d)(1) of
ERISAdoesnotapplytoanorderthatis
determined to be a qualified domestic re-
lations order.
(d)Rollovers to a section 403(b) con-
tract—(1)General rule. A section 403(b)
contract may accept a contribution that is
an eligible rollover distribution (as defined
in section 402(c)(4)) made from another
eligible retirement plan (as defined in
section 402(c)(8)(B)). Any amount con-
tributed to a section403(b) contract as an
eligible rollover distribution is not taken
into account for purposes of the limits
in §1.403(b)–4, but, except as otherwise
specifically provided (for example, at
§1.403(b)–6(i)), is otherwise treated in the
same manner as an amount held under a
section 403(b) contract for purposes of
§§1.403(b)–3 through 1.403(b)–9 and this
section.
(2)Special rules relating to after-tax
employee contributions and designated
Roth contributions. A section 403(b) plan
that receives an eligible rollover distri-
bution that includes after-tax employee
contributions or designated Roth contri-
butions is required to obtain information
regarding the employee’s section 72 ba-
sis in the amount rolled over. A section
403(b) plan is permitted to receive an el-
igible rollover distribution that includes
designated Roth contributions only if the
plan permits employees to make elective
deferrals that are designated Roth contri-
butions.
(e)Deemed IRAs. See regulations un-
der section 408(q) for special rules relating
to deemed IRAs.
(f)Defined benefit plans—(1)Defined
benefit plans generally. Except for a
TEFRA church defined benefit plan as
defined in paragraph (f)(2) of this sec-
tion, section 403(b) does not apply to any
contributions or accrual under a defined
benefit plan.
(2)TEFRA church defined benefit
plans. See section 251(e)(5) of the Tax
Equity and Fiscal Responsibility Act of
1982, Public Law 97–248, for a provision
permitting certain arrangements estab-
lished by a church-related organization
and in effect on September 3, 1982 (a
TEFRA church defined benefit plan) to be
treated as a section 403(b) contract even
though it is a defined benefit arrangement.
In accordance with section 403(b)(1), for
purposes of applying section 415 to a
TEFRA church defined benefit plan, the
accruals under the plan are limited to the
maximum amount permitted under sec-
tion 415(c) when expressed as an annual
addition, and, for this purpose, the rules
at §1.402(b)–1(a)(2) for determining the
present value of an accrual under a non-
qualified defined benefit plan also apply
for purposes of converting the accrual un-
der a TEFRA church defined benefit plan
to an annual addition. See section 415(b)
for additional limits applicable to TEFRA
church defined benefit plans.
(g)Other rules relating to section
501(c)(3) organizations. See section
501(c)(3) and regulations thereunder for
the substantive standards for tax-exemp-
tion under that section, including the
requirement that no part of the organiza-
tion’s net earnings inure to the benefit of
any private shareholder or individual. See
also sections 4941 (self dealing), 4945
(taxable expenditures), and 4958 (excess
benefit transactions), and the regulations
thereunder, for rules relating to excise
taxes imposed on certain transactions in-
volving organizations described in section
501(c)(3).
§1.403(b)–11 Applicable dates.
(a)General rule. Except as otherwise
provided in this section, §§1.403(b)–1
through 1.403(b)–10 apply for taxable
years beginning after December 31, 2008.
(b)Collective bargaining agreements.
In the case of a section 403(b) plan main-
tained pursuant to one or more collective
bargaining agreements that have been
ratified and in effect on July 26, 2007,
§§1.403(b)–1 through 1.403(b)–10 do not
apply before the earlier of—
(1) The date on which the last of the col-
lective bargaining agreements terminates
(determined without regard to any exten-
sion thereof after July 26, 2007); or
(2) July 26, 2010.
(c)Church conventions; retirement
income account. (1) In the case of a
section 403(b) plan maintained by a
church-related organization for which
the authority to amend the plan is held by
a church convention (within the meaning
of section 414(e)), §§1.403(b)–1 through
1.403(b)–10 do not apply before the first
day of the first plan year that begins after
December 31, 2009.
(2) In the case of a loan or other ex-
tension of credit to the employer that was
entered into under a retirement income ac-
count before July 26, 2007, the plan does
not fail to satisfy §1.403(b)–9(a)(2)(i)(C)
on account of the loan or other extension
of credit if the plan takes reasonable steps
to eliminate the loan or other extension
of credit to the employer before the ap-
plicable date for §1.403(b)–9(a)(2) or as
promptly as practical thereafter (including
taking steps after July 26, 2007 and before
the applicable date).
(d)Special rules for plans that exclude
certain types of employees from elective
deferrals. (1) If, on July 26, 2007, a plan
excludes any of the following categories
of employees, then the plan does not fail
2007–36 I.R.B.519September 4, 2007

to satisfy §1.403(b)–5(b) as a result of that
exclusion before the first day of the first
taxable year that begins after December
31, 2009:
(i) Employees who make a one-time
election to participate in a governmental
plan described in section 414(d) that is not
a section 403(b) plan.
(ii) Professors who are providing ser-
vices on a temporary basis to another ed-
ucational organization (as defined under
section 170(b)(1)(A)(ii)) for up to one year
and for whom section 403(b) contributions
are being made at a rate no greater than the
rate each such professor would receive un-
der the section 403(b) plan of the original
educational organization.
(iii) Employees who are affiliated with
a religious order and who have taken a
vow of poverty where the religious order
provides for the support of such employees
in their retirement from eligibility to make
elective deferrals.
(2) If, on July 26, 2007, a plan excludes
employees who are covered by a collec-
tive bargaining agreement from eligibility
to make elective deferrals, the plan does
not fail to satisfy §1.403(b)–5(b) (relating
to universal availability) as a result of that
exclusion before the later of—
(i) The first day of the first taxable year
that begins after December 31, 2008; or
(ii) The earlier of—
(A) The date on which the related col-
lective bargaining agreement terminates
(determined without regard to any exten-
sion thereof after July 26, 2007); or
(B) July 26, 2010.
(3) In the case of a governmental plan
(as defined in section 414(d)) for which
the authority to amend the plan is held by
a legislative body that meets in legisla-
tive session, the plan does not fail to sat-
isfy §1.403(b)–5(b) as a result of any ex-
clusion in paragraph (d)(1)(i), (d)(1)(ii),
(d)(1)(iii), or (d)(2) of this section before
theearlierof—
(i) The close of the first regular legisla-
tive session of the legislative body with the
authority to amend the plan that begins on
or after January 1, 2009; or
(ii) January 1, 2011.
(e)Special rules for plans that per-
mit in-service distributions. (1) Section
1.403(b)–6(b) does not apply to a contract
issued by an insurance company before
January 1, 2009.
(2) Any amendment to comply with the
requirements of §1.403(b)–6 (disregarding
paragraph (e)(1) of this section) that is
adopted before January 1, 2009, or such
later date as may be permitted under guid-
ance issued by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b)ofthischapter),
does not violate section 204(g) of the Em-
ployee Retirement Income Security Act of
1974 to the extent theamendment elimi-
nates or reduces a right to receive benefit
distributions during employment.
(f)Special rule for life insurance con-
tracts. Section 1.403(b)–8(c)(2) does not
apply to a contract issued before Septem-
ber 24, 2007.
(g)Special rule for contracts received
in an exchange. Section 1.403(b)–10(b)(2)
does not apply to a contract received in
an exchange that occurred on or before
September 24, 2007 if the exchange (in-
cluding the contract received in the ex-
change) satisfies such rules as the Com-
missioner has prescribed in guidance of
general applicability at the time of the ex-
change.
(h)Special rule for coordination with
regulations under section 415. Section
1.403(b)–3(b)(4)(ii) is applicable for tax-
able years beginning on or after July 1,
2007.
(i)Special rule for coordination with
regulations under section 402A. Sec-
tions 1.403(b)–3(c), 1.403(b)–7(e), and
1.403(b)–10(d)(2) are applicable with re-
spect to taxable years beginning on or after
January 1, 2007.
§1.403(d)–1 [Removed]
Par. 8. Section 1.403(d)–1 is removed.
Par. 9. Section 1.414(c)–5 is redesig-
nated as §1.414(c)–6 and new §1.414(c)–5
is added to read as follows:
§1.414(c)–5 Certain tax-exempt
organizations.
(a)Application. This section applies to
an organization that is exempt from tax un-
der section 501(a). The rules of this sec-
tion only apply for purposes of determin-
ing when entities are treated as the same
employer for purposes of section 414(b),
(c), (m), and (o) (including the sections re-
ferred to in section 414(b), (c), (m), (o),
and (t)), and are in addition to the rules
otherwise applicable under section 414(b),
(c), (m), and (o) for determining when enti-
ties are treated as the same employer. Ex-
cept to the extent set forth in paragraphs
(d), (e), and (f) of this section, this section
does not apply to any church, as defined
in section 3121(w)(3)(A), or any qualified
church-controlled organization, as defined
in section 3121(w)(3)(B).
(b)General rule. Inthecaseofanor-
ganization that is exempt from tax under
section 501(a) (an exempt organization)
whose employees participate in a plan, the
employer with respectto that plan includes
the exempt organization whose employees
participate in the plan and any other organ-
ization that is under common control with
that exempt organization. For this pur-
pose, common control exists between an
exempt organization and another organi-
zation if at least 80 percent of the direc-
tors or trustees of one organization are ei-
ther representatives of, or directly or in-
directly controlled by, the other organiza-
tion. A trustee or director is treated as a
representative of another exempt organiza-
tion if he or she also is a trustee, director,
agent, or employee of the other exempt or-
ganization. A trustee or director is con-
trolled by another organization if the other
organization has the general power to re-
move such trustee or director and desig-
nate a new trustee or director. Whether a
person has the power to remove or desig-
nate a trustee or director is based on facts
and circumstances. To illustrate the rules
of this paragraph (b), if exempt organiza-
tion A has the power to appoint at least 80
percent of the trustees of exempt organiza-
tion B (which is the owner of the outstand-
ing shares of corporation C, which is not
an exempt organization) and to control at
least 80 percent of the directors of exempt
organization D, then, under this paragraph
(b) and §1.414(b)–1, entities A, B, C, and
D are treated as the same employer with re-
spect to any plan maintained by A, B, C, or
D for purposes of the sections referenced
in section 414(b), (c), (m), (o), and (t).
(c)Permissive aggregation with entities
having a common exempt purpose—(1)
General rule. For purposes of this sec-
tion, exempt organizations that maintain
a plan to which section 414(c) applies
that covers one or more employees from
each organization may treat themselves
as under common control for purposes of
September 4, 20075202007–36 I.R.B.

section 414(c) (and, thus, as a single em-
ployer for all purposes for which section
414(c) applies) if each of the organizations
regularly coordinates their day-to-day ex-
empt activities. For example, an entity
that provides a type of emergency relief
within one geographic region and another
exempt organization that provides that
type of emergency relief within another
geographic region may treat themselves as
under common control if they have a single
plan covering employees of both entities
and regularly coordinate their day-to-day
exempt activities. Similarly, a hospital
that is an exempt organization and another
exempt organization with which it coordi-
nates the delivery of medical services or
medical research may treat themselves as
under common control if there is a single
plan covering employees of the hospital
and employees of the other exempt organ-
ization and the coordination is a regular
part of their day-to-day exempt activities.
(2)Authority to permit aggregation.
(i) For determining when entities are
treated as the same employer under sec-
tion 414(b), (c), (m), and (o), the Commis-
sioner may issue rules of general applica-
bility, in revenue rulings, notices, or other
guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b)
of this chapter), permitting other types
of combinations of entities that include
exempt organizations to elect to be treated
as under common control for one or more
specified purposes if—
(A) There are substantial business rea-
sons for maintaining each entity in a sepa-
rate trust, corporation, or other form; and
(B) Such treatment would be consistent
with the anti-abuse standards in paragraph
(f) of this section.
(ii) For example, this authority might be
exercised in any situation in which the or-
ganizations are so integrated in their op-
erations as to effectively constitute a sin-
gle coordinated employer for purposes of
section 414(b), (c), (m), and (o), including
common employee benefit plans.
(d)Permissive disaggregation between
qualified church controlled organizations
and other entities. In the case of a church
plan (as defined in section 414(e)) to which
contributions are made by more than one
common law entity, any employer may
apply paragraphs (b) and (c) of this sec-
tion to those entities that are not a church
(as defined in section 403(b)(12)(B) and
§1.403(b)–2) separately from those enti-
ties that are churches. For example, in
the case of a group of entities consist-
ing of a church (as defined in section
3121(w)(3)(A)), a secondary school (that
is treated as a church under §1.403(b)–2),
and several nursing homes each of which
receives more than 25 percent of its sup-
port from fees paid by residents (so that
none of them is a qualified church-con-
trolled organization under §1.403(b)–2
and section 3121(w)(3)(B)), the nursing
homes may treat themselves as being un-
der common control with each other, but
not as being under common control with
the church and the school, even though the
nursing homes would be under common
control with the school and the church
under paragraph (b) of this section.
(e)Application to certain church enti-
ties under section 3121(w)(3). [Reserved].
(f)Anti-abuse rule. In any case in
which the Commissioner determines that
the structure of one or more exempt orga-
nizations (which may include an exempt
organization and an entity that is not ex-
empt from income tax) or the positions
taken by those organizations has the effect
of avoiding or evading any requirements
imposed under section 401(a), 403(b),
or 457(b), or any applicable section (as
defined in section 414(t)), or any other
provision for which section 414(c) ap-
plies, the Commissioner may treat an
entity as under common control with the
exempt organization.
(g)Examples. The provisions of this
section are illustrated by the following ex-
amples:
Example 1.(i)Facts. Organization A is a tax-
exempt organization under section 501(c)(3) which
owns 80% or more of the total value of all classes of
stock of corporation B, which is a for profit organiza-
tion.
(ii)Conclusion. Under paragraph (a) of this sec-
tion, this section does not alter the rules of section
414(b) and (c), so that organization A and corporation
B are under common control under §1.414(c)–2(b).
Example 2.(i)Facts. Organization M is a hos-
pital which is a tax-exempt organization under sec-
tion 501(c)(3) and organization N is a medical clinic
which is also a tax-exempt organization under section
501(c)(3). N is located in a city and M is located in
a nearby suburb. There is a history of regular coor-
dination of day-to-day activities between M and N,
including periodic transfers of staff, coordination of
staff training, common sources of income, and coor-
dination of budget and operational goals. A single
section 403(b) plan covers professional and staff em-
ployees of both the hospital and the medical clinic.
While a number of members of the board of directors
of M are also on the board of directors of N, there is
less than 80% overlap in board membership. Both or-
ganizations have approximately the same percentage
of employees who are highly compensated and have
appropriate business reasons for being maintained in
separate entities.
(ii)Conclusion. M and N are not under common
control under this section, but, under paragraph (c) of
this section, may chose to treat themselves as under
common control, assuming both of them act in a man-
ner that is consistent with that choice for purposes of
§1.403(b)–5(a), sections 401(a), 403(b), and 457(b),
and any other applicable section (as defined in sec-
tion 414(t)), or any other provision for which section
414(c) applies.
Example 3.(i)Facts. Organizations O and P
are each tax-exempt organizations under section
501(c)(3). Each organization maintains a qualified
plan for it employees, but one of the plans would
not satisfy section 410(b) (or section 401(a)(4)) if
the organizations were under common control. The
two organizations are closely related and, while the
organizations have several trustees in common, the
common trustees constitute fewer than 80 percent of
the trustees of either organization. Organization O
has the power to remove any of the trustees of P and
to select the slate of replacement nominees.
(ii)Conclusion. Under these facts, pursuant to
paragraphs (b) and (f) of this section, the Commis-
sioner treats the entities as under common control.
(h)Applicable date. This section ap-
plies for plan years beginning after De-
cember 31, 2008.
Par. 10. For each entry listed in the
“Location” column, remove the language
in the “Remove” column and add the lan-
guage in the “Add” column in its place.
LocationRemoveAdd
§1.101–1(a)(2)(ii)paragraph (a)or (b) of §1.403(b)–1§1.403(b)–3
§1.101–1(a)(2)(ii)paragraph (c)(3) of §1.403(b)–1§1.403(b)–7
§1.401(a)(9)–1, A–1§1.403(b)–3§1.403(b)–6(e)
2007–36 I.R.B.521September 4, 2007

LocationRemoveAdd
§1.401(a)(31)–1, introductory text1.403(b)–21.403(b)–7(b)
§1.401(a)(31)–1, A–1(b)(3)§1.403(b)–2§1.403(b)–7(b)
§1.402(c)–2, introductory text1.403(b)–21.403(b)–7(b)
§1.402(c)–2, A–1(b)(4)§1.403(b)–2§1.403(b)–7(b)
§1.402(f)–1, introductory text1.403(b)–21.403(b)–7(b)
§1.403(a)–1(a)§1.403(b)–1§§1.403(b)–1 through 1.403(b)–10
§1.403(c)–1, all locations§1.403(b)–1(b)§1.403(b)–3
§1.403(c)–1, all locations§1.403(b)–1(b)(2)§1.403(b)–3(c)
PART 31—EMPLOYMENT
TAXES, INCOME TAXES,
PENALTIES, PENSIONS, RAILROAD
RETIREMENT, REPORTING
AND RECORDKEEPING
REQUIREMENTS, SOCIAL
SECURITY, UNEMPLOYMENT
COMPENSATION
Par. 11. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 12. For each entry listed in the
“Location” column, remove the language
in the “Remove” column and add the lan-
guage in the “Add” column in its place.
LocationRemoveAdd
§31.3405(c)–1, all locations§1.403(b)–2, Q&A–1§1.403(b)–7(b)
§31.3405(c)–1, A–1(b)§1.403(b)–2, Q&A–3§1.403(b)–7(b)
§31.3405(c)–1, A–1(b)§1.403(b)–2, Q&A–1 and Q&A–2§1.403(b)–7(b)
§31.3405(c)–1, A–2§1.403(b)–2, Q&A–2§1.403(b)–7(b)
PART 54—EXCISE TAXES, PENSIONS,
REPORTING AND RECORDKEEPING
REQUIREMENTS
Par. 13. The authority citation for part
54 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 14. For the entry listed in the
“Location” column, remove the language
in the “Remove” column and add the lan-
guage in the “Add” column in its place.
LocationRemoveAdd
§54.4974–2, A–3(a)(2)§1.403(b)–3§1.403(b)–6(e)
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 15. The authority citation for part
602 continues to read in part as follows:
Authority: 26 U.S.C. 7805.
Par. 16. In §602.101, paragraph (b)
is amended by removing the entry for
§1.403(b)–2 and adding entries to the ta-
ble for §§1.403(b)–7 and 1.402(b)–10 to
read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.403(b)–7........................................................... 1545–1341
1.
403(b)–10
........................................................... 15
45–2068
*****
September 4, 20075222007–36 I.R.B.

Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved July 2, 2007.
Eric Solomon,
Assistant Secretary of
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 23, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 26, 2007, 72 F.R. 41127)
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2007. See Rev. Rul. 2007-57, page
531.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2007. See Rev. Rul. 2007-57, page
531.
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 September 2007. See Rev. Rul. 2007-57, page
531.
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 September 2007. See
Rev. Rul. 2007-57, page 531.
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 September 2007. See Rev. Rul. 2007-57, page
531.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of September 2007. See
Rev. Rul. 2007-57, page 531.
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 September 2007. See Rev. Rul. 2007-57, page
531.
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 September 2007. See Rev. Rul. 2007-57, page
531.
Section 953.—Insurance
Income
Final regulations under section 1502 of the Code
allow the Internal Revenue Service to appoint a do-
mestic substitute agent for a consolidated group when
the group’s parent is a foreign corporation that is
treated as a domestic corporation as the result of a
section 953(d) election. See T.D. 9343, page 533.
Section1248.—GainFrom
Certain Sales or Exchanges
of Stock in Certain Foreign
Corporations
26 CFR 1.1248–1: Treatment of gain from certain
sales or exchanges of stock in certain foreign corpo-
rations.
T.D. 9345
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Section 1248 Attribution
Principles
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations under section 1248 of the In-
ternal Revenue Code (Code) that provide
guidance for determining the earnings and
profits attributable to stock of controlled
foreign corporations (or former controlled
foreign corporations) that are (were) in-
volved in certain nonrecognition transac-
tions. The final regulations are necessary
in order to supplement and clarify exist-
ing guidance in the regulations under sec-
tion 1248. The final regulations affect per-
sons subject to the regulations under sec-
tion 1248, as well as persons to which reg-
ulations under other Code provisions, such
as section 367(b), apply to the extent that
those regulations incorporate the princi-
ples of the section 1248 regulations. In
addition, the final regulations provide that
with respect to the sale by a foreign part-
nership of the stock of a corporation, the
partners in such foreign partnership shall
be treated as selling or exchanging their
proportionate share of the stock of such
corporation for purposes of section 1248.
DATES:Effective Date:These regulations
are effective on July 30, 2007.
Applicability Dates:For dates of
applicability, see §§1.1248–1(g) and
1.1248–8(d).
FOR FURTHER INFORMATION
CONTACT: Michael Gilman at (202)
622–3850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On June 2, 2006, proposed revisions
to the regulations under section 1248(a)
of the Code (REG–135866–02, 2006–27
I.R.B. 34) were published in theFederal
Register(71 FR 31985–01). On Au-
gust 14, 2006, two corrections to those
proposed regulations were published
in theFederal Register(published in
the I.R.B. as Announcement 2006–64,
2006–37 I.R.B. 447 [71 FR 46415], and
Announcement 2006–65, 2006–37 I.R.B.
447 [71 FR 46416]). Two written com-
ments were received. A public hearing
was not requested and none was held.
After consideration of the written com-
ments and other comments, the June 2,
2006, proposed regulations are adopted as
amended by this Treasury decision.
2007–36 I.R.B.523September 4, 2007

