us-irs-announcements-irb-2007-29-pdf•Internal Revenue Bulletin 2007-29 (PDF rendition): IRS Announcements
Internal Revenue Bulletin 2007-29 (PDF rendition): IRS Announcements
us-irs-announcements-irb-2007-29-pdfInternal Revenue Bulletin 2007-29 (PDF rendition): IRS AnnouncementsGuidance
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Bulletin No. 200 7-29 July 16, 2007 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 Notice 2007–57, page 87. This notice describes a transaction in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. The notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of regulations section 1.6011–4(b)(2) and sections 6111 and 6112 of the Code. Notice 20 07–58, page 88. This noti ce solicits comments on potential revisions to the def- initions of financial services income, active financing income, and finan cial services entities as currently set forth in regula- tions se ction 1.904–4(e), issued under section 904(d) of the Code. Th e Treasury Department and the IRS are considering the appr opriateness of revising these provisions in light of statu- tory cha nges made as part of the American Jobs Creation Act of 2004 to sections 864(f) and 904(d). Rev. Proc. 2007–45, page 89. Sample inter vivos charitable lead annuity trust (CLAT). This procedure contains sample forms for inter vivos grantor and nongrantor charitable lead annuity trusts. The procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. Rev. Proc. 2007–46, page 102. Sample testamentary charitable lead annuity trust (CLAT).This procedure contains a sample form, annotations, and alternate provisions for a testamentary charitable lead annuity trust. Rev. Proc. 2007–47, page 108. This procedure sets forth conditions under which a research agreement does not result in private business use under sec- tion 141(b) of the Code. Rev. Proc. 97–14 modified and su- perseded. Rev. Proc. 2007–48, page 110. Safe harbor method of accounting for rotable spare parts.This procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and provides procedures for taxpayers to obtain automatic consent to change to the safe harbor method of accounting. Rev. Proc. 2002–9 modified and amplified. Announcement 2007–62, page 115. This announcement alerts the public to the fact that proposed revisions to Form 1118,Foreign Tax Credit — Corporations, are being posted on the IRS website and solicits comments thereon. The revisions of Form 1118 were necessitated by statutory changes made to section 904 of the Code as part of the American Jobs Creation Act of 2004 relating to the num- ber of separate foreign tax credit limitation categories and the effect of overall domestic losses. EXEMPT ORGANIZATIONS Announcement 2007–64, page 125. The IRS has revoked its determination that South Carolina Benevolent Society, Inc., of Columbia, SC; Home Buyers Assistance Foundation, Inc., of Woodstock, GA; Angel Wings Cat Rescue and Sanctuary of Kingston, KY; and Brian Lees Sports Spectrum of Grand Rapids, MI, qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Code. (Continued on the next page) Fi nding Lists begin on page ii. ESTATE TAX Rev. Proc. 2007–45, page 89. Sample inter vivos charitable lead annuity trust (CLAT). This procedure contains sample forms for inter vivos grantor and nongrantor charitable lead annuity trusts. The procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. Rev. Proc. 200 7–46, page 102. Sample testam entary charitable lead annuity trust (CLAT).This p rocedure contains a sample form, annotations, and alternate provisions for a testamentary charitable lead annuity trus t. GIFT TAX Rev. Proc. 2007–45, page 89. Sample inter vivos charitable lead annuity trust (CLAT). This procedure contains sample forms for inter vivos grantor and nongrantor charitable lead annuity trusts. The procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. ADMINISTRATIVE Notice 2007–57, page 87. This notice describes a transaction in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. The notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, as listed transactions for purposes of regulations section 1.6011–4(b)(2) and sections 6111 and 6112 of the Code. Rev. Proc. 2007–47, page 108. This procedure sets forth conditions under which a research agreement does not result in private business use under sec- tion 141(b) of the Code. Rev. Proc. 97–14 modified and su- perseded. July 16, 20072007–29 I.R.B. 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. 2007–29 I.R.B.July 16, 2007 July 16, 20072007–29 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 167.—Depreciation A revenue procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and allows taxpayers to obtain the automatic consent of the Commissioner to change to the safe harbor method of accounting. See Rev. Proc. 2007-48, page 110. Section 168.—Accelerated Cost Recovery System A revenue procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and allows taxpayers to obtain the automatic consent of the Commissioner to change to the safe harbor method of accounting. See Rev. Proc. 2007-48, page 110. Section 170.—Charitable, etc., Cont ributions and Gifts 26 CFR 1.17 0A–6: Charitable contribution in trust. Sample int er vivos charitable lead annuity trusts.Th is revenue procedure contains sample declarat ions of trust for nongrantor and grantor char- itable le ad annuity trusts. This revenue procedure also cont ains annotations to the sample trusts and alternat e provisions that may be integrated into the sample tr usts. See Rev. Proc. 2007-45, page 89. Section 446.