Summary of Comments and
Explanation of Revisions
With respect to attribution of earn-
ings and profits to stock of an ac-
quiring corporation held by a non-ex-
changing shareholder, §1.1248–8(b)(4)
of the proposed regulations provides a
rule by cross-reference to §1.1248–2 or
§1.1248–3 (whichever is applicable) and
§1.1248–8(b)(6) (as applicable). A com-
mentator asserted that the proposed regu-
lations did not adequately explain which
earnings and profits were attributed to the
stock of the non-exchanging shareholder.
This commentator thought that the rule
was better explained in the preamble to
the proposed regulations, which states that
generally the earnings and profits attribut-
able to stock of an acquiring corporation
held by a non-exchanging shareholder
immediately prior to a restructuring trans-
action continue to be attributed to such
stock, and the earnings and profits of the
acquired corporation accumulated prior to
the restructuring transaction attributable
to the stock of an acquired corporation
are not attributed to the non-exchang-
ing shareholder’s stock in the acquiring
corporation. In order to clarify the regu-
lations, this language from the preamble
to the proposed regulations is included in
§1.1248–8(b)(4) of the final regulations.
Under §1.1248–1(a)(4) of the proposed
regulations, the partners in a foreign part-
nership shall be treated as selling or ex-
changing their proportionate share of stock
of a corporation sold or exchanged by the
foreign partnership. The proposed regula-
tions also apply section 1248(a) in cases
where the stock in a corporation that is
sold or exchanged is held through tiers
of foreign partnerships. This treatment
is necessary to reflect properly each part-
ner’s share of the corporation’s earnings
and profits as a dividend.
Acommentatornotedthat
§1.1248–1(a)(4) of the proposed reg-
ulations could be read to apply to the sale
by a partner of its interest in a partnership
holding the stock of a corporation. The
Treasury Department and the IRS did not
intend that interpretation because it would
be contrary to section 1248(g)(2)(B). An
amount that is received by a partner in
exchange for all or part of its partnership
interest is treated as ordinary income
under section 751(a) and (c) to the extent
attributable to stock in a foreign corpora-
tion as described in section 1248. Section
1248(g)(2)(B) provides that section 1248
will not apply if any other provision of
the Code treats an amount as ordinary
income. Accordingly, §1.1248–1(a)(4) in
the final regulations is revised to clarify
that a foreign partnership is treated as
an aggregate for this purpose only when
a foreign partnership sells or exchanges
stock of a corporation. Finally, a commen-
tator requested that the final regulations
allow a taxpayer to elect to apply the
rule in §1.1248–1(a)(4) to taxable years
ending before the effective date of the
final regulations. The Treasury Depart-
ment and the IRS regard this rule as a
clarification of existing law, but recognize
that some practitioners have expressed
the view that prior law was not entirely
clear. Accordingly, the final regulations
allow taxpayers to apply the rule in
§1.1248–1(a)(4) to open years provided
that the taxpayer consistently applies the
rule in all such years. A partner makes
this election by treating its distributive
share of gain attributable to a sale of
shares in a controlled foreign corporation
as gain recognized on a sale or exchange
of stock in a foreign corporation within
the meaning of section 1248(a).
In order to clarify the application of
§1.1248–8, the definition of controlled for-
eign corporation at §1.1248–8(b)(1)(iii)
has been revised to provide that a con-
trolled foreign corporation includes cor-
porations described in either section
953(c)(1)(B) or section 957.
A commentator requested the addition
of an example to §1.367(b)–4(d) to clar-
ify that earnings and profits attributable
to certain lower-tier subsidiaries are not
taken into account in determining the all
earnings and profits amount attributable to
transactions described in §1.367(b)–3. In
response to this comment, such an exam-
ple is included in §1.367(b)–4(d) of the fi-
nal regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of 5 U.S.C. chapter 5
does not apply to these regulations, and,
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act, 5 U.S.C.
chapter 6, does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding this regula-
tion was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small businesses.
Drafting Information
The principal author of the final reg-
ulations is Michael I. Gilman of the Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from the
Treasury Department and the IRS partici-
pated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.367(b)–2(c)(1) and (2) also
issued under 26 U.S.C. 367(b)(1) and (2).
Section 1.367(b)–2(d)(3) also issued
under 26 U.S.C. 367(b)(1) and (2).* * *
Section 1.367(b)–4(d) also issued under
26 U.S.C. 367(b)(1) and (2). * * *
Sections 1.1248–1(a)(1), (4), and (5)
also issued under 26 U.S.C. 1248(a) and
(c)(1) and (2).* * *
Section 1.1248–8 also issued under 26
U.S.C. 1248(a) and (c)(1) and (2). * * *
§1.367(b)–2 [Amended]
Par. 2. Section 1.367(b)–2 is amended
by:
1. Removing the language “, as
modified by §1.367(b)–4(d) (as applica-
ble).” from the last sentence of paragraph
(c)(1)(ii) and adding the language “. See
§1.1248–8.” in its place.
2. Removing paragraphs (c)(2)Exam-
ple 4and (d)(3)(ii).
3. Removing the language “, as
modified by paragraph (d)(3)(ii) of this
September 4, 20075242007–36 I.R.B.

section and §1.367(b)–4(d) (as applica-
ble).” from the last sentence of paragraph
(d)(3)(i)(B)(2) and adding the language
“. See §1.1248–8.” in its place.
4. Redesignating paragraph (d)(3)(iii)
as paragraph (d)(3)(ii).
Par. 3. Section 1.367(b)–4(d) is revised
to read as follows:
§1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.
*****
(d)Rules for subsequent sales
or exchanges—(1)Rule.Ifanex-
changing shareholder (as defined in
§1.1248–8(b)(1)(iv)) is not required to
include in income as a deemed dividend
the section 1248 amount under paragraph
(b) of this section in a section 367(b) ex-
change described in paragraph (a) of this
section (non-inclusion exchange), then,
for purposes of applying section 367(b)
or section 1248 to subsequent sales or
exchanges, and subject to the limitation
of §1.367(b)–2(d)(3)(ii) (in the case of a
transaction described in §1.367(b)–3), the
determination of the earnings and profits
attributable to the stock an exchanging
shareholder receives in the non-inclusion
exchange shall be determined pursuant to
the rules of section 1248 and the regula-
tions under that section.
(2)Example. The following example
illustrates the rules of this section. For
purposes of the example, assume that—
(i) There is no immediate gain recog-
nition pursuant to section 367(a)(1) and
the regulations under that section (either
through operation of the rules or be-
cause the appropriate parties have entered
into a gain recognition agreement under
§§1.367(a)–3(b) and 1.367(a)–8);
(ii) References to earnings and profits
are to earnings and profits that would be
includible in income as a dividend under
section 1248 and the regulations under that
section if stock to which the earnings and
profits are attributable were sold or ex-
changed by its shareholder;
(iii) Each corporation has only a single
class of stock outstanding and uses the cal-
endar year as its taxable year; and
(iv) Each transaction is unrelated to all
other transactions.
Example. Acquisition of the stock of a foreign
corporation that controls a foreign acquiring cor-
poration in a reorganization described in section
368(a)(1)(C).(i)Facts. DC1, a domestic corpora-
tion, has owned all the stock of CFC1, a controlled
foreign corporation, since its formation on January
1, year 1. CFC1 has owned all the stock of CFC2,
a controlled foreign corporation, since its formation
on January 1, year 1. FC, a foreign corporation that
is not a controlled foreign corporation, has owned all
of the stock of FC2, a foreign corporation, since its
formation on January 1, year 2. On December 31,
year 3, pursuant to a restructuring transaction that
was a triangular reorganization described in section
368(a)(1)(C), CFC1 transfers all of its assets, includ-
ing the CFC2 stock, to FC2 in exchange for 80% of
the voting stock of FC. CFC1 transfers the voting
stock of FC to DC1 and the CFC1 stock is cancelled.
Pursuant to section 1223(1), DC1 is considered to
have held the stock of FC since January 1, year 1.
Under section 1223(2), FC2 is considered to have
held the stock of CFC2 since January 1, year 1. On
December 31, year 3, CFC1 has $100 of earnings and
profits. From January 1, year 4, until December 31,
year 5, FC (a controlled foreign corporation after the
restructuring transaction) accumulates an additional
$50 of earnings and profits. FC2, a controlled foreign
corporation after the restructuring transaction, accu-
mulates $100 of earnings and profits from January
1, year 4, until December 31, year 5. On December
31, year 5, FC is liquidated into DC1 in a transaction
described in section 332.
(ii)Result. Generally, this paragraph (d) requires
that DC1 include in income the earnings and prof-
its attributable to its stock in FC as determined un-
der §1.1248–8. However, since the liquidation of FC
into DC1 is a transaction described in §1.367(b)–3,
the earnings and profits attributable to the stock of
FC are limited by §1.367(b)–2(d)(3)(ii) to that por-
tion of the earnings and profits accumulated by FC it-
self before or after the restructuring transaction, and
do not include the earnings and profits of FC’s sub-
sidiaries accumulated before or after the restructuring
transaction. Thus, DC1 will include $40 of earnings
and profits in income (80% of the $50 of earnings
and profits accumulated by FC after the restructuring
transaction).
Par. 4. Section 1.1248–1 is amended
by:
1. Removing the language “(or was
considered as held by reason of the ap-
plication of section 1223)” from the first
sentence of paragraph (a)(1) and adding
the language “(or was considered as held
by reason of the application of section
1223, taking intoaccount §1.1248–8)” in
its place and adding a new third sentence.
2. Redesignating paragraph (a)(4) as
paragraph (a)(5).
3. Adding new paragraphs (a)(4) and
(g).
4. AddingExample 4in newly-desig-
nated paragraph (a)(5).
The additions read as follows:
§1.1248–1 Treatment of gain from certain
sales or exchanges of stock in certain
foreign corporations.
(a)In general.(1)***See§1.1248–8
for additional rules regarding the attribu-
tion of earnings and profits to the stock of a
foreign corporation following certain non-
recognition transactions. * * *
*****
(4) For purposes of paragraph (a)(1) of
this section, if a foreign partnership sells or
exchanges stock of a corporation, the part-
ners in such foreign partnership shall be
treated as selling or exchanging their pro-
portionate share of the stock of such corpo-
ration. Stock which is considered to have
been sold or exchanged by a partner by
reason of the application of this paragraph
(a)(4) shall for purposes of applying such
sentence be treated as actually sold or ex-
changed by such partner.
(5) * * *
Example 4.(i)Facts. X, a domestic corporation,
and Y, a foreign corporation that is not a controlled
foreign corporation, are partners in foreign partner-
ship Z. X has a 60% interest in Z, and Y has a 40%
interest in Z. All parties are calendar year taxpayers.
On January 1, year 1, Z forms foreign corporation H,
a controlled foreign corporation that conducts a busi-
nessinCountryC.ZandH’sfunctional currency is
the United States dollar. In years 1 and 2, H did not
earn subpart F income as defined in section 952(a).
On December 31, year 2, Z sells all of the H stock for
$600 when Z’s adjusted basis in the stock is $100.
Therefore, Z recognizes a gain of $500 on the sale, of
which $300 is allocable to X as a 60% partner. At the
time of the sale, H had $300 of earnings and profits,
$180 of which (that is, 60% of $300) is attributable to
X’s 60% share of the H stock.
(ii)Result. Pursuant to section 1248(a) and para-
graphs (a)(1) and (4) of this section, X and Y are
treated as selling 60% and 40%, respectively, of the
H stock. X includes in its gross income as a dividend
$180 of the gain recognized on the sale. Because Y is
a foreign corporation that is not a CFC, neither sec-
tion 1248 nor section 964 applies to the sale of Y’s
40% share of the H stock.
(iii)Alternative facts. If, instead, X owned its
60% interest in Z through another foreign partnership,
the result would be the same.
*****
(g)Effective/applicability date.The
third sentence in paragraph (a)(1), para-
graph (a)(4), and paragraph (a)(5)Example
4of this section apply to income inclu-
sions that occur on or after July 30, 2007.
A taxpayer may elect to apply paragraph
(a)(4) of this section to income inclu-
sions in open taxable years provided that
it consistently applies paragraph (a)(4)
for income inclusions in the first year for
2007–36 I.R.B.525September 4, 2007

which the election is applicable and in all
subsequent years.
§§1.1248–2, 1.1248–3, 1.1248–7
[Amended]
Par. 5. In §§1.1248–2, 1.1248–3, and
1.1248–7, for each entry in the “Section”
column, remove the language in the “Re-
move” column and add the language in the
“Add” column in its place.
SectionRemoveAdd
§1.1248–2(a)(1)(or was considered to be held by reason
of the application of section 1223)
(or was considered to be held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–2(a)(2)(ii)(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–2(a)(3)(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–2(c)(4)(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–2(e)(1), introductory text(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–2(e)(2)(or is considered as held by reason of the
application of section 1223)
(orisconsideredasheldbyreasonofthe
application of section 1223, taking into
account §1.1248–8)
§1.1248–2(e)(3)(i)(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–3(a)(1)(or was considered to be held by reason
of the application of section 1223)
(or was considered to be held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–3(c)(1)(ii)(or was considered to have held by reason
of the application of section 1223)
(or was considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–3(e)(2)(i)(during the period such share, or block,
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223)
(during the period such share, or block,
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223, taking into account §1.1248–8)
§1.1248–3(e)(3)(during the period such share, or block,
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223)
(during the period such share, or block,
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223, taking into account §1.1248–8)
§1.1248–3(e)(5)(or another person who actually owned
the stock during such taxable year and
whose holding of the stock is attributed
by reason of the application of section
1223 to the person who sold or exchanged
the stock)
(or another person who actually owned
the stock during such taxable year and
whose holding of the stock is attributed
by reason of the application of section
1223, taking intoaccount §1.1248–8, to
the person who sold or exchanged the
stock)
September 4, 20075262007–36 I.R.B.

SectionRemoveAdd
§1.1248–3(e)(6), two placesby reason of the application of section
1223 to such person
by reason of the application of section
1223 to such person, taking into account
§1.1248–8
§1.1248–3(f)(2)(ii)(or was considered to have held by reason
of the application of section 1223)
(or was considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–3(f)(5)(ii)(during the period such stock was
considered to be held by such person by
reason of the application of section 1223)
(during the period such stock was
considered to be held by such person by
reason of the application of section 1223,
taking into account §1.1248–8)
§1.1248–3(f)(5)(iv)(during the period such share (or block)
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223)
(during the period such share (or block)
wasconsideredtobeheldbysuchperson
by reason of the application of section
1223, taking into account §1.1248–8)
§1.1248–7(b)(3)(i)(or was considered to have held by reason
of the application of section 1223)
(or was considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–7(b)(3)(iii)(or is considered to have held by reason
of the application of section 1223)
(or is considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
§1.1248–7(b)(4), introductory text(or was considered to have held by reason
of the application of section 1223)
(or was considered to have held by reason
of the application of section 1223, taking
into account §1.1248–8)
Par. 6. Section 1.1248–8 is added to
read as follows:
§1.1248–8 Earnings and profits
attributable to stock following certain
non-recognition transactions.
(a)Scope. This section sets forth
rules for the attribution of earnings and
profits for purposes of section 1248 and
§1.1248–1(a)(1) and to supplement the
rules in §§1.1248–2 and 1.1248–3 with
respect to—
(1)Stock that an exchanging share-
holder receives, or an acquiring corpo-
ration receives, in restructuring transac-
tions. Except as otherwise provided in
this paragraph (a), stock of a foreign cor-
poration that an exchanging shareholder
receives, or an acquiring corporation re-
ceives, pursuant to a restructuring transac-
tion (as defined in paragraph (b)(1)(vii) of
this section) in which the holding period
of such stock is determined by application
of section 1223(1) or 1223(2), whichever
is appropriate. This section shall not ap-
ply to an exchange otherwise described in
this paragraph (a)(1) if, as a result of the
exchange, the exchanging shareholder is
required to include in income as a deemed
dividend the section 1248 amount pur-
suant to §1.367(b)–4(b). See paragraphs
(b)(2) and (3) of this section;
(2)Nonexchanging shareholders.
Stockofaforeigncorporationthatpar-
ticipates in a restructuring transaction that
is held by a non-exchanging shareholder
(as defined in paragraph (b)(1)(vi) of this
section) in the restructuring transaction.
See paragraph (b)(4) of this section;
(3)Application of section 381.Stockof
a foreign corporation that receives assets in
a transfer to which section 361(a) applies
in connection with a reorganization de-
scribed in section 368(a)(1)(A), (C), (D),
(F), or (G), or in a distribution to which
section 332 applies, and to which section
381(c)(2)(A) and §1.381(c)(2)–1(a) apply.
See paragraph (b)(6) of this section; or
(4)Section 332 liquidations.Stockof
a foreign corporation that receives the as-
sets and liabilities of a foreign corporation
in a complete liquidation described in sec-
tion 332 if the foreign distributee is a for-
eign corporate shareholder (as defined in
paragraph (b)(1)(v) of this section) of the
liquidating corporation. See paragraph (c)
of this section.
(b)Earnings and profits attributable to
stock following a restructuring transac-
tion—(1)Definitions. The following defi-
nitions apply for purposes of this section:
(i)Acquired corporationis a corpora-
tion whose stock or assets are acquired
in exchange for stock in (or stock in and
other property of) either the acquiring cor-
poration or a foreign corporation that con-
trols, within the meaning of section 368(c),
the acquiring corporation in a restructuring
transaction.
(ii)Acquiring corporationis a corpo-
ration that acquires the stock or assets of
an acquired corporation in a restructuring
transaction.
(iii)Controlled foreign corporationis
a corporation described in either section
953(c)(1)(B) or section 957.
(iv)Exchanging shareholderis a person
that exchanges—
(A) In a restructuring transaction qual-
ifying as a nonrecognition transaction
within the meaning of section 7701(a)(45)
and described in section 354, 356, or
361(a), stock in an acquired corporation
for stock in eithera foreign acquiring
corporation or a foreign corporation that
is in control, within the meaning of sec-
2007–36 I.R.B.527September 4, 2007

tion 368(c), of an acquiring corporation
(whether domestic or foreign); or
(B) In a restructuring transaction qual-
ifying as a nonrecognition transaction
within the meaning of section 7701(a)(45)
and described in section 351, property
(including stock) for stock in a foreign
acquiring corporation.
(v)Foreign corporate shareholderis a
foreign corporation that—
(A) Owns stock of another foreign cor-
poration; and
(B) Has a section 1248 shareholder that
is also a section 1248 shareholder of the
other foreign corporation.
(vi)Non-exchanging shareholderis, at
the time the acquiring corporation partici-
pates in a restructuring transaction, either a
section 1248 shareholder or a foreign cor-
porate shareholder of the acquiring cor-
poration that is not an exchanging share-
holder with respect to that corporation.
(vii)Restructuring transactionis a
transaction qualifying as a nonrecognition
transaction within the meaning of section
7701(a)(45) and described in section 351,
354, 356, or 361.
(viii)Section 1248 shareholderis any
United States person that satisfies the own-
ership requirements ofsection 1248(a)(2)
and §1.1248–1(a)(2) with respect to a for-
eign corporation.
(2)Earnings and profits attributable
to stock that an exchanging shareholder
receives in a restructuring transaction.
Where, in a restructuring transaction, an
exchanging shareholder receives stock
in a foreign corporation, the holding pe-
riod of which is determined under section
1223(1), and the exchanging shareholder
is either a section 1248 shareholder or a
foreign corporate shareholder with respect
to that foreign corporation immediately
after the restructuring transaction, the
earnings and profits attributable to the
stock the exchanging shareholder receives
shall be determined pursuant to the rules
in paragraphs (b)(2)(i), (ii), and (iii) of this
section.
(i)Exchanging shareholder exchanges
property that is not stock of a foreign ac-
quired corporation with respect to which
the exchanging shareholder is a section
1248 shareholder or a foreign corporate
shareholder. Where the exchanging share-
holder exchanges in a restructuring trans-
action property that is not stock of a for-
eign acquired corporation with respect to
which the exchanging shareholder is a sec-
tion 1248 shareholder or a foreign corpo-
rate shareholder immediately before such
transaction, the earnings and profits at-
tributable to the stock that the exchang-
ing shareholder receives in the restructur-
ing transaction shall be determined in ac-
cordance with §1.1248–2 or §1.1248–3,
whichever is applicable, without regard to
any portion of the section 1223(1) hold-
ingperiodinthatstockthatispriortothe
restructuring transaction. See paragraph
(b)(7)Example 1of this section.
(ii)Exchanging shareholder exchanges
stock of a foreign corporation with respect
to which the exchanging shareholder is
either a section 1248 shareholder or a
foreign corporate shareholder. Except as
provided in paragraph (b)(2)(iii) of this
section, where the exchanging shareholder
exchanges in a restructuring transaction
stockofaforeignacquiredcorporation
with respect to which the exchanging
shareholder is either a section 1248 share-
holder or a foreign corporate shareholder
immediately before such restructuring
transaction, the earnings and profits at-
tributable to the stock that the exchanging
shareholder receives in the restructuring
transaction shall be the sum of the earnings
and profits attributable to—
(A)Thestockoftheforeignacquired
corporation exchanged (determined in ac-
cordance with §1.1248–2 or §1.1248–3,
whichever is applicable, and this section,
if applicable) that was accumulated before
the restructuring transaction; and
(B) The stock of the foreign corpora-
tion that the exchanging shareholder re-
ceives in the restructuring transaction (de-
termined in accordance with §1.1248–2 or
§1.1248–3, whicheveris applicable, and
this section, if applicable), without regard
to any portion of the section 1223(1) hold-
ingperiodinthatstockthatispriortothe
restructuring transaction. See paragraph
(b)(7)Example 2,Example 4,andExam-
ple 6of this section.
(iii)Exchanging shareholder receives
stock in a foreign corporation that con-
trols a domestic acquiring corporation.
Where the acquiring corporation is a do-
mestic corporation and the exchanging
shareholder receives in a restructuring
transaction stock in a foreign corpora-
tion that controls (within the meaning of
section 368(c)) the domestic acquiring
corporation, the earnings and profits at-
tributable to the stock that the exchanging
shareholder receives in the restructur-
ing transaction shall consist solely of the
amount of earnings and profits attributable
to such stock (determined in accordance
with §1.1248–2 or §1.1248–3, whichever
is applicable, and this section, if appli-
cable) without regard to any portion of
the section 1223(1) holding period in that
stock that is prior to the restructuring
transaction. See paragraph (b)(7)Example
5of this section.
(3)Earnings and profits attributable
to stock in a foreign corporation cer-
tain acquiring corporations receive in
a restructuring transaction.Wherean
acquiring corporation receives, in a re-
structuring transaction, stock in a foreign
acquired corporation, the holding period
of which is determined under section
1223(2), and the acquiring corporation
is either a section 1248 shareholder or a
foreign corporate shareholder with respect
to that foreign acquired corporation imme-
diately after the restructuring transaction,
the earnings and profits attributable to the
foreign acquired corporation stock that
the acquiring corporation receives shall be
determined pursuant to the rules in para-
graphs (b)(3)(i) and (ii) of this section.
(i)Stock of a foreign corporation with
respect to which the exchanging share-
holder is neither a section 1248 share-
holder nor a foreign corporate share-
holder. The earnings and profits attribut-
able to the stock of the foreign acquired
corporation that the acquiring corpora-
tion receives in a restructuring transaction
where the exchangingshareholder is nei-
ther a section 1248 shareholder nor a
foreign corporate shareholder with respect
to that foreign acquired corporation imme-
diately before the restructuring transaction
shall be determined in accordance with
§1.1248–2 or §1.1248–3, whichever is
applicable, without regard to any portion
of the section 1223(2) holding period in
that stock that is prior to the restructuring
transaction.
(ii)Stock of a foreign corporation with
respect to which the exchanging share-
holder is either a section 1248 shareholder
or a foreign corporate shareholder.The
earnings and profits attributable to the
stock of a foreign acquired corporation
that the acquiring corporation receives
in the restructuring transaction where
the exchanging shareholder is either a
September 4, 20075282007–36 I.R.B.

section 1248 shareholder or a foreign cor-
porate shareholder with respect to that
foreign corporation immediately before
the restructuring transaction shall be de-
termined in accordance with §1.1248–2
or §1.1248–3, whichever is applicable,
with regard to the portion of the section
1223(2) holding period of the stock that
the exchanging shareholder took into ac-
count for purposes of attributing earnings
and profits to that stock (determined in
accordance with this section). See para-
graph (b)(7)Example 3,Example 5,and
Example 7of this section.
(4)Earnings and profits attributable
to stock held by a non-exchanging share-
holder in a foreign acquiring corporation.
(i) Except to the extent paragraph (b)(4)(ii)
of this section applies, the earnings and
profits attributable to stock of a foreign
acquiring corporationheldbyanon-ex-
changing shareholder immediately prior to
a restructuring transaction continue to be
attributed to such stock, and the earnings
and profits of the acquired corporation
accumulated prior tothe restructuring
transaction attributable to the stock of an
acquired corporation are not attributed to
the non-exchanging shareholder’s stock
in the foreign acquiring corporation. See
§1.1248–2 or §1.1248–3 (whichever is
applicable) and, as applicable, paragraph
(b)(6) of this section; see also paragraph
(b)(7)Example 2andExample 4of this
section.
(ii) Where a non-exchanging share-
holder holds stock in a foreign corporation
that is also an exchanging shareholder
and a foreign acquiring corporation in the
same restructuring transaction—
(A) The earnings and profits attrib-
utable to such stock shall be the sum of
the earnings and profits attributable to the
stock of such foreign corporation immedi-
ately before the restructuring transaction
(including amounts attributed under sec-
tion 1248(c)(2)) and the earnings and
profits attributable to the stock of the for-
eign acquiring corporation accumulated
after the restructuring transaction (in-
cluding amounts attributed under section
1248(c)(2)); and
(B) Paragraph (b)(6) of this section ap-
plies. See paragraph (b)(7)Example 8of
this section.
(iii) Where the acquiring corporation is
a foreign corporate shareholder with re-
spect to stock of a foreign acquired cor-
poration, paragraph (b)(3) of this section
shall not apply for purposes of determin-
ing the earnings and profits attributable to
stock in the foreign acquiring corporation
owned by a non-exchanging shareholder
thereof (see section 1248(c)(2)). See para-
graph (b)(7)Example 6of this section.
(5)Reduction in earnings and profits at-
tributable to stock to prevent multiple in-
clusions with respect to the same earn-
ings and profits. To the extent consistent
with the principles of section 1248, adjust-
ments to earnings and profits attributable
to stock shall be made such that section
1223(1) and (2) and this section are applied
in a manner that results in earnings and
profits being taken into account only once.
Thus, for example, when a controlled for-
eign corporation sells or exchanges all or
part of the stock of another foreign corpo-
ration to which earnings and profits are at-
tributable pursuant to this paragraph (b) or
paragraph (c) of this section, proportion-
ate reductions shall be made to the earn-
ings and profits attributed to the stock of
the selling foreign corporate shareholder
owned by a section 1248 shareholder. See
paragraph (b)(7)Example 7of this section.
(6)Special rule regarding section 381.
Solely for purposes of determining the
earnings and profits (or deficit in earn-
ings and profits) attributable to stock
pursuant to this paragraph (b), the earn-
ings and profits of a corporation shall
not include earnings and profits that are
treated as received or incurred under sec-
tion 381(c)(2)(A) and §1.381(c)(2)–1(a).
See paragraph (b)(7)Example 4of this
section.
(7)Examples. The application of this
paragraph (b) is illustrated by the follow-
ing examples. Unless otherwise indicated,
in the following examples assume that—
(i) There is no immediate gain recog-
nition pursuant to section 367(a)(1) and
the regulations under that section (either
through operation of the rules or be-
cause the appropriate parties have entered
into a gain recognition agreement under
§§1.367(a)–3(b) and 1.367(a)–8);
(ii) There is no income inclusion re-
quired pursuant to section 367(b) and the
regulations under that section, and all re-
porting requirements in those regulations
are complied with;
(iii) References to earnings and prof-
its are to earnings and profits that would
be includible in income as a dividend un-
der section 1248 and the regulations under
that section if stock to which the earnings
and profits are attributable were sold or ex-
changed by its shareholder;
(iv) Each corporation has only a single
class of stock outstanding and uses the cal-
endar year as its taxable year; and
(v) Each transaction is unrelated to all
other transactions.
Example 1.A section 351 exchange of property
other than stock in a foreign corporation with respect
to which the exchanging shareholder is either a sec-
tion 1248 shareholder or a foreign corporate share-
holder.(i)Facts. DC1, a domestic corporation, has
owned all the stock of CFC, a foreign corporation,
since CFC’s formation on January 1, year 3. On De-
cember 31, year 5, DC2, a domestic corporation un-
related to DC1, contributes property it has held since
January 1, year 1, to CFC in exchange for voting stock
ofCFCinarestructuringtransactionthatisanex-
change under section 351. The property that DC2
contributes is not stock in a foreign corporation with
respect to which DC2 was either a section 1248 share-
holder or a foreign corporate shareholder. DC2 re-
ceives 80% of the voting stock of CFC in the restruc-
turing transaction and its holding period in that CFC
stock, determined pursuant to section 1223(1), began
on January 1, year 1. CFC has $100 of accumulated
earnings and profits on December 31, year 5. On De-
cember 31, year 7, when the accumulated earnings
and profits of CFC are $200, DC2, a section 1248
shareholder with respect to CFC, sells its CFC stock.
(ii)Result. Under paragraph (b)(2)(i) of this sec-
tion, the earnings and profits attributable to the CFC
stock sold by DC2 are $80. This amount consists of
none of the $100 of earnings and profits accumulated
by CFC before the restructuring transaction, and 80%
of the $100 of earnings and profits of CFC accumu-
lated after the restructuring transaction.
Example 2.A section 351 exchange of controlled
foreign corporation stock by a United States person
for stock in a controlled foreign corporation in a re-
structuring transaction.(i)Facts. The facts are the
same as inExample 1except as follows. The property
that DC2 contributes is 100% of the stock in CFC2, a
foreign corporation. DC2 has owned all the stock of
CFC2 since CFC2’s formation on January 1, year 2,
and CFC2 has $200 of earnings and profits as of De-
cember 31, year 5. CFC2 does not accumulate any ad-
ditional earnings and profits from December 31, year
5, to December 31, year 7. On December 31, year
7, when the accumulated earnings and profits of CFC
are $200, DC2, a section 1248 shareholder with re-
spect to CFC, sells its CFC stock. Also on that date,
DC1 sells its CFC stock.
(ii)Result.(A)DC2 sale. Pursuant to paragraph
(b)(2)(ii) of this section, the earnings and profits at-
tributable to the CFC stock sold by DC2 are $280.
This amount consists of all of the $200 of earnings
and profits of CFC2 accumulated before the restruc-
turing transaction (see also section 1248(c)(2)), none
of the $100 of earnings and profits accumulated by
CFC before the restructuring transaction, and 80% of
the $100 of earnings and profits of CFC accumulated
after the restructuring transaction.
(B)DC1 sale. Pursuant to paragraph (b)(4) of
this section, the earnings and profits attributable to
2007–36 I.R.B.529September 4, 2007

the CFC stock sold by DC1, a non-exchanging share-
holder in the restructuring transaction, are $120. This
amount consists of all of the $100 of earnings and
profits of CFC accumulated before the restructuring
transaction, none of the $200 of earnings and profits
of CFC2 accumulated before the restructuring trans-
action, and 20% of the $100 of earnings and profits of
CFC accumulated after the restructuring transaction.
Example 3.A section 351 exchange of controlled
foreign corporation stock by a United States person
for stock in a domestic corporation in a restructuring
transaction.(i)Facts. DC1, a domestic corporation,
has owned all of the stock of CFC, a foreign corpo-
ration, since CFC’s formation on January 1, year 1.
DC1 has also owned all the stock of DC2, a domes-
tic corporation, since DC2’s formation on January 1,
year 1. On December 31, year2, DC1 contributes the
stock of CFC to DC2 in exchange for stock in DC2
in a restructuring transaction that is an exchange de-
scribed in section 351. On December 31, year 2, CFC
has $100 of accumulated earnings and profits. DC2
has a basis in the CFC stock determined under section
362, and is considered to have held the CFC stock
since January 1, year 1, pursuant to section 1223(2).
On December 31, year 4, when the accumulated earn-
ings and profits of CFC are still $100, DC2 sells its
CFC stock.
(ii)Result. Under paragraph (b)(3)(ii) of this sec-
tion, $100 of accumulated earnings and profits of
CFC is attributable to the stock of CFC sold by DC2,
even though DC2 did not hold the stock of CFC dur-
ing the time CFC accumulated the earnings and prof-
its.
Example 4.Acquisition of a controlled foreign
corporation by a controlled foreign corporation in a
reorganization described in section 368(a)(1)(C) (or
section 368(a)(1)(B)).(i)Facts. DC1, a domestic cor-
poration, has owned all the stock of CFC1, a foreign
corporation, since its formation on January 1, year
1. DC2, a domestic corporation unrelated to DC1,
has owned all of the stock of CFC2, a foreign cor-
poration, since its formation on January 1, year 2.
On December 31, year 3, pursuant to a restructur-
ing transaction that is a reorganization described in
section 368(a)(1)(C), CFC1 transfers all of its assets
to CFC2 in exchange for 25% of the voting stock of
CFC2. CFC1 distributes the CFC2 stock to DC1 and
the CFC1 stock is cancelled. DC1’s holding period
in the CFC2 stock, determined under section 1223(1),
begins on January 1, year 1. On December 31, year
3, CFC1 has $100 of accumulated earnings and prof-
its and CFC2 has $200 of accumulated earnings and
profits. CFC2 succeeds tothe $100 of CFC1 accumu-
lated earnings and profits in the reorganization under
section 381. From January 1, year 4 to December 31,
year 5, CFC2 incurred a deficit in earnings and prof-
its in the amount of ($200). On December 31, year 5,
both DC1 and DC2 sell their stock in CFC2.
(ii)Result.(A)DC1. Pursuant to paragraph
(b)(2)(ii) of this section, $50 of earnings and prof-
its is attributable to the CFC2 stock sold by DC1.
This amount consists of $100 of CFC1’s earnings
and profits accumulated before the restructuring
transaction, reduced by 25% of CFC2’s ($200)
post-restructuring transaction deficit in earnings and
profits. None of the $200 of CFC2’s earnings and
profits accumulated by CFC2 prior to the reorgani-
zation is attributed to the CFC2 stock sold by DC1.
Also, none of the earnings and profits CFC2 suc-
ceeded to under section 381 is attributed to the CFC2
stock sold by DC1, pursuant to paragraph (b)(6) of
this section.
(B)DC2. Pursuant to paragraph (b)(4) of this sec-
tion, there is $50 of accumulated earnings and prof-
its attributable to the CFC2 stock sold by DC2. This
amount consists of all of the $200 of CFC2’s earn-
ings and profits accumulated by CFC2 prior to the
reorganization, reduced by 75% of CFC2’s deficit in
earnings and profits in the amount of ($200) incurred
after the restructuring transaction. None of the $100
of CFC1 accumulated earnings and profits succeeded
to under section 381 is attributable to the CFC2 stock
sold by DC2, pursuant to paragraph (b)(6) of this sec-
tion.
(C)Section 368(a)(1)(B) reorganization.If,
instead of DC1 acquiring its 25% interest in CFC2
pursuant to a reorganization described in section
368(a)(1)(C), DC1 had transferred the stock of CFC1
to CFC2 in exchange for 25% of the voting stock
of CFC2 in a reorganization described in section
368(a)(1)(B), the results would be the same as de-
scribed in paragraphs (ii)(A) and (B) of thisExample
4.
Example 5.Acquisition of the stock of a foreign
corporation that controls a domestic acquiring cor-
poration in a triangular reorganization described in
section 368(a)(1)(C).(i)Facts. DC1, a domestic cor-
poration, has owned all the stock of CFC1, a foreign
corporation, since its formation on January 1, year
1. CFC1 has owned all the stock of CFC2, a for-
eign corporation, since its formation on January 1,
year 1. FC, a foreign corporation that is not a con-
trolled foreign corporation, has owned all of the stock
of DC2, a domestic corporation, since its formation
on January 1, year 2. On December 31, year 3, pur-
suant to a restructuring transaction that was a triangu-
lar reorganization described in section 368(a)(1)(C),
CFC1 transfers all of its assets, including the CFC2
stock, to DC2 in exchange for 60% of the voting
stock of FC. CFC1 transfers the voting stock of FC
to DC1 and the CFC1 stock is cancelled. Pursuant
to section 1223(1), DC1 is considered to have held
the stock of FC since January 1, year 1. Under sec-
tion 1223(2), DC2 is considered to have held the
stockofCFC2sinceJanuary1,year1. OnDecem-
ber 31, year 3, CFC1 has $100 of earnings and prof-
its, CFC2 has $300 of earnings and profits, and FC
has $200 of earnings and profits. DC1 includes the
$100 all earnings and profits amount attributable to
its CFC1 stock in income as a deemed dividend un-
der §1.367(b)–3 upon the exchange of CFC1 stock for
FC stock. Pursuant to the lower-tier earnings exclu-
sion of §1.367(b)–2(d)(3)(ii), that amount does not
include the $300 of earnings and profits of CFC2.
From January 1, year 4, until December 31, year 5,
FC (now a controlled foreign corporation) accumu-
lates an additional $50 of earnings and profits. From
January 1, year 4 until December 31, year 5, CFC2
accumulates an additional $100 of earnings and prof-
its. On December 31, year 5, DC1 sells its stock in
FC and DC2 sells its stock in CFC2.
(ii)Result.(A)DC1. Pursuant to paragraph
(b)(2)(iii) of this section, there is $30 of earnings
and profits attributable to the stock of FC sold by
DC1. This amount consists of 60% of the $50 of
earnings and profits accumulated by FC after the
restructuring transaction, and none of the earnings
and profits accumulated by CFC1, CFC2, or FC
before the restructuring transaction.
(B)DC2. Pursuant to paragraph (b)(3)(ii) of this
section, there is $400 of earnings and profits attribut-
able to the stock of CFC2 sold by DC2. This amount
consists of all of the earnings and profits accumulated
by CFC2 during DC2’s section 1223(2) holding pe-
riod.
Example 6.Acquisition of the stock of a for-
eign corporation that controls a foreign acquiring
corporation in a reorganization described in section
368(a)(1)(C).(i)Facts. DC1, a domestic corporation,
has owned all the stock of CFC1, a foreign corpora-
tion, since its formation on January 1, year 1. CFC1
has owned all the stock of CFC2, a foreign corpora-
tion, since its formation on January 1, year 1. FC,
a foreign corporation that is not a controlled foreign
corporation, has owned all of the stock of FC2, a for-
eign corporation, since its formation on January 1,
year 2. On December 31, year 3, pursuant to a re-
structuring transaction that was a triangular reorgani-
zation described in section 368(a)(1)(C), CFC1 trans-
fers all of its assets, including the CFC2 stock, to FC2
in exchange for 60% of the voting stock of FC. CFC1
transfers the voting stock of FC to DC1 and the CFC1
stock is cancelled. Pursuant to section 1223(1), DC1
is considered to have held the stock of FC since Jan-
uary 1, year 1. Under section 1223(2), FC2 is consid-
ered to have held the stock of CFC2 since January 1,
year 1. On December 31, year 3, CFC1 has $100 of
earnings and profits, CFC2 has $300 of earnings and
profits, FC has $200 of earnings and profits, and FC2
has no earnings and profits. From January 1, year 4,
until December 31, year 5, FC (now a controlled for-
eign corporation) accumulates an additional $50 of
earnings and profits. From January 1, year 4 until De-
cember 31, year 5, CFC2 accumulates an additional
$100 of earnings and profits. FC2, a controlled for-
eign corporation after the restructuring transaction,
accumulates $100 of earnings and profits from Jan-
uary 1, year 4, until December 31, year 5. On De-
cember 31, year 5, DC1 sells its stock in FC.
(ii)Result. Pursuant to paragraphs (b)(2)(ii) and
(b)(4)(iii) of this section, there is $550 of earnings and
profits attributable to the stock of FC sold by DC1.
This amount consists of all $400 of the CFC1 and
CFC2 earnings and profits accumulated before the re-
structuring transaction (see also section 1248(c)(2)),
and 60% of the $250 of the earnings and profits accu-
mulatedbyFC,FC2,andCFC2aftertherestructuring
transaction.
Example 7.Acquisition of controlled foreign cor-
poration stock by a controlled foreign corporation in
a reorganization describedin section 368(a)(1)(B),
followed by a sale of the acquired stock by the acquir-
ing controlled foreign corporation.(i)Facts.DC1,a
domestic corporation, has owned all of the outstand-
ing stock of CFC1, a foreign corporation, since its
formation on January 1, year 1. CFC1 has owned all
of the outstanding stock of CFC3, a foreign corpora-
tion, since its formation on January 1, year 1. DC2,
a domestic corporation unrelated to DC1, has owned
all of the outstanding stock of CFC2, a foreign cor-
poration, since its formation on January 1, year 2.
On December 31, year 3, pursuant to a restructuring
transaction that is a reorganization described in sec-
tion 368(a)(1)(B), CFC1 transfers all of the stock of
CFC3 to CFC2 in exchange for 40% of CFC2’s stock.
On December 31, year 3, CFC2 and CFC3 have, re-
September 4, 20075302007–36 I.R.B.

spectively, $40 and $20 of earnings and profits. On
December 31, year 5, when the accumulated earn-
ings and profits of CFC3 are $50 ($20 of earnings
and profits as of December 31, year 3, plus $30 of
earnings and profits generated from January 1, year 4,
through December 31, year 5), CFC2 sells the stock
of CFC3 in a transaction to which section 964(e) ap-
plies.
(ii)Result.(A)CFC2. Pursuant to paragraph
(b)(3)(ii) of this section, there is $50 of earnings and
profits attributable to the CFC3 stock sold by CFC2.
This amount consists of the accumulated earnings and
profits attributable to CFC2’s entire section 1223(2)
holding period in the CFC3 stock.
(B)CFC1, DC2, and DC1. Under paragraph
(b)(5) of this section, the earnings and profits attrib-
utable to the CFC2 stock held by CFC1 and DC2,
and the earnings and profits attributable to the CFC1
stock held by DC1, will be reduced (regardless of
whether CFC2 recognizes gain on its sale of CFC3
stock).
(1)CFC1. The earnings and profits attributable to
the CFC2 stock held by CFC1 will be reduced by $32,
or the amount of earnings and profits as of Decem-
ber 31, year 5, that would have been attributable to
the CFC2 stock held by CFC1 pursuant to paragraph
(b)(2)(ii) of this section. This amount consists of all
of the $20 of earnings and profits accumulated by
CFC3 before the restructuring transaction and 40% of
the $30 of earnings and profits accumulated by CFC3
aftertherestructuringtransaction(.40X$30=$12).
(2)DC1. The earnings and profits attributable to
the CFC1 stock held by DC1 will also be reduced by
$32, or the amount of earnings and profits that would
have been attributable to the CFC1 stock held by DC1
as of December 31, year 5.
(3)DC2. The earnings and profits attributable to
the CFC2 stock held by DC2 will be reduced by $18,
or the amount of earnings and profits that would have
been attributable to the CFC2 stock held by DC2 as of
December 31, year 5, under paragraph (b)(4) of this
section. This amount consists of 60% of the $30 (.60
X $30 = $18) of earnings and profits accumulated by
CFC3 after the restructuring transaction.
(C)PartialsalebyCFC2. If, instead of sell-
ing 100% of the CFC3 stock, on December 31, year
5, CFC2 sells only 50% of its CFC3 stock, para-
graph (b)(5) of this section requires CFC1 to reduce
the earnings and profits of CFC3 attributable to its
CFC2 stock to $16. Similarly, DC1 would be required
to reduce the earnings and profits of CFC3 attribut-
able to its CFC1 stock by $16. Paragraph (b)(5) of
this section also requires DC2 to reduce the CFC3
earnings and profits attributable to its CFC2 stock by
$9. These reductions occur without regard to whether
CFC2 recognizes gain on its sale of CFC3 stock.
Example 8.Acquisition of the assets of a
lower-tier controlled foreign corporation by an up-
per-tier controlled foreign corporation in a restruc-
turing transaction described in section 368(a)(1)(C).
(i)Facts. DC, a domestic corporation, has owned all
the stock of CFC1, a controlled foreign corporation,
since its formation on January 1, year 1. CFC1 is a
holding company that has owned 79% of the stock
of CFC2, a controlled foreign corporation, since its
formation on January 1, year 1. The other 21% of
CFC2 stock is owned by X, an unrelated party. On
December 31, year 1, CFC2 has $200 of earnings
and profits. On December 31, year 1, CFC1 has
no accumulated earnings and profits. On December
31, year 1, pursuant to a restructuring transaction
described in section 368(a)(1)(C), CFC2 transfers all
its properties to CFC1. In exchange, CFC1 assumes
the liabilities of CFC2 and transfers to CFC2 voting
stock representing 21% of the stock of CFC1. CFC2
distributes the voting stock to X and liquidates. The
liabilities assumed do not exceed 20% of the value
of the properties of CFC2. From January 1, year 2,
to December 31, year 3, CFC1 accumulates $100 of
earnings and profits. On December 31, year 3, DC
sells its CFC1 stock.
(ii)Result. Pursuant to paragraph (b)(4)(ii) of this
section, there is $237 of earnings and profits attribut-
able to DC’s CFC1 stock. This amount consists of
79% of CFC2’s $200 of earnings and profits accu-
mulated before the restructuring transaction (see sec-
tion 1248(c)(2)), and 79% of CFC1’s $100 of earn-
ings and profits accumulated after the restructuring
transaction. Pursuant to paragraph (b)(6) of this sec-
tion, none of CFC2’s $200 of earnings and profits to
which CFC1 succeeded under section 381 would be
attributable to DC’s CFC1 stock.
(c)Earnings and profits attributable to
stock of a foreign distributee corporation
that is a foreign corporate shareholder
with respect to a foreign liquidating corpo-
ration—(1)General rule. If a foreign cor-
poration (liquidating corporation) makes
a distribution of property in complete liq-
uidation under section 332 to a foreign
corporation (distributee), and immediately
before the liquidation the distributee was a
foreign corporate shareholder with respect
to the liquidating foreign corporation, the
amount of earnings and profits attributable
to the distributee stock upon its subse-
quent sale or exchange will be determined
under this paragraph (c)(1). The earnings
and profits attributable will be the sum
of the earnings and profits attributable to
the stock of the distributee immediately
before the liquidation (including amounts
attributed under section 1248(c)(2)) and
the earnings and profits attributable to
the stock of the distributee accumulated
after the liquidation(including amounts
attributed under section 1248(c)(2)).
(2)Special rule regarding section 381.
Solely for purposes of determining the
earnings and profits (or deficit in earnings
and profits) attributable to stock under this
paragraph (c), the attributed earnings and
profits of a corporation shall not include
earnings and profits that are treated as
received or incurred pursuant to section
381(c)(2)(A) and §1.381(c)(2)–1(a).
(3)Example.(i)Facts. DC, a domestic corpora-
tion, has owned all of the stock of CFC1, a foreign
corporation, since its formation on January 1, year 1.
CFC1 is an operating company that has owned all of
the stock of CFC2, a foreign corporation, since its for-
mation on January 1, year 1. On December 31, year 2,
CFC1 has $200 of accumulated earnings and profits
and CFC2 has a ($200) deficit in earnings and prof-
its. On December 31, year 2, CFC2 distributes all of
its assets and liabilities to CFC1 in a liquidation to
which section 332 applies. From January 1, year 3,
until December 31, year 4, CFC1 accumulates no ad-
ditional earnings and profits. On December 31, year
4, DC sells its stock in CFC1.
(ii)Result. Pursuant to paragraph (c)(1) of this
section, there are no earnings and profits attributable
to DC’s CFC1 stock. This amount consists of the sum
of the earnings and profits attributable to the CFC1
stock immediately before the liquidation (100% of
the $200 accumulated earnings and profits of CFC1
and 100% of CFC2’s ($200) deficit in earnings and
profits) and the amount of earnings and profits ac-
cumulated after the section 332 liquidation (see also
section 1248(c)(2)).
(d)Effective/applicability date.This
section applies to income inclusions that
occur on or after July 30, 2007.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved July 16, 2007.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 27, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 30, 2007, 72 F.R. 41442)
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 September 2007.
Rev. Rul. 2007–57
This revenue ruling provides various
prescribed rates for federal income tax
purposes for September 2007 (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
2007–36 I.R.B.531September 4, 2007