—General Rule for Methods of Accounting A revenue procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and allows taxpayers to obtain the automatic consent of the Commissioner to change to the safe harbor method of accounting. See Rev. Proc. 2007-48, page 110. Section 481.— Adjustments Required by Changes in Method of Accounting A revenue procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and allows taxpayers to obtain the automatic consent of the Commissioner to change to the safe harbor method of accounting. See Rev. Proc. 2007-48, page 110. Section 642.—Special Rules for Credits and Deductions 26 CFR 1.642(c)–1: Unlimited deduction for amounts paid for a charitable purpose. Sample inter vivos charitable lead annuity trusts.This revenue procedure contains sample declarations of trust for nongrantor and grantor char- itable lead annuity trusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2007-45, page 89. 26 CFR 1.642(c)–1: Unlimited deduction for amounts paid for a charitable purpose. Sample testamentary charitable lead annuity trust.This revenue procedure contains a sample declaration of trust for a testamentary charitable lead annuity trust. This revenue procedure also contains annotations to the sample trust and alternate provi- sions that may be integrated into the sample trust. See Rev. Proc. 2007-46, page 102. Section 2055.—Transfers for Public, Charitable, and Religious Uses 26 CFR 20.2055–2: Transfers not exclusively for charitable purposes. Sample inter vivos charitable lead annuity trusts.This revenue procedure contains sample declarations of trust for nongrantor and grantor char- itable lead annuity trusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2007-45, page 89. 26 CFR 20.2055–2: Transfers not exclusively for charitable purposes. Sample testamentary charitable lead annuity trust. This revenue procedure contains a sample declaration of trust for a testamentary charitable lead annuity trust. This revenue procedure also contains annotations to the sample trust and alternate provi- sions that may be integrated into the sample trust. See Rev. Proc. 2007-46, page 102. Section 25 22.—Charitable and Simil ar Gifts 26 CFR 25. 2522(c)–3: Transfers not exclusively for charitab le, etc., purposes in the case of gifts made after Jul y 31, 1969. Sample in ter vivos charitable lead annuity trusts.T his revenue procedure contains sample declarat ions of trust for nongrantor and grantor char- itable l ead annuity trusts. This revenue procedure also con tains annotations to the sample trusts and alterna te provisions that may be integrated into the sample t rusts. See Rev. Proc. 2007-45, page 89. 2007–29 I.R.B.86July 16, 2007 Part III. Administrative, Procedural, and Miscellaneous Loss Importation Transaction Notice 2007–57 The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income. This notice alerts taxpayers and their rep- resentatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially sim- ilar transactions, aslisted transactions for purposes of § 1.6011–4(b)(2) of the In- come Tax Regulations and §§ 6111 and 6112 of the Internal Revenue Code. This notice also alerts persons involved with these transactions to certain responsibili- ties that may arise from their involvement with these transactions. FACTS In one variation of the loss importa- tion transaction, a U.S. taxpayer (Tax- payer) is a shareholder of an S corpo- ration (S Corporation). S Corporation acquires control of a foreign entity (For- eign Entity) by purchasing from a foreign shareholder stock of Foreign Entity meet- ing the requirements of § 1504(a)(2). When S Corporation purchases the For- eign Entity stock, Foreign Entity is classi- fied as a corporation for U.S. tax pur- poses under § 301.7701–2(b)(2) and § 301.7701–3(b)(2)(i)(B) of the Proce- dure and Administration Regulations, and is a controlled foreign corporation (CFC) within the meaning of § 957(a). Foreign Entity enters into substantially offsetting positions in foreign currency. Next, Foreign Entity disposes of or closes out some positions in the foreign currency for a gain while retaining the offsetting loss positions. Foreign Entity is not itself subject to U.S. taxation on the gains from the offsetting options. Foreign Entity may use the proceeds from these dispositions or closings out to enter into new positions in foreign currency. By entering into the new positions in foreign currency, Foreign Entity can effectively preserve the retained loss positions in the foreign currency and virtually eliminate further economic risk. After realizing gains from disposing of or closing out some of the offsetting po- sitions, Foreign Entity elects to be disre- garded as an entity separate from its owner for U.S. tax purposes. Based on the ef- fective date of this election, Foreign En- tity is not a CFC for an uninterrupted pe- riod of 30 days during Foreign Entity’s taxable year, and S Corporation is not re- quired to include any of Foreign Entity’s subpart F income in its gross income. See § 951(a). The gains are not otherwise sub- ject to U.S. taxation. See,e.g., §§ 881 and 882. The election results in the distribu- tion of all of Foreign Entity’s assets and liabilities to its shareholder in a deemed liquidation of Foreign Entity. See Treas. Reg. § 301.7701–3(g)(1)(iii). After the election, some or all of the loss positions in the foreign currency are allowed to ex- pire, are disposed of, or are closed out, and some or all of the gain positions are allowed to expire, are disposed of, or are closed out, resultingin an aggregate net loss. S Corporation passes Taxpayer’spro ratashare of the loss through to Taxpayer. Taxpayer purports to have sufficient ba- sis in its S