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. 2007
–57 TABLE 1
Applicable Federal Rates (AFR) for September 2007
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.82%4.76%4.73%4.71%
110% AFR5.31%5.24%5.21%5.18%
120% AFR5.79%5.71%5.67%5.64%
130% AFR6.29%6.19%6.14%6.11%
Mid-term
AFR4.79%4.73%4.70%4.68%
110% AFR5.27%5.20%5.17%5.14%
120% AFR5.76%5.68%5.64%5.61%
130% AFR6.24%6.15%6.10%6.07%
150% AFR7.23%7.10%7.04%7.00%
175% AFR8.45%8.28%8.20%8.14%
Long-t
erm
AFR5.09%5.03%5.00%4.98%
110% A
FR
5.61%5.53%5.49%5.47%
120% AFR6.13%6.04%6.00%5.97%
130% AFR6.65%6.54%6.49%6.45%
REV.
RUL. 2007–57 TABLE 2
Adjusted AFR for September 2007
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
3.65%3.62%3.60%3.59%
Mid-term adjusted AFR3.92%3.88%3.86%3.85%
Lo
ng-term adjusted
AF
R
4.
44%
4.
39%
4.
37%
4.
35%
REV. RUL. 2007–57 TABLE 3
Rates Under Section 382 for September 2007
Adjusted federal long-term rate for the current month4.44%
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.)4.50%
September 4, 20075322007–36 I.R.B.

REV. RUL. 2007–
57 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for September 2007
Appropriate percentage for the 70% present value low-income housing credit8.15%
Appropriate percentage for the 30% present value low-income housing credit3.49%
REV. RUL. 2007–57 TABLE 5
Rate Under Section 7520 for September 2007
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 interest5.8%
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 September 2007. See Rev. Rul. 2007-57, page
531.
Section 1502.—Regulations
26 CFR 1.1502–77: Agent for the group.
T.D. 9343
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Agent for a Consolidated
Group With Foreign Common
Parent
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations under section 1502 that pro-
vide the Internal Revenue Service with the
authority to designate a domestic member
of the consolidated group as a substitute
agent to act as the sole agent for the group
where a foreign entity is the group’s com-
mon parent. The final regulations are nec-
essary to clarify and explain the rules gov-
erning the designation of an agent for the
members of a consolidated group. The
regulations affect corporations that join in
the filing of a consolidated Federal income
taxreturnwherethecommonparentof
the consolidated group is a foreign entity
that is treated as a domestic corporation
pursuant to section 7874(b) of the Internal
Revenue Code (Code) or as the result of a
section 953(d) election.
DATES:Effective Date:These regulations
are effective July 23, 2007.
Applicability Date:For dates of appli-
cability, see §1.1502–77(h)(3).
FOR FURTHER INFORMATION
CONTACT: Stephen R. Cleary, (202)
622–7750, (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 14, 2006, the IRS and Trea-
sury Department published temporary reg-
ulations (T.D. 9255, 2006–1 C.B. 741) in
theFederal Register(71 FR 13001) pro-
viding the IRS the authority to designate a
domestic member of a consolidated group
to be the sole agent for the group where
the common parent of the group is a for-
eign entity. A notice of proposed rule-
making (REG–164247–05, 2006–1 C.B.
758) cross-referencing the temporary reg-
ulations was published in theFederal Reg-
isterfor the same day (71 FR 13062). The
temporary regulations provide procedures
for the IRS’s designation of a “domestic
substitute agent” and define the term of
that substitute agent’s agency.
Explanation of Provisions and
Summary of Comments
No comments were received respond-
ing to the notice of proposed rulemaking,
and no public hearing was requested
or held. The proposed regulations are
adopted as amended by this Treasury de-
cision and the corresponding temporary
regulations are removed. The temporary
regulations, as contained in the 26 CFR
part 1 edition revised as of April 1, 2007,
remain in effect for certain taxable years
as provided by §1.1502–77(h)(3)(ii) of
these final regulations.
These final regulations clarify the term
of the domestic substitute agent’s agency
by specifying that once appointed for one
or more taxable years of the group, un-
less the designation is expressly limited to
such term, the domestic substitute agent
will continue to be the agent for subse-
quent taxable years of the group until cer-
tain specified eventsoccur. These final
regulations also specify that, if the domes-
tic substitute agent is the group’s agent for
a taxable year, it will generally continue to
serve as the agent for that year until the
domestic substitute agent’s existence ter-
minates. Finally, these final regulations
clarify that if a group with a domestic sub-
stitute agent continues in existence with a
new common parent that is a domestic cor-
poration (without regard to section 7874 or
a section 953(d) election) during a consol-
idated return year, the domestic substitute
agent is the agent of the group for the year
through the date of the transaction in which
the new common parent becomes the com-
mon parent, and thereafter the new com-
mon parent becomes the agent of the group
for the entire taxable year.
Additionally, these regulations indicate
that §1.1502–77(e)(1) is also applicable
for purposes of determining whether a do-
mestic substitute agent’s existence has ter-
minated.
2007–36 I.R.B.533September 4, 2007

Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. Pursuant to 5 U.S.C.
553(d)(3) it has been determined that a de-
layed effective date is unnecessary because
this rule finalizes currently effective tem-
porary rules regarding the designation of a
domestic substitute agent without substan-
tive change. It is hereby certified that these
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities. This certification is based
on the fact that these regulations will pri-
marily affect affiliated groups of corpora-
tions that have electedto file consolidated
returns, which tend to be larger businesses.
Therefore, a regulatory flexibility analysis
is not required. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice
of proposed rulemaking preceding these fi-
nal regulations was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regula-
tions is Stephen R. Cleary of the Office
of Associate Chief Counsel (Corporate).
Other personnel from the Treasury Depart-
ment and the IRS participated in their de-
velopment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.1502–77T to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1502–77 is amended
by:
1. Revising paragraph (e)(1).
2. Adding paragraph (h)(3).
3. Revising paragraph (j).
The additions and revisions read as fol-
lows:
§1.1502–77 Agent for the group.
*****
(e)Termination of a corporation’s ex-
istence—(1)In general. For purposes of
paragraphs (a)(1)(v), (a)(4)(i), (d), and (j)
of this section, the existence of a corpora-
tion is deemed to terminate if—
(i) Its existence terminates under appli-
cable law; or
(ii) Except as provided in paragraph
(e)(3) of this section, it becomes, for Fed-
eral tax purposes, either—
(A) an entity that is disregarded as an
entity separate from its owner; or
(B) an entity that is reclassified as a
partnership. * * *
*****
(h) * * *
(3)Designation of a domestic substi-
tute agent—(i)In general. The provisions
of paragraphs (e)(1) and (j) of this section
apply to taxable years for which the con-
solidated Federal income tax return is due
(without extensions) after July 23, 2007.
(ii)Prior law. For taxable years for
which the consolidated Federal income tax
return is due (without extensions) on or be-
fore July 23, 2007, see §1.1502–77(e)(1)
as contained in the 26CFR part 1 edition
revised as of April 1, 2007. For taxable
years for which the consolidated Federal
income tax return is due (without exten-
sions) after March 14, 2006, and on or be-
fore July 23, 2007, see §1.1502–77T as
contained in the 26 CFR part 1 edition re-
vised as of April 1, 2007.
*****
(j)Designation by Commissioner if
common parent is treated as a domestic
corporation under section 7874 or section
953(d)—(1)In general.Ifthecommon
parent is an entity created or organized
under the law of a foreign country and
is treated as a domestic corporation by
reason of section 7874 (or regulations
under that section) or a section 953(d)
election (a foreign common parent), the
Commissioner may at any time, with or
without a request from any member of the
group, designate another member of the
group to act as the agent for the group (a
domestic substitute agent) for any taxable
year for which the consolidated Federal
income tax return is due (without exten-
sions) after July 23, 2007, and the foreign
common parent would otherwise be the
agent for the group. For each such year,
the domestic substitute agent will be the
sole agent for the group even though the
foreign common parent remains in exis-
tence. The foreign common parent ceases
to be the agent for the group when the
Commissioner’s designation of a domes-
tic substitute agent becomes effective. The
Commissioner may designate a domestic
substitute agent for the term of a single
taxable year, multiple years, or on a con-
tinuing basis.
(2)Domestic substitute agent. The do-
mestic substitute agent, by designation or
by succession, shall be a domestic corpo-
ration described in paragraph (d)(1)(i)(A)
of this section (determined without regard
to section 7874, a section 953(d) election
or section 1504(d)).
(3)Designation by the Commissioner.
The Commissioner will notify the domes-
tic substitute agent in writing by mail or
faxed transmission of the designation. The
domestic substitute agent’s designation is
effective on the earliest of the 14
th
day
following the date of a mailing, the 4
th
day following a faxed transmission, or the
date the Commissioner receives written
confirmation of the designation by a duly
authorized officer of the domestic substi-
tute agent (within the meaning of section
6062). The domestic substitute agent must
give notice of its designation to the foreign
common parent and each corporation that
was a member of the group during any part
of any consolidated return year for which
the domestic substitute agent will be the
agent. A failure of the domestic substitute
agent to notify the foreign common parent
or any member of the group does not inval-
idate the designation. The Commissioner
will send a copy of the notification to the
foreign common parent, and if applicable,
to any domestic substitute agent the des-
ignation replaces; a failure to send a copy
of the notification does not invalidate the
designation.
(4)Term of agency—(i)Taxable years
for which domestic substitute agent is the
agent. If the Commissioner designates a
domestic substitute agent for one or more
taxable years, unless the designation is ex-
presslylimitedtosuchterm,suchdomes-
tic substitute agent will continue as the
group’s sole agent for subsequent taxable
years until the domestic substitute agent
ceases to be a member of the continu-
ing group, is replaced by a new domes-
September 4, 20075342007–36 I.R.B.

tic common parent (as provided in para-
graph (j)(4)(iv)(A) of this section), is re-
placed by the Commissioner, or is replaced
by a default substitute agent (as provided
in paragraph (j)(5)(ii) of this section). If
during the course of a consolidated return
year the domestic substitute agent ceases
to be a member of the continuing group or
is replaced, it shall no longer act as agent
for such taxable year or subsequent taxable
years in any matter.
(ii)Continuing agency for prior tax-
able years. Unless replaced by a default
substitute agent (as provided in paragraph
(j)(5)(ii) of this section) or by the Commis-
sioner, the domestic substitute agent at the
end of a taxable year of the group will re-
main the agent for such year until its ex-
istence terminates, even if the group sub-
sequently ceases to exist or the domestic
substitute agent subsequently ceases to be
a member of the group.
(iii)Replacement of a §1.1502–
77(d)(1) agent. If, pursuant to paragraph
(d)(1) of this section, the common parent
of the group designates a foreign common
parent as the agent for the group for any
taxable year, the Commissioner may, at
any time, designate a domestic substitute
agent to replace the foreign common par-
ent, even if the Commissioner approved
the terminating common parent’s designa-
tion.
(iv)Group continues with a new com-
mon parent—(A)Year the new common
parent becomes the common parent.If
the group has a domestic substitute agent
and the group continues in existence with a
new common parent during a consolidated
return year, and such new common par-
ent is a domestic corporation (determined
without regard to section 7874 or a sec-
tion 953(d) election), the domestic substi-
tute agent at the beginning of the year is the
agent for the group through the date of the
transaction in which the new common par-
ent becomes the common parent, and the
new common parent becomes the agent for
the group beginning the day after the trans-
action, at which time it becomes the agent
for the group with respect to the entire con-
solidated return year (including the period
through the date of the transaction) and the
former domestic substitute agent will no
longer be the agent for the group for that
year.
(B)Years preceding the year the new
common parent becomes the common
parent. If after the Commissioner’s des-
ignation of a domestic substitute agent the
group remains in existence with a new
common parent, and such new common
parent is a domestic corporation (deter-
minedwithoutregardtosection7874or
a section 953(d) election), the Commis-
sioner may designate the new common
parent as the sole agent for the group for
any of the group’s prior taxable years (for
which the consolidated Federal income
tax return is due (without extensions) after
July 23, 2007) in which the new common
parent was a member of the group. For
this purpose, the new common parent is
treated as having been a member of the
group for any taxable year it is primarily
liable for the group’s income tax liability.
(v)Replacement of domestic substitute
agent by the Commissioner.TheCom-
missioner may at any time, with or with-
out a request from any member of the
group, designate a replacement for a do-
mestic substitute agent (or a successor to
such agent).
(5)Deemed §1.1502–77(d) designa-
tion—(i)In general. If the Commissioner
designates a domestic substitute agent un-
der this paragraph (j), it will be treated as
a designation of a substitute agent under
paragraph (d) of this section.
(ii)Default substitute agent.Ifthedo-
mestic substitute agent’s existence termi-
nates and it has a single successor that is
a domestic corporation (without regard to
section 269B) that is eligible to be a do-
mestic substitute agent, such successor be-
comes the domestic substitute agent and is
treated as a default substitute agent under
paragraph (d)(2) of this section. See para-
graph (d)(4) of this section regarding the
consequences of the successor’s failure to
notify the Commissioner of its status as a
default substitute agent. The default sub-
stitute agent shall use procedures in sec-
tion 9 of Rev. Proc. 2002–43, 2002–2 C.B.
99, or a corresponding provision of a suc-
cessor revenue procedure for notification.
(See §601.601(d)(2)(ii)(b)ofthischapter.)
(6)Request that IRS designate a domes-
tic substitute agent—(i)Original designa-
tion. If the common parent of the group is
a foreign common parent, and the IRS has
not designated a domestic substitute agent,
one or more members of the group may re-
quest the IRS to make a designation for
taxable years for which the consolidated
Federal income tax return is due (without
extensions) after July 23, 2007. Such re-
quest is deemed to be a request under para-
graph (d)(3)(i) of this section. Members of
the group shall use the procedures in sec-
tion 10 of Rev. Proc. 2002–43, 2002–2
C.B. 99, or a corresponding provision of a
successor revenue procedure for this pur-
pose. (See §601.601(d)(2)(ii)(b)ofthis
chapter.)
(ii)Request that IRS replace a previ-
ously designated substitute agent.Ifthe
IRS designates a domestic substitute agent
pursuant to this paragraph (j), one or more
members of the group may request that the
IRS replace the designated domestic sub-
stitute agent with another member (or suc-
cessor to another member). Such a request
is deemed to be a request pursuant to para-
graph (d)(3)(ii) of this section. Members
of the group shall use the procedures in
section 11 of Rev. Proc. 2002–43, 2002–2
C.B. 99, or a corresponding provision of a
successor revenue procedure for this pur-
pose. (See §601.601(d)(2)(ii)(b)ofthis
chapter.)
§1.1502–77T [Removed
]
Par. 3. Section 1.1502–77T is removed.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved July 16, 2007.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 20, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 23, 2007, 72 F.R. 40066)
Section 7425.—Discharge
of Liens
26 CFR 301.7425–3: Discharge of liens; special
rules.
T.D. 9344
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Change to Office to Which
Notices of Nonjudicial Sale
2007–36 I.R.B.535September 4, 2007

and Requests for Return of
Wrongfully Levied Property
Must Be Sent
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal and temporary regulations relating
to the discharge of liens under section
7425 and return of wrongfully levied
upon property under section 6343 of the
Internal Revenue Code (Code) of 1986.
These temporary regulations clarify that
such notices and claims should be sent
to the IRS official and office specified
in the relevant IRS publications. The
temporary regulations will affect parties
seeking to provide the IRS with notice of
a nonjudicial foreclosure sale and parties
making administrative requests for return
of wrongfully levied property. The text
of the temporary regulations also serves
as the text of the proposed regulation
(REG–148951–05) set forth in the notice
of proposed rulemaking on this subject in
this issue of the Bulletin.
DATES:Effective/applicability Date:
These regulations are effectiveAugust 20,
2007.
FOR FURTHER INFORMATION
CONTACT: Robin M. Ferguson, (202)
622–3630 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Procedure and Administration Regu-
lations (26 CFR part 301) relating to the
giving of notice of nonjudicial sales under
section 7425(b) of the Code. Final regula-
tions (T.D. 7430, 1976–2 C.B. 314) were
published on August 20, 1976, in theFed-
eral Register(41 FR 35174). This docu-
ment also contains amendments to the Pro-
cedure and Administration Regulations re-
lating to requests for return of wrongfully
levied property under section 6343(b) of
the Code. Final regulations (T.D. 8587,
1995–1 C.B. 207) were published on Jan-
uary 3, 1995, in theFederal Register(60
FR 33).
For notices of nonjudicial foreclosure
sale under Section 7425(b) and requests
for return of property wrongfully levied
upon under Section 6343(b), the existing
regulations direct the notices and requests
to be sent to the “district director (marked
for the attention of the Chief, Special Pro-
cedures Staff).” The offices of the district
director and Special Procedures were elim-
inated by the IRS reorganization imple-
mented pursuant to the IRS Restructur-
ing and Reform Act of 1998, Public Law
105–206 (RRA 1998), creating uncertainty
as to the timeliness of notices and requests
under these provisions.
Explanation of Provisions
Section 7425(b) provides for the dis-
charge of a junior federal tax lien by a non-
judicial sale, if proper notice is provided
to the IRS. Treas. Reg. §301.7425–2(a).
Notice of a nonjudicial sale is required
if notice of the federal tax lien has been
properly filed more than 30 days before
the nonjudicial sale. Section 7425(b)(1).
A party holding a nonjudicial sale must
provide written notification to the IRS
at least 25 days prior to the scheduled
sale of the property or the federal tax lien
remains on the property after the sale.
Section 7425(c)(1). When the notice is
properly sent, and the federal tax lien dis-
charged, the IRS may redeem the property
within 120 days from the date of sale or
any longer period allowed under state
law. Section 7425(d). If the notice is
not properly sent, the nonjudicial sale is
made subject to and without disturbing the
federal tax lien. Section 7425(b); Treas.
Reg. §301.7425–2(a);Tompkins v. United
States, 946 F.2d 817, 820 (11th Cir. 1991);
Simon v. United States, 756 F.2d 696,
697–98 (9th Cir. 1985).
Treas. Reg. §301.7425–3(a)(1) spec-
ifies that notice “shall be given, in writ-
ing by registered or certified mail or by
personal service...to the district director
(marked for the attention of the chief, spe-
cial procedures staff) for the Internal Rev-
enue district in which the sale is to be con-
ducted.” The regulation further provides
that such notice of sale is not effective if
given to a district director other than the
district director for the Internal Revenue
district in which the sale is to be conducted.
In light of the IRS reorganization subse-
quent to RRA 1998, the district and special
procedures offices referenced in the regu-
lations no longer exist. Notices of sale, if
addressed to an office other than that stated
in the regulation, may be misdirected. As a
result, the IRS office responsible for eval-
uating notices of nonjudicial sale may not
receive notice of the sale and the IRS may
not have the opportunity to timely redeem.
InGlasgow Realty, LLC v. Withington,345
F.Supp. 2d 1025 (E.D. Mo. 2004), the
court held that the federal tax lien was dis-
charged by a nonjudicial sale under sec-
tion 7425(b) where the notice of sale was
addressed to a local IRS taxpayer assis-
tance center rather than the district direc-
tor’s office.Glasgow Realtydemonstrates
the confusion that resulted from attempts
to comply with the current regulation in
light of the IRS reorganization. An amend-
ment is necessary to both assist the public
so as to prevent further confusion on where
to send notices of nonjudicial foreclosure
sales, and to prevent the possible loss of
proceeds that the IRS could acquire from
redemptions if the proper office has timely
notice of the sale.
Similar problems arise with respect to
requests for return of wrongfully levied
property under section 6343(b). Requests
for the return of the amount of money
levied upon or received from the sale of
property must be filed within nine months
from the date of the levy. Treas. Reg.
§301.6343–2(a)(2). The nine month pe-
riod for filing a wrongful levy suit is ex-
tended by the filing of a timely adminis-
trative claim. Section 6532(c).
As is the case with notices of nonjudi-
cial sale, the regulations specify that the re-
quest for return of wrongfully levied prop-
erty be addressed to the district director
(marked for the attention of the Chief, Spe-
cial Procedures Staff) for the Internal Rev-
enue district in which the levy is made.
Treas. Reg. §301.6343–2(b). The elimi-
nation of these offices by the IRS reorga-
nization can similarly result in misdirected
requests. An amendment is necessary to
assist the public in filing timely requests
with the proper office.
In order to account for the IRS’s cur-
rent organizational structure and to allow
for future reorganizations of the IRS, the
temporary regulations remove the title
“district director” throughout Treas. Reg.
§§301.7425–3 and 301.6343–2. The title
is not replaced with any specific official
or office. Instead, the public is directed
September 4, 20075362007–36 I.R.B.