Corporation stock or in its in- debtedness to S Corporation to enable Tax- payer to claim the loss. Variations exist in the types of entities and forms of loss importation used in the transaction described above. For example, in one variation of the transaction, a C cor- poration may be used instead of an S cor- poration; or a foreign entity with more than one owner may elect to be classified for U.S. tax purposes as a partnership, rather than as an entity disregarded as separate from its owner. Further, the importation of the loss may be accomplished by other methods, such as a corporate reorganiza- tion described in § 368(a) or a transfer to which § 351 applies. Variations also exist in how the offsetting positions may be used in the transaction described above. For ex- ample, taxpayers may use positions with respect to property other than foreign cur- rency. DISCUSSION The transactions described in this notice are designed so that taxpayers may claim losses without taking into account the cor- responding gains attributable to the offset- ting positions in foreign currency or other property. In the loss importation trans- action described above, taxpayers are at- tempting to exploit the entity classifica- tion rules and § 951(a) in order to claim losses without taking into account the cor- responding gains attributable to the offset- ting positions in foreign currency. The Ser- vice may challenge these transactions by, for example, disallowing the loss or allo- cating the loss to the CFC. The Service may assert one or a combination of argu- ments including, but not limited to, argu- ments under §§ 165, 269, 482, and 988. In addition, the Service may assert that the transaction fails one or more judicial doctrines, such as the economic substance doctrine. Transactions that are the same as, or substantially similar to, the transactions described in this notice are identified as “listed transactions” for purposes of §§ 1.6011–4(b)(2) and §§ 6111 and 6112 effective June 20, 2007, the date this notice was released to the public. Independent of their classification as listed transac- tions, transactions that are the same as, or substantially similar to, the transactions described in this notice may already be subject to the requirements of § 6011, § 6111, § 6112, or the regulations thereun- der. Persons required to disclose these trans- actions under § 1.6011–4 who fail to do so may be subject to the penalty under § 6707A which applies to returns and state- ments due after October 22, 2004. Persons required to disclose these transactions un- der § 1.6011–4 who fail to do so may be subject to an extended period of limitations under § 6501(c)(10). Persons required to disclose or register these transactions un- der § 6111 who fail to do so may be sub- ject to the penalty under § 6707(a). Per- sons required to maintain lists of investors 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 penalties on persons involved in these transactions or substantially simi- lar transactions, including the accuracy-re- lated penalty under § 6662 or § 6662A. July 16, 2007872007–29 I.R.B. The Service and Treasury recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transactions described in this notice. These taxpayers should take ap- propriate correctiveaction and ensure that their transactions are disclosed properly. DRAFTING INFORMATION The principal author of this notice is Megan Stoner of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information re- garding this notice, contact Ms. Stoner at (202) 622–3070 (not a toll-free call). Request for Comments Regarding Financial Services Income Under Section 904(d) Notice 2007–58 The Internal Revenue Service (IRS) and the Treasury Department are studying the appropriateness of updating Treasury Regulation § 1.904–4(e) in light of recent statutory changes. This notice invites pub- lic comments relating to the definitions of financial services income, active financing income or financial services entities under that regulation. BACKGROUND Section 404 of the American Jobs Cre- ation Act of 2004, Public Law 108–357, 118 Stat. 1418 (October 22, 2004) (AJCA) generally reduced the number of separate foreign tax credit limitation categories un- der section 904(d) of the Internal Revenue Code (the Code) from eight to two, ef- fective for taxable years beginning after December 31, 2006. As a result, income which would have been assigned to the separate category for financial services in- come had such income been earned in a taxable year beginning before January 1, 2007, is now treated as general category income. However, this applies only in the case of a member of a financial services group or any other person predominantly engaged in the active conduct of a banking, insurance, financing, or similar business. Section 904(d)(2)(C)(i). Treasury Reg- ulation § 1.904–4(e)(3)(i) currently pro- vides that a person is considered to be pre- dominantly engaged in the active financ- ing business for any year if for that year at least 80 percent of its gross income is ac- tive financing income, as defined in Trea- sury Regulation § 1.904–4(e)(2). Section 401 of the AJCA modifies present-law interest expense allocation rules under section 864 of the Code to provide taxpayers with a one-time election under new section 864(f) to allocate and apportion interest expense of the domestic members of a worldwide affiliated group (as defined in new section 864(f)(1)(C)) on a worldwide-group basis. Taxpayers are allowed to apply present-law finan- cial institution group rules to treat certain financial institutions as a separate af- filiated