to refer to the current relevant IRS pub-
lications or their successor publications
for where to send notices or claims. The
temporary regulations provide the web
address for the IRS Internet site which
may be used to obtain copies of IRS pub-
lications. The current publications for
nonjudicial foreclosure sales are IRS Pub-
lication 786, “Instructions for Preparing
a Notice of Nonjudicial Sale of Property
and Application for Consent to Sale,”
and IRS Publication 4235, “Technical
Services (Advisory) Group Addresses.”
According to Publication 786, the appli-
cation or notice should be addressed to
the Technical Services Group Manager
for the area in which the notice of fed-
eral tax lien was filed. Publication 786
then instructs the reader to use Publication
4235 to determine where to mail the re-
quest. Publication 4235 lists the addresses
for the Technical Services offices. The
current publication for requests for re-
turn of wrongfully levied property is IRS
Publication 4528, “Making an Administra-
tive Wrongful Levy Claim Under Internal
Revenue Code (IRC) Section 6343(b).”
According to Publication 4528, the claim
should be marked for the attention of the
Advisory Territory Manager for the area
where the taxpayer whose tax liability was
the basis for the levy or seizure resides.
Publication 4528 theninstructs the reader
to use Publication 4235 to locate the mail-
ing address for the appropriate Advisory
Territory Manager.
Effective Date
These temporary regulations apply to
any notice of sale filed or request for return
of property made afterAugust 20, 2007.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. For applicability of
the Regulatory Flexibility Act, please re-
fer to the cross-reference notice of pro-
posed rulemaking published elsewhere in
this Bulletin. Pursuant to section 7805(f)
of the Internal Revenue Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regula-
tions is Robin M. Ferguson, Office of As-
sociate Chief Counsel, Procedure and Ad-
ministration Division.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6343–2 is amended
as follows:
1. Paragraphs (a)(1) introductory text
and (b) introductory text are revised.
2. Paragraphs (a)(4), (c), (d)(1), and
(d)(2) are amended by removing the lan-
guage “director” and adding the language
“IRS” in its place wherever it appears.
3. Paragraph (b)(4), is amended by
removing the language “Internal Revenue
district” and adding the language “IRS of-
fice” in its place.
4. Paragraph (e) is revised.
The revisions and addition read as fol-
lows:
§301.6343–2 Return of wrongfully levied
upon property.
(a) * * * (1) [Reserved]. For further
guidance, see §301.6343–2T(a) introduc-
tory text.
*****
(b) [Reserved]. For further guidance,
see §301.6343–2T(b) introductory text.
*****
(e) [Reserved]. For further guidance,
see §301.6343–2T(e).
Par. 3. Section 301.6343–2T is added
to read as follows:
§301.6343–2T Return of wrongfully levied
upon property.
(a)Return of property—(1)General
rule. If the Internal Revenue Service (IRS)
determines that property has been wrong-
fully levied upon, the IRS may return—
(a)(1)(i) through (a)(4) [Reserved]. For
further guidance, see §301.6343–2(a)(1)(i)
through (a)(4).
(b)Request for return of property.A
written request for the return of property
wrongfully levied upon must be given to
the IRS official, office and address spec-
ified in IRS Publication 4528, “Making
an Administrative Wrongful Levy Claim
Under Internal Revenue Code (IRC) Sec-
tion 6343(b),” or its successor publication.
The relevant IRS publications may be
downloaded from the IRS internet site
atwww.irs.gov. Under this section, a re-
quest for the return of property wrongfully
levied upon is not effective if it is given to
an office other than the office listed in the
relevant publication. The written request
must contain the following information—
(b)(1) through (d)(2) [Reserved]. For
further guidance, see §301.6343–2(b)(1)
through (d)(2).
(e)Effective/applicability date.This
section applies to any request for return of
wrongfully levied property that is filed af-
terAugust 20, 2007.
Par. 4. Section 301.7425–3 is amended
as follows:
1. Paragraphs (a)(1), (b)(1), (b)(2),
(c)(1), (d)(2), (d)(3), and (d)(4) are re-
vised.
2. Paragraphs (a)(2)(i), (a)(2)(ii)(C),
and (a)(2)(iii)Examples 1,2,and
3are
amended by removing the language “dis-
trict director” and adding the language
“IRS” in its place wherever it appears.
3. Paragraph (d)(1)(ii)(A) is amended
by removing the language “internal rev-
enue district” and adding the language
“IRS office” in its place.
4. Paragraph (e) is added.
The revisions and addition read as fol-
lows:
§301.7425–3 Discharge of liens; special
rules.
(a) * * * (1) [Reserved]. For further
guidance, see §301.7425–3T(a)(1).
*****
(b) * * * (1) [Reserved]. For further
guidance, see §301.7425–3T(b)(1).
*****
(2) [Reserved]. For further guidance,
see §301.7425–3T(b)(2).
(c) * * * (1) [Reserved]. For further
guidance, see §301.7425–3T(c)(1).
2007–36 I.R.B.537September 4, 2007

*****
(d) * * *
(2) [Reserved]. For further guidance,
see §301.7425–3T(d)(2).
(3) [Reserved]. For further guidance,
see §301.7425–3T(d)(3).
(4) [Reserved]. For further guidance,
see §301.7425–3T(d)(4).
(e) [Reserved]. For further guidance,
see §301.7425–3T(e).
Par. 5. Section 301.7425–3T is added
to read as follows:
§301.7425–3T Discharge of liens; special
rules.
(a)Notice of sale requirements—(1)In
general. Except in the case of the sale
of perishable goods described in paragraph
(c) of this section, a notice (as described in
paragraph (d) of this section) of a nonjudi-
cial sale shall be given, in writing by reg-
istered or certified mail or by personal ser-
vice, not less than 25 days prior to the date
of sale (determined under the provisions of
§301.7425–2(b)), to the Internal Revenue
Service (IRS) official, office and address
specified in IRS Publication 786, “Instruc-
tions for Preparing a Notice of Nonjudi-
cial Sale of Property and Application for
Consent to Sale,” or its successor publica-
tion. The relevant IRS publications may
be downloaded from the IRS internet site
atwww.irs.gov. Under this section, a no-
tice of sale is not effective if it is given
to an office other than the office listed in
the relevant publication. The provisions of
sections 7502 (relating to timely mailing
treated as timely filing) and 7503 (relating
to time for performance of acts where the
last day falls on Saturday, Sunday, or a le-
gal holiday) apply in the case of notices re-
quired to be made under this paragraph.
(a)(2) [Reserved]. For further guid-
ance, see §301.7425–3(a)(2).
(b)Consent to sale—(1)In general.
Notwithstanding the notice of sale pro-
visions of paragraph (a) of this section, a
nonjudicial sale of property shall discharge
or divest the property of the lien and title
of the United States if the IRS consents
to the sale of the property free of the lien
or title. Pursuant to section 7425(c)(2),
where adequate protection is afforded the
lien or title of the United States, the IRS
may, in its discretion, consent with re-
spect to the sale of property in appropriate
cases. Such consent shall be effective only
if given in writing and shall be subject
to such limitations and conditions as the
IRS may require. However, the IRS may
not consent to a sale of property under this
section after the date of sale, as determined
under §301.7425–2(b). For provisions re-
lating to the authority of the IRS to release
a lien or discharge property subject to a
tax lien, see section 6325 and the section
6325 regulations.
(2)Application for consent.Anyper-
son desiring the IRS’s consent to sell prop-
erty free of a tax lien or a title derived from
the enforcement of a tax lien of the United
States in the property shall submit to the
IRS, at the office and address specified in
the relevant IRS publications, a written ap-
plication, in triplicate, declaring that it is
made under penalties of perjury, and re-
questing that such consent be given. The
application shall contain the information
required in the case of a notice of sale, as
set forth in paragraph (d)(1) of this section,
and, in addition, shall contain a statement
of the reasons why the consent is desired.
(c)Sale of perishable good–(1)In gen-
eral. A notice (as described in paragraph
(d) of this section) of a nonjudicial sale of
perishable goods (as defined in paragraph
(c)(2) of this section) shall be given in writ-
ing, by registered or certified mail or deliv-
ered by personal service, at any time be-
fore the sale, to the IRS official and of-
fice specified in the relevant IRS publica-
tions, at the address specified in such pub-
lications. Under this section, a notice of
sale is not effective if it is given to an of-
fice other than the office listed in the rele-
vant publication. If a notice of a nonjudi-
cial sale is timely given in the manner de-
scribed in this paragraph, the nonjudicial
sale shall discharge or divest the tax lien,
or a title derived from the enforcement of
a tax lien, of the United States in the prop-
erty. The provisions of sections 7502 (re-
lating to timely mailing treated as timely
filing) and 7503 (relating to time for per-
formance of acts where the last day falls on
Saturday, Sunday, or a legal holiday) apply
in the case of notices required to be made
under this paragraph. The seller of the per-
ishable goods shall hold the proceeds (ex-
clusiveofcosts)ofthesaleasafund,for
not less than 30 days after the date of the
sale, subject to the liens and claims of the
United States, in the same manner and with
the same priority as the liens and claims of
the United States had with respect to the
property sold. If the seller fails to hold the
proceeds of the sale in accordance with the
provisions of this paragraph and if the IRS
asserts a claim to the proceeds within 30
days after the date of sale, the seller shall
be personally liable to the United States for
an amount equal to the value of the inter-
est of the United States in the fund. How-
ever, even if the proceeds of the sale are
not so held by the seller, but all the other
provisions of this paragraph are satisfied,
the buyer of the property at the sale takes
the property free of the liens and claims of
the United States. In the event of a post-
ponement of the scheduled sale of perish-
able goods, the seller is not required to no-
tify the IRS of the postponement. For pro-
visions relating to the authority of the IRS
to release a lien or discharge property sub-
ject to a tax lien, see section 6325 and the
regulations.
(c)(2) through (d)(1) [Reserved]. For
further guidance, see §301.7425–3(c)(2)
through (d)(1).
(d)(2)Inadequate notice. Except as
otherwise provided in this paragraph, a no-
tice of sale described in paragraph (a) of
this section which does not contain the in-
formation described in paragraph (d)(1) of
this section shall be considered inadequate
by the IRS. If the IRS determines that the
notice is inadequate, the IRS will give writ-
ten notification of the items of informa-
tion which are inadequate to the person
who submitted the notice. A notice of sale
which does not contain the name and ad-
dress of the person submitting such notice
shall be considered to be inadequate for all
purposes without notification of any spe-
cific inadequacy. In any case where a no-
tice of sale does not contain the informa-
tion required under paragraph (d)(1)(ii) of
this section with respect to a Notice of Fed-
eral Tax Lien, the IRS may give written no-
tification of such omission without speci-
fication of any other inadequacy and such
notice of sale shall beconsidered inade-
quate for all purposes. In the event the IRS
gives notification that the notice of sale is
inadequate, a notice complying with the
provisions of this section (including the re-
quirement that the notice be given not less
than 25 days prior to the sale in the case of
a notice described inparagraph (a) of this
section) must be given. However, in ac-
cordance with the provisions of paragraph
(b)(1) of this section, in such a case the
IRS may, in its discretion, consent to the
September 4, 20075382007–36 I.R.B.

sale of the property free of the lien or ti-
tle of the United States even though notice
of the sale is given less than 25 days prior
to the sale. In any case where the person
who submitted a timely notice which in-
dicates his name and address does not re-
ceive, more than 5 days prior to the date of
sale, written notification from the IRS that
the notice is inadequate, the notice shall be
considered adequate for purposes of this
section.
(3)Acknowledgment of notice.Ifano-
tice of sale described in paragraph (a) or
(c) of this section is submitted in duplicate
to the IRS with a written request that re-
ceipt of the notice be acknowledged and
returned to the person giving the notice,
this request will be honored by the IRS.
The acknowledgment by the IRS will in-
dicate the date and time of the receipt of
the notice.
(4)Disclosure of adequacy of notice.
The IRS is authorized to disclose, to any
person who has a proper interest, whether
an adequate notice of sale was given under
paragraph (d)(1) of this section. Any per-
son desiring this information should sub-
mit to the IRS a written request which
clearly describes the property sold or to
be sold, identifies the applicable notice of
lien, gives the reasons for requesting the
information, and states the name and ad-
dress of the person making the request.
The request should be submitted to the
IRS official, office and address specified
in IRS Publication 4235, “Technical Ser-
vices (Advisory) Group Addresses,” or its
successor publication. The relevant IRS
publications may be downloaded from the
IRS internet site atwww.irs.gov.
(e)Effective/applicability date.This
section applies to any notice of sale that is
filed afterAugust 20, 2007.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved July 11, 2007.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 19, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 20, 2007, 72 F.R. 39737)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2007. See Rev. Rul. 2007-57, page
531.
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 September 2007. See Rev. Rul. 2007-57, page
531.
Section 7874.—Rules
Relating to Expatriated
Entities and Their Foreign
Parents
Final regulations under section 1502 of the Code
allow the Internal Revenue Service to appoint a do-
mestic substitute agent for a consolidated group when
the group’s parent is a foreign corporation that is
treated as a domestic corporation under section 7874
of the Code. See T.D. 9343, page 533.
2007–36 I.R.B.539September 4, 2007

Part II. Treaties and Tax Legislation
Subpart A.—Tax Conventions and Other Related Items
U.S.-Netherlands:
Qualification of Certain
Pension and Other Employee
Benefit Arrangements
Announcement 2007–75
The following is a copy of the Com-
petent Authority Agreement (“CAA”) en-
teredintobytheCompetentAuthoritiesof
the United States and the Netherlands with
respect to the qualification of certain tax-
exempt trusts, companies, or other organi-
zations for benefits under Article 35 of the
U.S.-Netherlands income tax treaty. The
CAA also provides guidelines for claim-
ing treaty benefits in each country and the
methods each country will use to grant
treaty benefits.
ThetextoftheCAAisasfollows:
COMPETENT AUTHORITY
AGREEMENT
The Competent Authorities of the
Netherlands and the United States hereby
amend and restate the agreement that
they entered into on March 23, 2000
1
,
with respect to the qualification of certain
tax-exempt trusts, companies, or other
organizations for benefits under Article 35
of the Convention between the Kingdom
of the Netherlands and the United States of
America for the avoidance of double tax-
ation and the prevention of fiscal evasion
with respect to taxes on income, signed
on December 18, 1992, and amended by
Protocols signed on October 13, 1993 and
March 8, 2004 (the “Treaty”). The agree-
ment specifies the procedures for claiming
treaty benefits in each country and the
methods each country will use to grant
treaty benefits.
This agreement constitutes a Mutual
Agreement in accordance with Article 29
of the Treaty.
Chapter I
Qualification for treaty benefits under
Article 35 of the 1992 Netherlands-US in-
come tax treaty
Paragraph 1 of Article 35 of the Treaty
provides that dividends or interest derived
by a trust, company, or other organiza-
tion constituted and operated exclusively
to administer or provide benefits under
one or more funds or plans established to
provide pension, retirement, or other em-
ployee benefits shall be exempt from tax
in one Contracting State if it is a resident
of the other Contracting State according to
the laws of that other State and its income
is generally exempt from tax in that other
State. Paragraph 2 provides that the provi-
sionsofparagraph1donotapplywithre-
spect to the income of a trust, company, or
other organization from carrying on a trade
or business or from a related person other
than a person referred to in paragraph 1.
Questions have been raised regarding
the types of trusts, companies, or other or-
ganizations that qualify for benefits under
Article 35 of the Treaty. In practice, there
are many different types of funds or plans
established to provide pension, retirement,
or other employee benefits and it is not al-
ways clear which of these funds or plans
fulfill the requirements of Article 35. In
view of this uncertainty, the competent au-
thorities of the Netherlands and the United
States agree that the types of trusts, com-
panies, or other organizations mentioned
in chapters II and IV of this agreement are
considered to fall within the scope of Arti-
cle 35.
It is understood that for the purpose of
this agreement the term “Code section”
refers to a section of the U.S. Internal Rev-
enue Code of 1986, as amended, and that
the term “trust” includes a custodial ac-
count treated as a trust for U.S. federal in-
come tax purposes.
Chapter II
U.S. resident tax-exempt trusts, compa-
nies, or other organizations
Subject to the conditions of Article 26,
paragraph 2 of Article 35, and paragraph
4 of Article 34 of the Treaty, the following
types of U.S. resident trusts, companies, or
other organizations are treated as the bene-
ficial owners of dividends and interest de-
rived from the Netherlands and are consid-
ered to qualify for benefits under Article
35 of the Treaty:
1. a U.S. resident tax-exempt trust pro-
viding pension or retirement benefits
under a Code section 401(a) qualified
pension plan, profit sharing plan or
stock bonus plan (including Code sec-
tion 401(k) arrangements);
2. a U.S. resident tax-exempt trust de-
scribed in Code section 457(g) provid-
ing pension or retirement benefits un-
der a Code section 457(b) plan;
3. a U.S. resident tax-exempt trust pro-
viding pension or retirement benefits
under a Code section 403(b) plan;
4. a U.S. resident tax-exempt trust that
is an individual retirement account
(Code section 408), a Roth individ-
ual retirement account (Code section
408A), or a simple retirement ac-
count, or a U.S. resident tax-exempt
trust that is providing pension or re-
tirement benefits under a simplified
employee pension plan;
5. a group trust described in IRS Rev-
enue Ruling 81–100 and meeting the
conditions of IRS Revenue Ruling
2004–67;
6. a U.S. resident common trust fund
(Code section 584) to the extent that
the participants are trusts mentioned
under points 1) through 5) above;
7. the Thrift Savings Fund (Code section
7701(j)); and
8. a voluntary employees’ beneficiary
association (Code section 501(c)(9)).
However, a U.S. resident tax-exempt
trust mentioned under points 2), 3), or 4)
above will not be considered to qualify
for treaty benefits under Article 35 of the
Treaty in any taxable year if less than 70%
of the total amount of the withdrawals
1
Dutch Form IB 96 USA uses the date March 27, 2000, which was the date the original agreement was published in the Staatscourant, but the competent authorities here refer to the same
original mutual agreement as is referred to in Form IB–96-USA.
September 4, 20075402007–36 I.R.B.

from such U.S. trust during that year is
used to provide pension, retirement or
other employee benefits as meant in Arti-
cle 35 of the Treaty.
Any type of U.S. resident tax-exempt
trust, company, or other organization not
mentioned above, that considers itself
to qualify for benefits under Article 35
of the Treaty, may present its case to
the Netherlands tax unit Belastingdienst
Limburg / kantoor Buitenland (address:
P.O. Box 2865, 6401 DJ HEERLEN, The
Netherlands), or to the U.S. competent au-
thority (see Rev. Proc. 2006–54, 2006–49
I.R.B. 1035) requesting competent author-
ity consideration under Article 29 of the
Treaty.
Chapter III
Appropriate procedures for filing a re-
quest for an application of treaty benefits
in the Netherlands
A trust, company, or other organiza-
tion that qualifies for benefits under Ar-
ticle 35 of the Treaty may claim benefits
with respect to income derived from the
Netherlands referred to in Article 10 (Div-
idends). The Netherlands does not apply a
withholding tax on outgoing interest pay-
ments as meant in Article 12 of the Treaty.
The Netherlands has two methods for
granting benefits for Dutch source div-
idend income: the so-called exemption
method (in which case the treaty rate is ap-
plied at source) and the so-called refund
method.
As a general rule, the Netherlands ap-
plies the exemption method when granting
treaty benefits in the case of Dutch source
dividend income received by a resident of
the United States, which means that treaty
benefitswillbegrantedbymeansofanex-
emption from Netherlands withholding tax
at source. In view of the Netherlands com-
petent authority’s preference for a closer
monitoring of all requests filed for an ap-
plication of benefits under Article 35 of
the Treaty, a U.S. resident tax-exempt trust
(including a U.S. common trust fund or
group trust) mentioned in point 1) through
8) of chapter II of this agreement shall —
as a general rule — be required to use the
refund method when filing its request for
an application of benefits under Article 35
of the Treaty. Only if the conditions listed
below are fulfilled, may such a U.S. res-
ident tax-exempt trust use the exemption
method when filing its request for an ap-
plication of benefitsunder Article 35 of the
Treaty.
The Netherlands 2007 regulations for
the implementation of the Treaty give a
detailed description of the procedures to be
applied in the case of both the exemption
method and the refund method.
Theexemptionmethodmaybeusedif
the U.S. resident tax-exempt trust, com-
pany, or other organization requesting ben-
efits under Article 35 of the Treaty:
* provides to the appropriate Dutch
withholding agent or payor, Form 6166,
a U.S. residency certification letter issued
by the U.S. Internal Revenue Service for
the applicable taxable year(s) (Form 6166
may be obtained by filing Form 8802
(Application for United States Residency
Certification) in accordance with the in-
structions for Form 8802) stating that the
entity in question is a trust forming part of
a pension, profit sharing, or stock bonus
plan qualified underCode section 401(a)
of the Internal Revenue Code (an example
of Form 6166 is attached); or
* provides to the appropriate Dutch
withholding agent or payor, a so-called
“qualification” certification issued by the
competent Netherlands tax authorities,
stating that the entity in question is a U.S.
resident tax-exempttrust, company, or
other organization described in paragraph
1 of Article 35 of the Treaty.
Requests for a “qualification” cer-
tification may be filed with the tax
unit Belastingdienst Limburg / kantoor
Buitenland (address: P.O. Box 2865, 6401
DJ HEERLEN, The Netherlands).
A “qualification” certification, issued
by the competent Netherlands tax authori-
ties, is in principle valid indefinitely. How-
ever, a “qualification” certification will no
longer be valid in the event:
*there is a material change in facts or
circumstances; or
*It is determined that the “qualifica-
tion” certification wasissued erroneously;
or
*the U.S. resident tax-exempt entity in
question has not claimed an application
of benefits under Article 35 of the Treaty
for five consecutive calendar years. Since
Form 6166 issued by the U.S. Internal
Revenue Service is not valid indefinitely,
a U.S. resident tax-exempt entity that has
been issued a Form 6166 by the U.S. In-
ternal Revenue Service may also file a
request for a “qualification” certification
with the competent Netherlands tax au-
thorities.
Irrespective of the above, use of the re-
fund method is mandatory in any taxable
year for a U.S. resident tax-exempt entity
mentioned under point 2) or 4) of chapter
II, if less than 70% of the total amount of
the withdrawals from such U.S. trust dur-
ing that year is used to provide pension or
retirement benefits.
Where assets of the pension fund(s) or
pension plan(s) are held in custodial ac-
counts, the Dutch Form IB 96 USA re-
quires a certification that the claim for a re-
fund of Dutch dividend tax is filed for the
benefit of the custodial accounts in ques-
tion.
The status of all U.S. resident tax-ex-
empt trusts, companies, or other organiza-
tions claiming benefits under Article 35 of
the Treaty may at any time be subject to
verification by the competent Netherlands
tax authority. If considered necessary, use
will be made of the exchange of informa-
tion procedure (Article 30 of the Treaty).
Chapter IV
Netherlands resident tax-exempt trusts,
companies, or other organizations
Subject to the conditions of Article 26,
paragraph 2 of Article 35, and paragraph 4
of Article 34 of the Treaty, the following
types of Netherlands resident trusts, com-
panies, or other organizations are treated
as beneficial owners of dividends and in-
terest derived from the United States and
are considered to qualify for benefits un-
der Article 35 of the Treaty:
1. a Netherlands resident tax-exempt
company constituted and operated
exclusively to administer or pro-
vide benefits as meant in article
5, paragraph 1, under b), of the
Netherlands corporation tax act (in-
cluding a Netherlands resident tax-ex-
empt company constituted and op-
erated exclusively to administer or
provide benefits under a pension plan
as meant in article 3.13, paragraph 1,
under b), of the Netherlands income
tax act);
2. a Netherlands fund that is exempt un-
der the Netherlands corporation tax
2007–36 I.R.B.541September 4, 2007

act and constituted by a Netherlands
labor union and operated exclusively
to administer or provide benefits to
its members in case they are on strike
(stakingskassen) and of which the
payments are exempt under article
3.13, paragraph 1, under f), of the
Netherlands income tax act; and
3. Netherlands limited fund for mu-
tual account (besloten fondsen voor
gemene rekening) in which each par-
ticipant is a Netherlands resident
tax-exempt company mentioned un-
der points 1) or 2) above.
Any type of Netherlands resident tax-
exempt trust, company, or other organi-
zation not mentioned above, that consid-
ers itself to qualify for benefits under Ar-
ticle 35 of the Treaty, may present its case
to the U.S. competent authority, or to the
Netherlands competent authority request-
ing competent authority consideration un-
der Article 29 of the Treaty.
Chapter V
Appropriate procedures for filing a re-
quest for an application of treaty benefits
in the United States
Under U.S. tax law, a Netherlands
resident taxpayer (including a Nether-
lands resident tax-exempt entity referred
to in Article 35 of the Treaty) may file
for an application of treaty benefits at
source, or may claim a refund of U.S.
income tax withheld according to regula-
tions set forth under the Internal Revenue
Code. The following procedures apply to
a Netherlands resident tax-exempt trust,
company, or other organization.
A Netherlands resident tax-exempt
trust, company, or other organization de-
scribed in this agreement should claim
exemption from U.S. income tax with-
holding under Article 35 of the Treaty on
dividends or interest income referred to
in Articles 10 and 12, respectively, of the
Treaty by providing a properly completed
IRS Form W–8BEN (Certificate of For-
eign Status of Beneficial Owner for United
States Tax Withholding) to the appropriate
withholding agent or payer of such in-
come before the income is paid or credited
to the company. An entity filing Form
W–8BEN should cite Article 35 of the
Treatyonline10thereof,andstatethatit
is a Netherlands resident tax-exempt trust,
company, or other organization described
in chapter IV of this agreement.
Alternatively, the trust, company, or
other organization may seek a refund of
taxes withheld on such dividend or interest
income by timely filing a U.S. income tax
return and claiming a refund of such taxes.
The status of all Netherlands resident
tax-exempt trusts, companies, or other or-
ganizations providing pension, retirement,
or other employee benefits and claiming
benefits under Article 35 of the Treaty may
be subject to verification by the Internal
Revenue Service. If considered neces-
sary, use will be made of the exchange of
information procedure (Article 30 of the
Treaty).
AsamendedbyArticle6ofthePro-
tocol signed on October 13, 1993, para-
graph 2 of Article 35 of the Treaty provides
that dividends paid by a person resident in
the United States that is a Real Estate In-
vestment Trust (“REIT”) from gains real-
ized on the disposition of real property sit-
uated in the United States are not eligible
for benefits under Article 35. Such distri-
butions are subject to U.S. tax under para-
graph 1 of Article 14 of the Treaty. In ad-
dition, distributions paid by a person resi-
dent in the United States that is a Regulated
Investment Company (“RIC”) from gains
realized on the disposition of real property
situated in the United States are not eligi-
ble for benefits under Article 35 and are
subject to U.S. tax under paragraph 1 of
Article 14.
Pursuant to section 897(h)(1) of the In-
ternal Revenue Code, as amended, certain
amounts distributed by qualified invest-
ment entities (REITs and certain RICs) that
would have otherwise been treated as dis-
tributions from gains realized on the dis-
position of real property situated in the
United States are treated and taxed as div-
idends. Such amounts will be treated as
dividends that are eligible for exclusion
under paragraph 1 of Article 35.
Paragraph 2 of Article 35 also provides
that income of a trust, company, or other
organization is not exempt under Article
35 if it is derived from carrying on a trade
or business or from a related person that is
not itself eligible for benefits under Article
35. Paragraph XXXVII of the Understand-
ing accompanying the Protocol signed on
March 8, 2004 provides that for purposes
of paragraph 2 of Article 35, a person will
be considered to be a “related person” if
more than 80 percent of the vote or value
of any class of shares is owned by the per-
son deriving the income.
Agreed to by the undersigned compe-
tent authorities:
Frank Y. Ng
U.S. Competent Authority
Maarten Brabers
Netherlands Competent Authority
September 4, 20075422007–36 I.R.B.

2007–36 I.R.B.543September 4, 2007

Part III. Administrative, Procedural, and Miscellaneous
Transaction of Interest —
Contribution of Successor
Member Interest
Notice 2007–72
The Internal Revenue Service and the
Treasury Department are aware of a type
of transaction, described below, in which a
taxpayer directly or indirectly acquires cer-
tain rights in real property or in an entity
that directly or indirectly holds real prop-
erty, transfers the rights more than one year
after the acquisition to an organization de-
scribed in § 170(c) of the Internal Revenue
Code, and claims a charitable contribution
deduction under § 170 that is significantly
higher than the amount that the taxpayer
paid to acquire the rights. The IRS and the
Treasury Department believe this transac-
tion has the potential for tax avoidance or
evasion, but lack sufficient information to
determine whether the transaction should
be identified specifically as a tax avoid-
ance transaction. This notice identifies this
transaction, and substantially similar trans-
actions, as transactions of interest for pur-
poses of § 1.6011–4(b)(6) of the Income
TaxRegulationsand§§6111and6112.
This notice also alerts persons involved
with these transactions to certain respon-
sibilities that may arise from their involve-
ment with these transactions.
FACTS
In a typical transaction, Advisor owns
all of the membership interests in a lim-
ited liability company (LLC) that directly
or indirectly owns real property (other
than a personal residence as defined in
§ 1.170A–7(b)(3)) that may be subject to
a long-term lease. Advisor and Taxpayer
enter into an agreement under the terms
of which Advisor continues to own the
membership interests in LLC for a term
of years (the Initial Member Interest), and
Taxpayer purchases the successor member
interest in LLC (the Successor Member
Interest), which entitles Taxpayer to own
all of the membership interests in LLC
upon the expiration of the term of years.
In some variations of this transaction,
Taxpayer may hold the Successor Member
Interest through another entity, such as a
single member limited liability company.
Further, the agreement may refer to the
Successor Member Interest as a remainder
interest.
After holding the Successor Member
Interest for more than one year (in order to
treat the interest as long-term capital gain
property), Taxpayer transfers the Succes-
sor Member Interest to an organization de-
scribedin§170(c)(Charity).
Taxpayer claims the value of the Suc-
cessor Member Interest to be an amount
that is significantly higher than Taxpayer’s
purchase price (for example, an amount
that is a multiple of Taxpayer’s purchase
price and exceeds normal appreciation).
Taxpayer claims a charitable contribution
deduction under § 170 based on this higher
amount. Taxpayer reaches this value by
taking into account an appraisal obtained
by or on behalf of Advisor or Taxpayer of
the fee interest in the underlying real prop-
erty and the § 7520 valuation tables.
The Internal Revenue Service and the
Treasury Department are concerned about
apparent irregularities in this transaction.
Specifically, the IRS and the Treasury De-
partment are concerned with the large dis-
crepancy between (1) the amount Taxpayer
paid for the Successor Member Interest,
and (2) the amount claimed by Taxpayer
as a charitable contribution. The IRS and
the Treasury Department also have the fol-
lowing additional concerns, which may be
present in some variations of this trans-
action: (1) any mischaracterization of the
ownership interests in LLC; (2) a Char-
ity’s agreement not to transfer the Succes-
sor Member Interest for a period of time
(which may coincide with the expiration
of the applicable period in § 6050L(a)(1));
and (3) any sale by Charity of the Succes-
sor Member Interest to a party selected by
or related to Advisor or Taxpayer.
TRANSACTION OF INTEREST
Effective Date
Transactions that are the same as, or
substantially similar to, the transactions
described in this notice are identified as
transactions of interest for purposes of
§ 1.6011–4(b)(6) and §§ 6111 and 6112
effective August 14, 2007, the date this
notice was released to the public. Persons
entering into these transactions on or af-
ter November 2, 2006, must disclose the
transaction as described in § 1.6011–4.
Material advisors who make a tax state-
ment on or after November 2, 2006, with
respect to transactions entered into on or
after November 2, 2006, have disclosure
and list maintenance obligations under
§§ 6111 and 6112. See § 1.6011–4(h) and
§§ 301.6111–3(i) and 301.6112–1(g) of
the Procedure and Administration Regula-
tions.
Independent of their classification as
transactions of interest, transactions that
are the same as, or substantially similar
to, the transaction described in this notice
already may be subject to the require-
ments of § 6011, 6111, or 6112, or the
regulations thereunder. When the IRS and
the Treasury Department have gathered
enough information to make an informed
decision as to whether this transaction is a
tax avoidance type of transaction, the IRS
and the Treasury Department may take
one or more actions, including removing
the transaction from the transactions of
interest category in published guidance,
designating the transaction as a listed
transaction, or providing a new category
of reportable transaction.
Participation
Under § 1.6011–4(c)(3)(i)(E), Advisor,
LLC or any entity used in place of LLC,
Taxpayer, and any members of Taxpayer if
Taxpayer is a flow-through entity, are par-
ticipants in this transaction for each year
in which their respective tax returns reflect
tax consequences or the tax strategy de-
scribed in this notice.
Charity is not a participant if it re-
ceived the Successor Member Interest
described in this notice on or prior to
August 14, 2007. For Successor Mem-
ber Interests received after August 14,
2007, under § 1.6011–4(c)(3)(i)(E) Char-
ity is a participant in this transaction for
the first year for which Charity’s tax return
reflects the Successor Member Interest de-
scribed in this notice. In general, Charity
is required to report the receipt of the Suc-
cessor Member Interest described in this
notice on its return for the year in which
it is received. See § 6033. Therefore,
in general, Charity will be a participant
September 4, 20075442007–36 I.R.B.

for the year in which Charity received the
Successor Member Interest.
Time for Disclosure
See § 1.6011–4(e) and § 301.6111–3(e).
Material Advisor Threshold Amount
The threshold amounts are the same
as those for listed transactions. See
§ 301.6111–3(b)(3)(i)(B).
Penalties
Persons required to disclose these trans-
actions under § 1.6011–4 who fail to do
so may be subject to the penalty under
§ 6707A. Persons required to disclose
these transactions under § 6111 who fail to
do so may be subject to the penalty under
§ 6707(a). Persons required to maintain
lists of advisees under § 6112 who fail to
do so (or who fail to provide such lists
when requested by the Service) may be
subject to the penalty under § 6708(a). In
addition, the Service may impose other
penalties on persons involved in these
transactions or substantially similar trans-
actions, including the accuracy-related
penalty under § 6662 or 6662A.
DRAFTING INFORMATION
The principal authors of this notice
are Patricia M. Zweibel of the Office of
Associate Chief Counsel (Income Tax
and Accounting) and Leslie H. Finlow
of the Office of Associate Chief Coun-
sel (Passthroughs and Special Indus-
tries). For further information concerning
this notice generally, contact Ms. Zweibel
at (202) 622–7900 (not a toll-free call).
For further information concerning the
sections of this notice under the heading
TRANSACTIONS OF INTEREST, con-
tact Ms. Finlow at (202) 622–3070 (not a
toll-free call).
Transaction of Interest —
Toggling Grantor Trust
Notice 2007–73
The Internal Revenue Service and the
Treasury Department are aware of a type
of transaction, described below, that uses
a grantor trust, and the purported termi-
nation and subsequent re-creation of the
trust’s grantor trust status, for the pur-
pose of allowing the grantor to claim a
tax loss greater than any actual economic
loss sustained by the taxpayer or to avoid
inappropriately the recognition of gain.
The IRS and Treasury Department be-
lieve this transaction has the potential for
tax avoidance or evasion, but lack suffi-
cient information to determine whether
the transaction should be identified specif-
ically as a tax avoidance transaction.
This notice identifies this transaction,
and substantially similar transactions, as
transactions of interest for purposes of
§ 1.6011–4(b)(6) of the Income Tax Reg-
ulations and §§ 6111 and 6112 of the
Internal Revenue Code. This notice also
alerts persons involved with these trans-
actions to certain responsibilities that may
arise from their involvement with these
transactions.
FACTS
In one variation of the transaction,
Grantor purchases four options. The value
of each one of the options is expected to
move inversely in relation to at least one
of the other options over a relevant range
of values so that, before expiration of any
one of the options, there will be a gain
in two options (gain options) and a sub-
stantially offsetting loss in the other two
options (loss options). Grantor creates
Trust and funds Trust with the options and
a small amount of cash. Grantor gives
a short-term unitrust interest in Trust to
Beneficiary and retains a noncontingent
remainder interest in Trust. The remainder
interest is structured to have a value as de-
termined under § 7520 that equals the fair
market value of the options. Grantor takes
the position that Grantor’s remainder in-
terest is a qualified interest under § 2702.
Because of the retained remainder inter-
est, Grantor treats Trust as a trust owned
by Grantor under subpart E (§ 671 and
following), part I, subchapter J, chapter
1 of the Code (a grantor trust). The trust
agreement also provides that Grantor will
have the power, exercisable in a nonfidu-
ciary capacity, to reacquire Trust corpus
by substituting other property of an equiv-
alent value (the substitution power) and
that this substitution power will become
effective on a specified date in the future.
See § 675(4).
After establishing and funding Trust,
Grantor sells the remainder interest in
Trust to an unrelated person (Buyer) for
an amount equal to the fair market value
of the remainder interest (which is equal
to the fair market value of the options).
Grantor claims that the basis in the remain-
der interest is determined by allocating to
the remainder interest a portion of the
basis in all of the Trust assets (based on
the respective fair market values of the
remainder and unitrust interests at the time
of the sale). Therefore, Grantor claims
there is no gain recognized on the sale of
the remainder interest because Grantor’s
basis in the remainder interest is the same
as the amount realized (prearranged to
be equivalent to the fair market value of
the options). Buyer gives Grantor an in-
stallment obligation (Note), cash, or other
consideration for the remainder interest.
Grantor claims that the sale of the remain-
der interest has terminated (toggled off)
the grantor trust status of Trust so that,
during the period after the sale and be-
fore the effective date of the substitution
power, Trust is no longer a grantor trust
under § 671.
Grantor claims that, once the substi-
tution power becomes effective, Trust’s
grantor trust status is restarted (toggled
on). The loss options are then closed
out. The amount Grantor paid for those
options (the original basis of those op-
tions) is greater than the amount Trust
receives when the loss options are closed
out. Grantor claims that Trust’s status as a
grantor trust causes Grantor to recognize
the loss on the two loss options. Grantor
calculates the loss based on the difference
between the amount realized and the orig-
inal basis in the loss options, even though
Grantor previously used a portion of the
basis in the Trust assets (equivalent to the
basis in all of the options) to eliminate
Grantor’s gain on the sale of the remain-
der interest. Trust’s remaining assets then
consist of the two gain options, the con-
tributed cash, and amounts received, if
any, upon the termination of the loss op-
tions.
Buyer then purchases the unitrust inter-
est in Trust from Beneficiary for an amount
equal to the actuarial value of that interest
(which equals or approximates the amount
2007–36 I.R.B.545September 4, 2007

of cash Grantor contributed to Trust), mak-
ing Buyer the owner of both the remainder
interest and the unitrust interest. Trust then
terminates (by operation of law or Buyer’s
action), and Trust’s assets are distributed
to Buyer. Buyer claims a basis in the assets
(the gain options and the cash) from Trust
equal to the amount paid by Buyer for the
two separate interests in Trust. Grantor
does not treat the termination of Trust as
a taxable disposition by Grantor of the as-
sets of Trust.
The gain options are exercised or sold,
or otherwise terminate, and Buyer claims
to recognize gain on the gain options only
to the extent that the amount realized ex-
ceeds the basis Buyer allocates to the gain
options. The transaction has been struc-
tured so that any gain recognized would
be minimal. If Buyer purchased the re-
mainder interest from Grantor with a Note,
Buyer uses the proceeds from the options
to pay the Note. If Grantor borrowed to
purchase the options, Grantor repays the
loan from the Note proceeds.
In another variation of the transaction,
the facts are the same as described above
except for the following. Grantor con-
tributes to Trust liquid assets such as cash
or marketable securities, rather than op-
tions. Grantor’s basis in the contributed
assets equals or is approximately equal to
the fair market value of the assets at the
time of contribution. Before the speci-
fied date on which Grantor’s substitution
power becomes effective, Grantor sells
the remainder interest in Trust to Buyer
for an amount equal to the fair market
value of the remainder interest and claims
to recognize no gain or a minimal gain
or loss for the same reason as described
above. As in the prior variation, Grantor
claims that the sale terminates (toggles
off) Trust’s grantor trust status. After
the substitution power becomes effective,
Grantor substitutes appreciated property
for Trust’s liquid assets. The fair market
value of the substituted property is equiv-
alent to the fair market value of the liquid
assets. Grantor claims that, once the sub-
stitution power becomes effective (prior to
the exchange), Trust’s grantor trust status
is restarted (toggled on), and, therefore,
the substitution will not cause Grantor to
recognize gain.
As described above, Buyer purchases
the unitrust interest in Trust from Ben-
eficiary, terminates Trust, and receives
Trust’s assets on distribution. For tax
purposes, Grantor does not treat the termi-
nation of Trust as a disposition by Grantor
of the appreciated assets in Trust. Buyer
claims a basis in the assets of Trust (the
appreciated property and cash) equal to
theamountpaidbyBuyerfortheinterests
in Trust.
One of the purported tax consequences
of the first variation of the transaction is
that Grantor sells the remainder interest
and receives an amount substantially equal
to the fair market value of the (non-cash)
assets contributed to Trust but nevertheless
claims a tax loss attributable to those as-
sets even though Grantor has not suffered
an equivalent economic loss. One of the
purported tax consequences of the second
variation of the transaction is that Grantor
avoids the recognition of gain on the dispo-
sition of the appreciated assets substituted
for the original assets contributed to Trust.
These transactions usually occur within
a short period of time during the taxable
year (typically within 30 days), and, in
each case, Grantor claims that the termi-
nation and subsequent reestablishment of
grantor trust status, combined with the se-
ries of events regarding Trust’s assets, re-
sult in tax consequences that could not be
achieved without both the toggling off and
on of grantor trust status. The transac-
tions in this notice, as described above, do
not include the situation where a trust’s
grantor trust status is terminated, unless
there is also a subsequent toggling back
to the trust’s original status for income tax
purposes.
TRANSACTION OF INTEREST
Effective Date
Transactions that are the same as, or
substantially similar to, the transactions
described in this notice are identified as
transactions of interest for purposes of
§ 1.6011–4(b)(6) and §§ 6111 and 6112
effective August 14, 2007, the date this
notice was released to the public. Persons
entering into these transactions on or af-
ter November 2, 2006, must disclose the
transaction as described in § 1.6011–4.
Material advisors who make a tax state-
ment on or after November 2, 2006, with
respect to transactions entered into on or
after November 2, 2006, have disclosure
and list maintenance obligations under
§§ 6111 and 6112. See § 1.6011–4(h) and
§§ 301.6111–3(i) and 301.6112–1(g) of
the Procedure and Administration Regula-
tions.
Independent of their classification as
transactions of interest, transactions that
are the same as, or substantially similar to,
the transaction described in this notice may
already be subject to the requirements of
§§ 6011, 6111, or 6112, or the regulations
thereunder. When the IRS and Treasury
Department have gathered enough infor-
mation to make an informed decision as to
whether this transaction is a tax avoidance
type of transaction, the IRS and Treasury
Department may take one or more actions,
including removing the transaction from
the transactions of interest category in pub-
lished guidance, designating the transac-
tion as a listed transaction, or providing a
new category of reportable transaction.
Participation
Under § 1.6011–4(c)(3)(i)(E), Grantor,
Buyer, and Beneficiary are participants in
this transaction for each year in which their
respective tax returns reflect tax conse-
quences or a tax strategy described in this
notice.
Time for Disclosure
See § 1.6011–4(e) and § 301.6111–3(e).
Material Advisor Threshold Amount
The threshold amounts are the same
as those for listed transactions. See
§ 301.6111–3(b)(3)(i)(B).
Penalties
Persons required to disclose these trans-
actions under § 1.6011–4 who fail to do
so may be subject to the penalty under
§6707A.Personsrequiredtodisclose
these transactions under § 6111 who fail to
do so may be subject to the penalty under
§ 6707(a). Persons required to maintain
lists of advisees under § 6112 who fail to
do so (or who fail to provide such lists
when requested by the Service) may be
subject to the penalty under § 6708(a). In
addition, the Service may impose other
penalties on parties involved in these
transactions or substantially similar trans-
actions, including the accuracy-related
penalty under § 6662 or § 6662A.
September 4, 20075462007–36 I.R.B.

DRAFTING INFORMATION
The principal author of this notice
is Tolsun N. Waddle of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this notice, con-
tact Mr. Waddle at (202) 622–3070 (not a
toll-free call).
26 CFR 31.3402(q): Return of information on pro-
ceeds from poker tournaments.
(Also: § 3406.)
Rev. Proc. 2007–57
SECTION 1. PURPOSE
This revenue procedure informs tax-
payers of their obligations under section
3402(q) pertaining to withholding and in-
formation reporting applicable to certain
amounts paid to winners of poker tourna-
ments. It further sets forth procedures to
be used to comply with the relevant re-
quirements of the Internal Revenue Code
and Treasury Regulations thereunder.
SECTION 2. FACTUAL
BACKGROUND
A business taxpayer (“poker tourna-
ment sponsor”) may sponsor a poker
tournament, charging an entry fee and
a “buy-in” fee for each participant. In
exchange for the fees, each participant
receives a set of poker chips with a nom-
inal face value for use in the specific
poker tournament. The poker tournament
sponsor pays amounts, which exceed a
participant’s fees by $5,000, to a certain
number of tournament winner(s), out of
a pool comprised of all the participants’
fees.
SECTION 3. LEGAL BACKGROUND
.01.Withholding under section 3402.
Section 3402(q)(1) provides that every
person who makes any payment of win-
nings which are subject to withholding
shall deduct and withhold from the pay-
ment an amount equal to the product of the
third lowest rate of tax applicable under
section 1(c) and such payment. Section
3402(q)(3) provides that the term “win-
nings which are subject to withholding”
means, in part, proceeds from a wagering
transaction, if the proceeds are more than
$5,000 from a wager placed in any sweep-
stakes, wagering pool, or lottery. The term
“wagering pool” includes “all pari-mutuel
betting pools, including on- and off-track
racing pools, and similar types of betting
pools.” H.R. Conf. Rep. No. 94–1515, at
488 (1976) (relating to the enactment of
§ 3402(q)). “In common usage the term
‘pool’ connotes a particular gambling
practice, an arrangement whereby all bets
constitute a common fund to be taken
by the winner or winners.”United States
v. Berent, 523 F.2d 1360, 1361 (9
th
Cir.
1975). Section 3402(q)(4)(A) provides
that proceeds from a wager shall be deter-
mined by reducing the amount received
by the amount of the wager.
.02.Information reporting un-
der section 31.3402(q)–1(e). Section
31.3402(q)–1(e) of the Employment Tax
Regulations provides that each person
who is to receive a payment of winnings
subject to withholding shall furnish to the
payer a statement on Form W–2G or Form
5754 (whichever is applicable) made un-
der the penalties of perjury containing
certain required information, including
the name, address, and Taxpayer Identi-
fication Number of the winning payee.
Section 31.3402(q)–1(f)(1) provides that
every person making a payment of win-
nings for which withholding is required
shall file a Form W–2G with the IRS on or
before February 28 (March 31 if filed elec-
tronically) of the calendar year following
the calendar year in which the payment of
winnings is made and shall furnish a copy
of the Form to the payee.
SECTION 4. APPLICATION
A poker tournament sponsor is required
to withhold and report on payments of
more than $5,000 made to a winning payee
in a taxable year by filing an information
return with the IRS as prescribed by sec-
tion 3402(q). The poker tournament spon-
sor must furnish a copy of the informa-
tion return to the IRS on or before Feb-
ruary28(March31iffiledelectronically)
of the calendar year following the calendar
year in which the payment is made, as pre-
scribed by section 31.3402(q) of the regu-
lations.
SECTION 5. SCOPE
This revenue procedure applies to poker
tournament sponsors, including casinos,
which pay amounts to winners in a manner
substantially similar to that described in
section 2 of this revenue procedure.
SECTION 6. WAIVER OF LIABILITY
UNDER SECTION 3402 AND
WAIVER OF OTHER PENALTIES OR
ADDITIONS TO TAX
The IRS will not assert any liability
for additional tax or additions to tax for
violations of any withholding obligation
with respect to amounts paid to winners
of poker tournaments under section 3402,
provided that the poker tournament spon-
sor meets all of the requirements for in-
formation reporting under section 3402(q)
and the regulations thereunder.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
payments made on or after March 4, 2008.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Blaise G. Dusenberry of the
Office of Associate Chief Counsel (Pro-
cedure and Administration). For further
information regarding this revenue proce-
dure, contact Cynthia McGreevy at (202)
622–4910 (not a toll-free call).
2007–36 I.R.B.547September 4, 2007

Part IV. Items of General Interest
Notice of Proposed
Rulemaking
Abandonment of Stock and
Other Securities
REG–101001–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak
ing.
SUMMARY: These proposed regulations
provide guidance concerning the availabil-
ity and character of a loss deduction under
section 165 of the Internal Revenue Code
for losses sustained from abandoned secu-
rities. These proposed regulations are nec-
essary to clarify the tax treatment of losses
from abandoned securities, and will affect
any taxpayer claiming a deduction for a
loss from abandoned securities after the
date these regulations are published as fi-
nal regulations in theFederal Register.
DATES: Written or electronic comments
and requests for a public hearing must be
received by October 29, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–101001–05), room
5205, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–101001–05),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC 20224, or sent electronically, via
the IRS internet site atwww.irs.gov/regs
or via the Federal eRulemaking Portal
atwww.regulations.gov(indicate IRS
REG–101001–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Lisa S. Dobson at (202)
622–7790, or Sean M. Dwyer at (202)
622–5020; concerning submissions of
comments and requests for a hearing,
Kelly Banks at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document proposes to amend
§1.165–5 of the Income Tax Regulations
(26 CFR part 1) to provide guidance con-
cerning the Federal income tax treatment
of abandoned securities.
Abandonment of Securities
Section 165(a) of the Code allows a
deduction for any loss sustained during
the taxable year and not compensated
for by insurance or otherwise. Section
1.165–1(d)(1) of the Income Tax Regu-
lations provides that a loss is treated as
sustained during the taxable year in which
the loss occurs, as evidenced by a closed
and completed transaction, and as fixed
by an identifiable event occurring in such
taxable year.
Section 165(g)(1) provides that if any
security that is a capital asset becomes
worthless during the taxable year, the re-
sulting loss is treated as a loss from the sale
or exchange of a capital asset (that is, as a
capital loss) on the last day of the taxable
year. Section 165(g)(2) definessecurityas
a share of stock in a corporation; a right to
subscribe for or to receive a share of stock
in a corporation; or a bond, debenture, note
or certificate or otherevidence of indebt-
edness issued by a corporation or govern-
ment with interest coupons or in registered
form. Section 165(g)(3) provides an ex-
ception from capital loss treatment for cer-
tain worthless securities in a domestic cor-
poration affiliated with the taxpayer.
The legislative history of the predeces-
sorofsection165(g)indicates that the pro-
vision was enacted to remove the “peculiar
and anomalous results” that followed from
treating losses from the worthlessness of
securities as ordinary losses or deductions,
and losses from the sale or exchange of
securities as capital losses, because both
losses represent a loss of capital in a trans-
action entered into for profit. See H. Rep.
No. 1860, 75th Cong., 3d Sess., at 18–19
(1938).
The Treasury Department and the IRS
understand that some taxpayers have taken
the position that a loss under section 165(a)
resulting from the abandonment of a secu-
rity is not subject to the loss characteriza-
tion rules provided in section 165(g).
Property that has become worthless
to the taxpayer may give rise to a loss
deduction under section 165(a). In gen-
eral, worthlessness is determined by a
combination of subjective and objective
indiciaincluding a subjective determina-
tion of worthlessness to the taxpayer and
objective evidence of a closed and com-
pleted transaction. SeeEchols v. Com-
missioner, 950 F.2d 209 (5
th
Cir. 1991);
Boehm v. Commissioner, 326 U.S. 287
(1945). For purposes of section 165(a),
the act of abandonment is an event that
establishes both of these elements. Rev.
Rul. 2004–58, 2004–1 C.B. 1043, see
§601.601(d)(2)(ii)(b). Although an act
of abandonment may be “one of several
factors in the analysis of whether the
taxpayer’s subjective determination of
an asset’s worthlessness is sustainable,
abandonment is not an indispensable re-
quirement for a worthlessness deduction
under Code section 165.”Echols, 950 F.2d
at 212. Identifiable events may include
“other acts or events which reflect the fact
that the property is worthless.”Proesel v.
Commissioner, 77 T.C. 992, 1005 (1981).
The proposed regulations provide that,
for purposes of applying the loss char-
acterization rules of section 165(g), the
abandonment of a security establishes the
worthlessness of the security to the tax-
payer. Under the proposed regulations a
loss established by the abandonment of a
security that is a capital asset is treated as a
loss from the sale or exchange, on the last
day of the taxable year, of a capital asset,
unless the exception in section 165(g)(3)
applies. In characterizing losses estab-
lished by the abandonment of a security in
a manner consistent with other worthless
security losses, the proposed regulations
further the legislative intent to eliminate
“peculiar and anomalous results.” See
H. Rep. No. 1860, 75th Cong., 3d Sess., at
18–19 (1938). See also §1.332–2(b) and
Rev. Rul. 2003–125, 2003–2 C.B. 1243,
see §601.601(d)(2)(ii)(b), (wherein the
character of a loss established in a trans-
action in which a shareholder disposes
September 4, 20075482007–36 I.R.B.

of stock and receives no consideration
(specifically, a liquidation that fails to
qualify under section 332) is prescribed
by section 165(g)).
Although a taxpayer need not relinquish
legal title to property in all cases to estab-
lish abandonment, in view of the nature of
a taxpayer’s rights in stock and other se-
curities these proposed regulations require
that to abandon a security, a taxpayer must
permanently surrender and relinquish all
rights in the security and receive no con-
sideration in exchange for the security.
Abandonment or Cancellation of Other
Debt Instruments
Section 166(a)(1) allows as a deduction
any debt which becomes worthless within
the taxable year. Under section 166(b), the
basis for determining the amount of the de-
duction is the adjusted basis of the debt.
Section 166(a)(2) permits a deduction for
partially worthless debts. It provides that
the Secretary, when satisfied that a debt is
recoverableonlyinpart,mayallowade-
duction for the debt in an amount not in
excess of the part charged off within the
taxable year. The courts have noted that
the tests for worthlessness under section
165 and under section 166 are fundamen-
tally the same. SeeUnited States v. S.S.
White Dental Mfg. Co., 274 U.S. 398, 401
(1927).
A creditor may not voluntarily cancel
a debt that has value and claim a deduc-
tion under section 166 because the debt is
now valueless. SeeJostens, Inc. v. Com-
missioner, 956 F.2d 175, 176–77 (8th Cir.
1992).
Two categories of worthless debts are
excepted from section 166: nonbusiness
debts under section 166(d) and debt secu-
rities under section 166(e). Under section
166(e), section 166 does not apply to a debt
that is evidenced by a security as defined in
section 165(g)(2)(C). Accordingly, the tax
treatment of debt securities is discussed in
theAbandonment of Securitiessection of
this preamble.
Section 166(d)(1)(A) provides that in
the case of a taxpayer other than a corpo-
ration, section 166(a) does not apply to a
nonbusiness debt. Instead, under section
166(d)(1)(B), a nonbusiness debt that be-
comes worthless is considered a loss from
the sale or exchange of a capital asset held
for not more than one year. Anonbusi-
ness debtis defined in section 166(d)(2)
as a debt that is not created or acquired
in connection with, or the worthlessness
of which is not incurred in, the taxpayer’s
trade or business. The legislative intent be-
hind section 166(d) is in part to provide for
parity of tax treatment with worthless se-
curities under section 165(g) and other in-
vestments. SeePutnam v. Commissioner,
352 U.S. 82, 91–92 (1956).
The Treasury Department and the IRS
request comments concerning the Federal
tax treatment of “abandoned debt” other
than debt securities, including nonbusiness
debts which, under section 166(d), are de-
ductible when worthless as short-term cap-
ital losses, and other debt instruments, the
worthlessness of which gives rise to a bad
debt deduction under section 166(a).
Proposed Effective Date
These proposed regulations are pro-
posed to apply to an abandonment of
securities occurring after the date these
regulations are published as final reg-
ulations in theFederal Register.No
inference is intended regarding the treat-
ment for Federal income tax purposes of
an abandonment of securities occurring
before these regulations are effective.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulation does not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small businesses.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS specifically request com-
ments on the clarity of the proposed rule
and how they can be made easier to un-
derstand. All comments will be available
for public inspection and copying. A pub-
lic hearing will be scheduled if requested
in writing by any person that timely sub-
mits written comments. If a public hearing
is scheduled, notice of the date, time, and
place for the public hearing will be pub-
lished in theFederal Register.
Although the proposed regulations pro-
vide that for purposes of section 165(g) the
termworthlessincludes abandoned securi-
ties for which no consideration is received,
there may be other contexts under the Code
or regulations in which the tax treatment of
abandoned securities is unclear or in which
abandonment and worthlessness should be
treated differently. In addition to com-
ments concerning the tax treatment of non-
security debt instruments, comments are
requested concerning the existence and ap-
propriate tax treatment of abandoned secu-
rities in other contexts.
Drafting Information
The principal authors of these regula-
tions are Lisa S. Dobson of the Office of
Associate Chief Counsel (Corporate) and
Sean M. Dwyer of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). Other personnel from Treasury De-
partment and the IRS 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 1.165–5 is amended as
follows:
1. Paragraph (i) is redesignated as para-
graph (j).
2. A new paragraph (i) is added.
The addition reads as follows:
2007–36 I.R.B.549September 4, 2007

§1.165–5 Worthless securities.
*****
(i)Abandonment of securities.For
purposes of section 165 and this section,
a security that becomes wholly worthless
includes a security described in paragraph
(a) of this section that is abandoned and
otherwise satisfies the requirements for a
deductible loss under section 165. If the
abandoned securityis a capital asset and
is not described in section 165(g)(3) and
paragraph (d) of this section (concerning
worthless securities of certain affiliated
corporations), the resulting loss is treated
as a loss from the sale or exchange, on the
last day of the taxable year, of a capital
asset. See section 165(g)(1) and paragraph
(c) of this section. To abandon a security,
a taxpayer must permanently surrender
and relinquish all rights in the security and
receive no consideration in exchange for
the security. For purposes of this section,
all the facts and circumstances determine
whether the transaction is properly char-
acterized as an abandonment or other type
of transaction, such as an actual sale or ex-
change, contribution to capital, dividend,
or gift.
*****
Linda E. Stiff,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 27, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 30, 2007, 72 F.R. 41468)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Change to Office to Which
Notices of Nonjudicial Sale
and Requests for Return of
Wrongfully Levied Property
Must Be Sent
REG–148951–05
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 is issuing temporary regulations
(T.D. 9344) relating to the discharge of
liens under section 7425 and return of
wrongfully levied upon property under
section 6343 of the Internal Revenue Code
(Code) of 1986. Those regulations clarify
that such notices and claims should be
sent to the IRS official and office spec-
ified in the relevant IRS publications.
The regulations will affect parties seek-
ing to provide the IRS with notice of a
nonjudicial foreclosure sale and parties
making administrative requests for return
of wrongfully levied property. 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 byOctober 18, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–148951–05),
Room 5203, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered to CC:PA:LPD:PR
(REG–148951–05), Courier’s Desk, In-
ternal Revenue Service, 1111 Consti-
tution Avenue, NW, Washington, DC
20224. Alternatively, taxpayers may sub-
mit comments electronically to the IRS
Internet site via the Federal eRulemak-
ing Portal atwww.regulations.gov(IRS
REG–148951–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Robin M. Ferguson, (202)
622–3630; concerning submissions of
comments, the hearing, call Kelly Banks,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in this issue of
the Bulletin contain amendments to the
Procedure and Administration Regulations
(26 CFR part 301) relating to the giving
of notice of nonjudicial sales under section
7425(b) of the Code and requests for re-
turn of wrongfully levied property under
section 6343(b) of the Code. 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.
Proposed Effective Date
These regulations are proposed to ap-
ply to any notice of sale filed or request
for return of property made after the date
that these regulations are published as fi-
nal regulations in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Internal Revenue
Code, this regulation has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and writ-
ten comments (a signed original and eight
(8) copies) or electronic comments that
are submitted timely to the IRS. The IRS
and Treasury Department specifically re-
quest comments on the clarity of the pro-
posed rules and how they may be made
easier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
September 4, 20075502007–36 I.R.B.

Drafting Information
The principal author of these regula-
tions is Robin M. Ferguson, Office of As-
sociate Chief Counsel, Procedure and Ad-
ministration Division.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posedtobeamendedasfollows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6343–2 is amended
by revising paragraphs (a)(1) introductory
text, (b) introductory text, and (e) to read
as follows:
§301.6343–2 Return of wrongfully levied
upon property.
(a)(1) [The text of the proposed
amendment for §301.6343–2(a)(1) in-
troductory text is the same as the text
of §301.6343–2T(a)(1) introductory text
published elsewhere in this issue of the
Bulletin].
*****
(b) [The text of the proposed amend-
ment for §301.6343–2(b) introductory text
is the same as the text of §301.6343–2T(b)
introductory text published elsewhere in
this issue of the Bulletin].
*****
(e) [The text of the proposed amend-
ment for §301.6343–2(e) is the same as the
text of §301.6343–2T(e) published else-
where in this issue of the Bulletin].
Par. 3. Section 301.7425–3 is amended
by revising paragraphs (a)(1), (b)(1),
(b)(2), (c)(1), (d)(2), (d)(3), and (d)(4),
and adding paragraph (e) to read as fol-
lows:
§301.7425–3 Discharge of Liens; special
rules.
(a)***(1)[Thetextoftheproposed
amendment for §301.7425–3(a)(1) is the
same as the text of §301.7425–3T(a)(1)
published elsewhere in this issue of the
Bulletin].
*****
(b)***(1)[Thetextoftheproposed
amendment for §301.7425–3(b)(1) is the
same as the text of §301.7425–3T(b)(1)
published elsewhere in this issue of the
Bulletin].
(2) [The text of the proposed amend-
ment for §301.7425–3(b)(2) is the same as
the text of §301.7425–3T(b)(2) published
elsewhere in this issue of the Bulletin].
*****
(c)***(1)[Thetextoftheproposed
amendment for §301.7425–3(c)(1) is the
same as the text of §301.7425–3T(c)(1)
published elsewhere in this issue of the
Bulletin].
*****
(d) * * *
(2) [The text of the proposed amend-
ment for §301.7425–3(d)(2) is the same as
the text of §301.7425–3T(d)(2) published
elsewhere in this issue of the Bulletin].
(3) [The text of the proposed amend-
ment for §301.7425–3(d)(3) is the same as
the text of §301.7425–3T(d)(3) published
elsewhere in this issue of the Bulletin].
(4) [The text of the proposed amend-
ment for §301.7425–3(d)(4) is the same as
the text of §301.7425–3T(d)(4) published
elsewhere in this issue of the Bulletin].
(e) [The text of the proposed amend-
ment for §301.7425–3(e) is the same as the
text of §301.7425–3T(e) published else-
where in this issue of the Bulletin].
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 19, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 20, 2007, 72 F.R. 39771)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Section 67 Limitations on
Estates or Trusts
REG–128224–06
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that provide guidance on
which costs incurred by estates or non-
grantor trusts are subject to the 2-percent
floor for miscellaneous itemized deduc-
tions under section 67(a). The regulations
will affect estates and non-grantor trusts.
This document also provides notice of a
public hearing on these proposed regula-
tions.
DATES: Written and electronic comments
must be received by October 25, 2007.
Outlines of topics to be discussed at the
public hearing scheduled for November
14, 2007 must be received by October 24,
2007.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–128224–06), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–128224–06),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
http://www.regulations.gov/(indicate IRS
and REG–128224–06). The public hear-
ing will be held in the IRS Auditorium,
Internal Revenue Building, 1111 Constitu-
tion Avenue, N.W., Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Jennifer N. Keeney, (202)
622–3060; concerning submissions of
comments, the hearing, or to be placed on
the building access list to attend the hear-
ing, Richard A. Hurst, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1. Section
67(a) of the Internal Revenue Code (Code)
provides that, for an individual taxpayer,
miscellaneous itemized deductions are al-
lowed only to the extent that the aggregate
of those deductions exceeds 2 percent of
2007–36 I.R.B.551September 4, 2007

adjusted gross income. Section 67(b) ex-
cludes certain itemized deductions from
the definition of “miscellaneous itemized
deductions”. Section 67(e) provides that,
for purposes of section 67, the adjusted
gross income of an estate or trust shall be
computed in the same manner as in the
case of an individual. However, section
67(e)(1) provides that the deductions for
costspaidorincurredinconnectionwith
the administration of the estate or trust and
which would not have been incurred if the
property were not held in such estate or
trust shall be treated as allowable in arriv-
ing at adjusted gross income. Therefore,
deductions described in section 67(e)(1)
are not subject to the 2-percent floor for
miscellaneous itemized deductions under
section 67(a).
United States courtsof appeals have in-
terpreted the language of section 67(e)(1)
differently in determining whether costs
incurred by trustees are subject to the
2-percent floor. The issue in each case
has been whether the trust’s costs (specif-
ically, investment advisory fees) “would
not have been incurred if the property
were not held in such trust or estate.” In
O’Neill v. Commissioner, 994 F.2d 302
(6th Cir. 1993), the Court of Appeals
for the Sixth Circuit held that investment
advisory fees paid for professional in-
vestment services were fully deductible
under section 67(e)(1) where the trustees
lacked experience in managing large sums
of money. The court found that, under
state law, the trustee was required to en-
gage an investment advisor to meet its
fiduciary obligations and to incur fees that
the trust would not have incurred if the
property were not held in trust. The court
held that estate or trust expenditures that
are necessary to meet specific fiduciary
obligations under state law are not sub-
ject to the 2-percent floor. In contrast, in
Mellon Bank, N.A. v. United States,265
F.3d 1275 (Fed. Cir. 2001),Scott v. United
States, 328 F.3d 132 (4th Cir. 2003), and
Rudkin v. Commissioner, 467 F.3d 149 (2d
Cir. 2006), the courts held that investment
advisory fees are subject to the 2-percent
floor. These courts read the language of
section 67(e)(1) differently than the Sixth
Circuit. Specifically, the courts inScott
andMellon Bankconcluded that a trust
expense is subject to the 2-percent floor
if it is an expense “commonly” or “cus-
tomarily” incurred by individuals; and the
court inRudkinlooked to whether such
an expense was “peculiar to trusts” and
“could not” be incurred by an individual.
The result of this lack of consistency in
the case law is that the deductions of simi-
larly situated taxpayers may or may not be
subject to the 2-percent floor, depending
upon the jurisdiction in which the executor
or the trustee is located. The IRS and the
Treasury Department believe that similarly
situated taxpayers should be treated con-
sistently by having section 67(e)(1) con-
strued and applied in the same way in all
jurisdictions. The proposed regulations
are intended to provide a uniform stan-
dard for identifying the types of costs that
are not subject to the 2-percent floor under
section 67(e)(1).
Explanation of Provisions
These proposed regulations pro-
vide that costs incurred by estates or
non-grantor trusts that are unique to an es-
tate or trust are not subject to the 2-percent
floor. For this purpose, a cost is unique to
an estate or trust if an individual could not
have incurred that cost in connection with
propertynotheldinanestateortrust. To
the extent that expenses paid or incurred
by an estate or non-grantor trust do not
meet this standard, they are subject to the
2-percent floor of section 67(a). (Neither
section 67 nor this rule applies to expenses
that are excluded under section 67(b) from
the definition of miscellaneous itemized
deductions, or to expenses related to a
trade or business.)
Under the proposed regulations,
whether costs are subject to the 2-per-
cent floor on miscellaneous itemized de-
ductions depends on the type of services
provided, rather than on taxpayer char-
acterizations or labels for such services.
Thus, taxpayers may not circumvent the
2-percent floor by “bundling” investment
advisory fees and trustees’ fees into a sin-
gle fee. The regulations provide that, if
an estate or non-grantor trust pays a single
fee that includes both costs that are unique
to estates and trusts and costs that are not,
then the estate or non-grantor trust must
use a reasonable method to allocate the
single fee between the two types of costs.
The regulations also provide a non-ex-
clusive list of services for which the cost
is either exempt from or subject to the
2-percent floor. The IRS and the Treasury
Department invite comments on whether
any safe harbors or other guidance, con-
cerning allocation methods or otherwise,
would be helpful.
Proposed Effective Date
The regulations, as proposed, apply to
payments made after the date final regula-
tions are published inFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the proposed rules, as well
as their clarity and how they can be made
easier to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for November 14, 2007, beginning at
10 a.m. in the IRS Auditorium, Inter-
nal Revenue Building, 1111 Constitution
Avenue, N.W., Washington, DC. Due to
building security procedures, visitors must
enter at the Constitution Avenue entrance.
In addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance area more than 15 minutes before
the hearing starts. For information about
September 4, 20075522007–36 I.R.B.

having your name placed on the building
access list to attend the hearing, see the
FOR FURTHER INFORMATION CON-
TACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments and
an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
October 24, 2007. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
ule of speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these regu-
lations is Jennifer N. Keeney, Office of
the Office of Associate Chief Counsel
(Passthroughs and Special Industries).
*****
Proposed Amendments to the
Regulations
Accord
ingly, 26 CFR part 1 is proposed
to be am
ended 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 1.67–4 is added to read
as follows:
§1.67–4 Costs paid or incurred by estates
or non-grantor trusts.
(a)In general. Section 67(e) provides
an exception to the 2-percent floor on mis-
cellaneous itemized deductions for costs
that are paid or incurred in connection with
the administration of an estate or a trust
not described in §1.67–2T(g)(1)(i) (a non-
grantor trust) and which would not have
been incurred if the property were not held
in such estate or trust. To the extent that
a cost incurred by an estate or non-grantor
trust is unique to such an entity, that cost is
not subject to the 2-percent floor on mis-
cellaneous itemized deductions. To the ex-
tent that a cost included in the definition
of miscellaneous itemized deductions and
incurred by an estate or non-grantor trust
is not unique to such an entity, that cost is
subject to the 2-percent floor.
(b)Unique. For purposes of this sec-
tion, a cost is unique to an estate or a
non-grantor trust if an individual could not
have incurred that cost in connection with
property not held in an estate or trust. In
making this determination, it is the type
of product or service rendered to the es-
tate or trust, rather than the characteriza-
tion of the cost of that product or service,
that is relevant. A non-exclusive list of
products or services that are unique to an
estate or trust includes those rendered in
connection with: fiduciary accountings;
judicial or quasi-judicial filings required
as part of the administration of the estate
or trust; fiduciary income tax and estate
tax returns; the division or distribution of
income or corpus to or among beneficia-
ries; trust or will contest or construction;
fiduciary bond premiums; and communi-
cations with beneficiaries regarding estate
or trust matters. A non-exclusive list of
products or services that are not unique to
an estate or trust, and therefore are subject
to the 2-percent floor, includes those ren-
dered in connection with: custody or man-
agement of property; advice on investing
for total return; gift tax returns; the de-
fense of claims by creditors of the decedent
or grantor; and the purchase, sale, mainte-
nance, repair, insurance or management of
non-trade or business property.
(c) “Bundled fees”. Ifanestateora
non-grantor trust pays a single fee, com-
mission or other expense for both costs that
are unique to estates and trusts and costs
that are not, then the estate or non-grantor
trust must identify the portion (if any) of
the legal, accounting, investment advisory,
appraisal or other fee, commission or ex-
pense that is unique to estates and trusts
and is thus not subject to the 2-percent
floor. The taxpayer must use any rea-
sonable method to allocate the single fee,
commission or expense between the costs
unique to estates and trusts and other costs.
(d)Effective/applicability date.These
regulations are proposed to be effective for
payments made after the date final regula-
tions are published inFederal Register.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 26, 2007,
8:45 a.m., and published in the issue of the Federal Register
for July 27, 2007, 72 F.R. 41243)
2007–36 I.R.B.553September 4, 2007

Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Reinstatements, Suspensions,
Censures, Disbarments, and Resignations
Announcement 2007-72
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Reinstatement To Practice Before the Internal Revenue
Service
Under Title 31, Code of Federal Reg-
ulations, Part 10, The Director, Office of
Professional Responsibility, may entertain
a petition for reinstatement for any attor-
ney, certified public accountant, enrolled
agent, or enrolled actuary censured, sus-
pended, or disbarred, from practice before
the Internal Revenue Service.
The following individuals’ eligibility to
practice before the Internal Revenue Ser-
vice has been restored:
NameAddressDesignationDate of Reinstatement
Mollo, Charles W.Anaheim, CAEADecember 1, 2004
Price, Richard A.Novato, CACPAApril 29, 2005
Reyes, Ruperto D.Placentia, CACPADecember 8, 2005
Schwartz, Kenneth J.West Hills, CAAttorneyFebruary 28, 2006
McCarthy III, William P.Sacramento, CAEAMarch 10, 2006
Deen, Mae T.Salinas, CAEAApril 16, 2006
Banks, Jean R.Van Nuys, CAEADecember 6, 2006
Eckstein, MatthewWoodbury, NYCPAMarch 14, 2007
Cunningham, WilliamPhiladelphia, PACPAMarch 31, 2007
Ganz, Sheldon M.Great Neck, NYCPAApril 19, 2007
Smith, Sean M.Kensington, MDEnrolled AgentApril 27, 2007
Frascella, Russell B.Pound Ridge, NYCPAApril 27, 2007
Lamont, AliceAtlanta, GACPAMay 4, 2007
Carroccio, Ronald P.Staten Island, NYCPAMay 15, 2007
Cohen, Ronald J.Cornwall, NYAttorneyJune 21, 2007
Troese, Jr., Henry A.Clarion, PAEnrolled AgentJune 25, 2007
September 4, 20075542007–36 I.R.B.

NameAddressDesignationDate of Reinstatement
Jacob, Robert T.Tucson, AZEnrolled AgentJune 27, 2007
Simontacchi, Joseph F.Rockaway, NJCPAJuly 3, 2007
Kimes, Larry W.Irving, TXCPAJuly 6, 2007
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Caplan, Howard A.Ocean, NJCPAIndefinite
from
April 1, 2007
Tow, Marc R.Newport Beach, CAAttorneyIndefinite
from
April 1, 2007
Pyburn, Richard E.Downers Grove, ILCPAIndefinite
from
April 9, 2007
Cook, Jack D.South Haven, MICPAIndefinite
from
April 17, 2007
Serban, Daniel E.Roanoke, INAttorneyIndefinite
from
April 19, 2007
Wentz, Debora B.Newton, NCCPAIndefinite
from
April 19, 2007
Ferguson, Duane F.Upland, CACPAIndefinite
from
May 1, 2007
Mulrey, Robert M.Milton, MACPAIndefinite
from
May 1, 2007
Colasuonno, Philip V.New Rochelle, NYCPAIndefinite
from
May 23, 2007
Bankston, David A.Land O Lakes, FLCPAIndefinite
from
June 1, 2007
2007–36 I.R.B.555September 4, 2007

NameAddressDesignationDate of Suspension
Nagy, Robert J.Charleston, SCCPAIndefinite
from
June 1, 2007
Wallen, David G.Beckley, WVCPAIndefinite
from
June 15, 2007
Rudick, Josephine M.Bear Creek, PAEnrolled AgentIndefinite
from
June 25, 2007
Iglesias, Jorge E.Roswell, GACPAIndefinite
from
July 1, 2007
Raimer, Russell B.Brecksville, OHCPAIndefinite
from
July 1, 2007
Stancukas, Stanley J.Forth Worth, TXCPAIndefinite
from
July 1, 2007
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Barach, Malcolm J.Brookline, MAAttorneyIndefinite
from
March 9, 2007
Cox, Marlisa R.Oklahoma City, OKCPAIndefinite
from
April 2, 2007
Artis, Paris A.Newberry, FLAttorneyIndefinite
from
April 13, 2007
Blackadar, Christine M.CenterHarbor, NHAttorneyIndefinite
from
April 13, 2007
Brelje, Brian J.Laguna Beach, CACPAIndefinite
from
April 13, 2007
September 4, 20075562007–36 I.R.B.

NameAddressDesignationDate of Suspension
Decker, Craig A.Mesa, AZAttorneyIndefinite
from
April 13, 2007
House, Stephen M.Nevada City, CACPAIndefinite
from
April 13, 2007
Laird, James J.San Ramon, CACPAIndefinite
from
April 13, 2007
Milner, Dennis V.Dublin, CAAttorneyIndefinite
from
April 13, 2007
Nutt, Jeremy C.Forth Worth, TXAttorneyIndefinite
from
April 13, 2007
Picl, Frank M.Peoria, ILAttorneyIndefinite
from
April 13, 2007
Britt, Jerry U.Mount Olive, NCCPAIndefinite
from
April 19, 2007
Lee, Janell M.Oakland, CACPAIndefinite
from
April 19, 2007
Baker, Sean W.Elkridge, MDAttorneyIndefinite
from
April 30, 2007
Brett, Stephen M.York Beach, MEAttorneyIndefinite
from
April 30, 2007
Donahue, Richard K.Lowell, MACPAIndefinite
from
April 30, 2007
Frank, Mack I.Eunice, LAAttorneyIndefinite
from
April 30, 2007
Leung, Elsie Y.Pasadena, CACPAIndefinite
from
April 30, 2007
Pearlman, Stephen E.Dix Hills, NYAttorneyIndefinite
from
April 30, 2007
Peer, JameelahWaimanalo,HIAttorneyIndefinite
from
April 30, 2007
2007–36 I.R.B.557September 4, 2007

NameAddressDesignationDate of Suspension
Riskowski, Patrick T.Omaha, NEAttorneyIndefinite
from
April 30, 2007
Schumacher, Mary M.Dubuque, IAAttorneyIndefinite
from
April 30, 2007
DeVaughn, Donald L.Plainview, MNAttorneyIndefinite
from
May 1, 2007
Waggle, Stephen L.Los Banos, CACPAIndefinite
from
May 24, 2007
Nefsky, Melvyn I.Los Angeles, CACPAIndefinite
from
June 11, 2007
Neuendorf, Louis E.Sandwich, ILAttorneyIndefinite
from
June 11, 2007
Thomas, Scott C.Parker, COAttorneyIndefinite
from
June 11, 2007
Todd, Donald J.South Holland, ILCPAIndefinite
from
June 11, 2007
Winrow, WayneEmeryville, CAAttorneyIndefinite
from
June 11, 2007
Cannon, Todd R.Florence,COAttorneyIndefinite
from
June 12, 2007
Hester, Karen H.Overland Park, KSAttorneyIndefinite
from
June 25, 2007
Denman, Dwight E.Dallas, TXAttorneyIndefinite
from
June 25, 2007
Korcan, BarryLoretto, PACPAIndefinite
from
June 25, 2007
Lloyd, Max C.South Jordan, UTCPAIndefinite
from
June 25, 2007
White, Lanny R.Lindon, UTCPAIndefinite
from
June 25, 2007
Bjorklund, Dennis A.Coralville, IAAttorneyIndefinite
from
June 28, 2007
September 4, 20075582007–36 I.R.B.

NameAddressDesignationDate of Suspension
Noel, RobertFairfield, CAAttorneyIndefinite
from
June 28, 2007
Sanger, Susan L.Greenwood Village, COAttorneyIndefinite
from
June 28, 2007
Shatzen, Robert S.Beaverton, ORAttorneyIndefinite
from
June 28, 2007
Stevenson, Albert D.Olive Branch, MSCPAIndefinite
from
June 28, 2007
Van Beek, AndreaOrange City, IAAttorneyIndefinite
from
June 28, 2007
Sojcher, Stuart H.Winchester, MAAttorneyIndefinite
from
July 3, 2007
Estrada, Severo C.San Jose, CACPAIndefinite
from
July 3, 2007
Ferguson, Robert E.Salt Point, NYAttorneyIndefinite
from
July 3, 2007
Wickenkamp, Mary C.Denison, TXAttorneyIndefinite
from
July 3, 2007
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Cettomai, Joseph W.Rootstown, OHCPAIndefinite
from
April 19, 2007
2007–36 I.R.B.559September 4, 2007

Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individu-
als have been disbarred from practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Haynes, Scott Y.Valdosta, GACPAMarch 19, 2007
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Lyons, John K.Dingmans Ferry, PAAttorneyApril 4, 2007
Bowman, T. HardieCorpus Christi, TXCPAMay 23, 2007
Kofford, Brian T.Provo, UTCPAJune 12, 2007
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Resignation
Hancock, William H.Plant City, FLApril 10, 2007
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2007–76
The names of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal Rev-
enue Code of 1986 are listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on September 4,
2007, and would end on the date the court
first determines that the organization is
not described in section 170(c)(2) as more
particularly set forth in section 7428(c)(1).
For individual contributors, the maximum
deduction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
September 4, 20075602007–36 I.R.B.

omissions of the organization that were
the basis for revocation.
Progressive Services, Inc.
Norman, OK
Harold Binstein Humanitarian Fund
Chicago, IL
SayNotoDrugs
Greenville, TX
Shamrock Boxing, Inc.
Covington, KY
National Home Foundation, Inc.
Rockville, MD
Business & Nonprofit Center
of Eastern Madera County
Fresno, CA
2007–36 I.R.B.561September 4, 2007

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
September 4, 2007i2007–36 I.R.B.

Numerical Finding List
1
Bulletins 2007–27 through 2007–36
Announcements:
2007-61, 2007-28 I.R.B.84
2007-62, 2007-29 I.R.B.115
2007-63, 2007-30 I.R.B.236
2007-64, 2007-29 I.R.B.125
2007-65, 2007-30 I.R.B.236
2007-66, 2007-31 I.R.B.296
2007-67, 2007-32 I.R.B.345
2007-68, 2007-32 I.R.B.348
2007-69, 2007-33 I.R.B.371
2007-70, 2007-33 I.R.B.371
2007-71, 2007-33 I.R.B.372
2007-72, 2007-33 I.R.B.373
2007-73, 2007-34 I.R.B.435
2007-74, 2007-35 I.R.B.483
2007-75, 2007-36 I.R.B.540
2007-76, 2007-36 I.R.B.560
Notices:
2007-54, 2007-27 I.R.B.12
2007-55, 2007-27 I.R.B.13
2007-56, 2007-27 I.R.B.15
2007-57, 2007-29 I.R.B.87
2007-58, 2007-29 I.R.B.88
2007-59, 2007-30 I.R.B.135
2007-60, 2007-35 I.R.B.466
2007-61, 2007-30 I.R.B.140
2007-62, 2007-32 I.R.B.331
2007-63, 2007-33 I.R.B.353
2007-64, 2007-34 I.R.B.385
2007-65, 2007-34 I.R.B.386
2007-66, 2007-34 I.R.B.387
2007-67, 2007-35 I.R.B.467
2007-68, 2007-35 I.R.B.468
2007-69, 2007-35 I.R.B.468
2007-71, 2007-35 I.R.B.472
2007-72, 2007-36 I.R.B.544
2007-73, 2007-36 I.R.B.545
Proposed Regulations:
REG-121475-03, 2007-35 I.R.B.474
REG-128274-03, 2007-33 I.R.B.356
REG-114084-04, 2007-33 I.R.B.359
REG-149036-04, 2007-33 I.R.B.365
REG-149036-04, 2007-34 I.R.B.411
REG-101001-05, 2007-36 I.R.B.548
REG-119097-05, 2007-28 I.R.B.74
REG-147171-05, 2007-32 I.R.B.334
REG-148951-05, 2007-36 I.R.B.550
REG-163195-05, 2007-33 I.R.B.366
REG-128224-06, 2007-36 I.R.B.551
REG-138707-06, 2007-32 I.R.B.342
Proposed Regulations— Continued:
REG-139268-06, 2007-34 I.R.B.415
REG-142039-06, 2007-34 I.R.B.415
REG-144540-06, 2007-31 I.R.B.296
REG-103842-07, 2007-28 I.R.B.79
Revenue Procedures:
2007-42, 2007-27 I.R.B.15
2007-43, 2007-27 I.R.B.26
2007-44, 2007-28 I.R.B.54
2007-45, 2007-29 I.R.B.89
2007-46, 2007-29 I.R.B.102
2007-47, 2007-29 I.R.B.108
2007-48, 2007-29 I.R.B.110
2007-49, 2007-30 I.R.B.141
2007-50, 2007-31 I.R.B.244
2007-51, 2007-30 I.R.B.143
2007-52, 2007-30 I.R.B.222
2007-53, 2007-30 I.R.B.233
2007-54, 2007-31 I.R.B.293
2007-55, 2007-33 I.R.B.354
2007-56, 2007-34 I.R.B.388
2007-57, 2007-36 I.R.B.547
Revenue Rulings:
2007-42, 2007-28 I.R.B.44
2007-43, 2007-28 I.R.B.45
2007-44, 2007-28 I.R.B.47
2007-45, 2007-28 I.R.B.49
2007-46, 2007-30 I.R.B.126
2007-47, 2007-30 I.R.B.127
2007-48, 2007-30 I.R.B.129
2007-49, 2007-31 I.R.B.237
2007-50, 2007-32 I.R.B.311
2007-57, 2007-36 I.R.B.531
Tax Conventions:
2007-75, 2007-36 I.R.B.540
Treasury Decisions:
9326, 2007-31 I.R.B.242
9327, 2007-28 I.R.B.50
9328, 2007-27 I.R.B.1
9329, 2007-32 I.R.B.312
9330, 2007-31 I.R.B.239
9331, 2007-32 I.R.B.298
9332, 2007-32 I.R.B.300
9333, 2007-33 I.R.B.350
9334, 2007-34 I.R.B.382
9335, 2007-34 I.R.B.380
9336, 2007-35 I.R.B.461
9337, 2007-35 I.R.B.455
9338, 2007-35 I.R.B.463
9339, 2007-35 I.R.B.437
9340, 2007-36 I.R.B.487
9341, 2007-35 I.R.B.449
Treasury Decisions— Continued:
9342, 2007-35 I.R.B.451
9343, 2007-36 I.R.B.533
9344, 2007-36 I.R.B.535
9345, 2007-36 I.R.B.523
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin
2007–26, dated June 25, 2007.
2007–36 I.R.B.iiSeptember 4, 2007

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2007–27 through 2007–36
Announcements:
84-26
Obsoleted by
T.D. 9336, 2007-35 I.R.B.461
84-37
Obsoleted by
T.D. 9336, 2007-35 I.R.B.461
Notices:
2003-81
Modified and supplemented by
Notice 2007-71, 2007-35 I.R.B.472
2006-43
Modified by
T.D. 9332, 2007-32 I.R.B.300
2006-89
Modified by
Notice 2007-67, 2007-35 I.R.B.467
2007-3
Modified by
Notice 2007-69, 2007-35 I.R.B.468
2007-26
Modified by
Notice 2007-56, 2007-27 I.R.B.15
Proposed Regulations:
REG-157711-02
Corrected by
Ann. 2007-74, 2007-35 I.R.B.483
REG-109367-06
Hearing scheduled by
Ann. 2007-66, 2007-31 I.R.B.296
REG-143601-06
Corrected by
Ann. 2007-71, 2007-33 I.R.B.372
Revenue Procedures:
90-27
Superseded by
Rev. Proc. 2007-52, 2007-30 I.R.B.222
95-28
Superseded by
Rev. Proc. 2007-54, 2007-31 I.R.B.293
97-14
Modified and superseded by
Rev. Proc. 2007-47, 2007-29 I.R.B.108
Revenue Procedures— Continued:
2002-9
Modified and amplified by
Rev. Proc. 2007-48, 2007-29 I.R.B.110
Rev. Proc. 2007-53, 2007-30 I.R.B.233
2004-42
Superseded by
Notice 2007-59, 2007-30 I.R.B.135
2005-16
Modified by
Rev. Proc. 2007-44, 2007-28 I.R.B.54
2005-27
Superseded by
Rev. Proc. 2007-56, 2007-34 I.R.B.388
2005-66
Clarified, modified, and superseded by
Rev. Proc. 2007-44, 2007-28 I.R.B.54
2006-25
Superseded by
Rev. Proc. 2007-42, 2007-27 I.R.B.15
2006-27
Modified by
Rev. Proc. 2007-49, 2007-30 I.R.B.141
2006-33
Superseded by
Rev. Proc. 2007-51, 2007-30 I.R.B.143
2006-55
Superseded by
Rev. Proc. 2007-43, 2007-27 I.R.B.26
2007-4
Modified by
Notice 2007-69, 2007-35 I.R.B.468
2007-15
Superseded by
Rev. Proc. 2007-50, 2007-31 I.R.B.244
Revenue Rulings:
74-299
Amplified by
Rev. Rul. 2007-48, 2007-30 I.R.B.129
89-96
Amplified by
Rev. Rul. 2007-47, 2007-30 I.R.B.127
92-17
Modified by
Rev. Rul. 2007-42, 2007-28 I.R.B.44
2001-48
Modified by
T.D. 9332, 2007-32 I.R.B.300
Treasury Decisions:
9321
Corrected by
Ann. 2007-68, 2007-32 I.R.B.348
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin 2007–26, dated June 25, 2007.
September 4, 2007iii2007–36 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under
related topics, select More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE INTERNAL
REVENUE BUL
LETIN
If you have c
omments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be p
leased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.g
ov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224
Internal Revenue Service
W
ashington,DC20224
Official B
usiness
Penalty for
Private Use, $300