group for purposes of interest allocation under the worldwide fungibil- ity approach. In the alternative, section 401 of the AJCA also provides a one-time election under section 864(f)(5) to expand the present-law financial institution group to include “financial corporations.” A fi- nancial corporation, as defined in new section 864(f)(5)(B), is any corporation if at least 80 percent of its gross income is financial services income, as described in section 904(d)(2)(D)(ii) of the Code and the regulations thereunder, derived from transactions with persons who are not related (within the meaning of section 267(b) or 707(b)(1))to the corporation. This provision is effective for taxable years beginning after December 31, 2008. The IRS and the Treasury Department believe that it is appropriate to review the provisions relating to financial services in- come and entities in Treasury Regulation § 1.904–4(e) in light of the amendments to the foreign tax credit rules in the AJCA. REQUEST FOR COMMENTS The IRS and the Treasury Department request comments specifically on whether any items currently listed as active financ- ing income under Treasury Regulation § 1.904–4(e)(2)(i) are over-inclusive or under-inclusive and whether any of the listed items should be clarified as applying only to transactions involving customers. More generally, comments are welcome as to whether any other provisions of Treasury Regulation § 1.904–4(e) relat- ing to the definitions of financial services income, active financing income or finan- cial services entities should be modified to take into consideration recent statutory changes or any changes in the nature of financial services that have taken place since this regulation was originally pub- lished. Comments should be submitted on or before September 10, 2007, and should include a referenceto Notice 2007–58. Send submissions to CC:PA:LPD:PR (Notice 2007–58), room 5203, Inter- nal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand de- liveredMonday through Fridaybe- tween the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2007–58), Courier’s desk, Internal Revenue Ser- vice, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electron- ically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2007–58” in the subject line of any electronic communi- cation. All material submitted will be available for public inspection and copy- ing. DRAFTING INFORMATION The principal author of this announce- ment is Jeffrey L. Parry of the Office of Associate Chief Counsel (International). For further information regarding this an- nouncement, contact Jeffrey L. Parry at (202) 622–3850 (not a toll-free call). 2007–29 I.R.B.88July 16, 2007 26 CFR 601.201: Rulings and determination letters. (Also: Part I, §§ 170, 642(c), 2055, 2522; §§ 1.170A–6, 20.2055–2, 25.2522(c)–3.) Rev. Proc. 2007–45 SECTION 1. PURPOSE This revenue procedure contains annotated sample declarations oftrust and alternate provisions that meet the requirements for an inter vivos charitable lead annuity trust (CLAT) providing for annuity payments payable to one or more charitable beneficiaries for the annuity period followed by the distribution of trust assets to one or more noncharitable remaindermen. SECTION 2. BACKGROUND The Internal Revenue Service (Service) is issuing sample forms for CLATs; annotations and alternate sample provisions are included as further guidance. In addition to the sample trust instruments for inter vivos CLATs that are included in this revenue procedure, a sample is provided in a separate revenue procedure for a testamentary CLAT (see Rev. Proc. 2007–46, 2007–29 I.R.B. 102). SECTION 3. SCOPE A CLAT is an irrevocable split-interest trust that provides for a specified amount to be paid to one or more charitable beneficiaries during the term of the trust. The principal remaining in the trust at the end of the term is paid over to, or held in a continuing trust for, a noncharitable beneficiary or beneficiaries identified in the trust. If the terms of a CLAT created during the donor’s life satisfy the applicable statutory and regulatory requirements, a gift of the charitable lead annuity interest will qualify for the gift tax charitable deduction under § 2522(c)(2)(B) and/or the estate tax charitablededuction under § 2055(e)(2)(B). In certain cases, the gift of the annuity interest may also qualify for the income tax charitable deduction under § 170(a). The value of the remainder interest is a taxable gift by the donor at the time of the donor’s contribution to the trust. There are two types of inter vivos CLATs: a “nongrantor CLAT” and a “grantor CLAT.” The income tax consequences are different for each. A nongrantor CLAT is subject to the provisions of part I, subchapter J of chapter 1 of subtitle A of the Internal Revenue Code (Code). Under the provisions of part I of subchapter J, a nongrantor CLAT is allowed a deduction under § 642(c)(1) in determining its taxable income for any amount of gross income paid for purposes specified in § 170(c). Generally, the donor is not entitled to any income tax charitable deduction. Section 4 of this revenue procedure provides a sample declaration of trust for a nongrantor CLAT with a term of years annuity period that is created by an individual who is acitizen or resident of the United States. Section 5 of this revenue procedure provides annotations to the provisions of the sample trust. Section 6 of this revenue procedure provides samples of certain alternate provisions concerning: (.01) an annuity period for the life of an individual; (.02) retention of the right to substitutethe charitable lead beneficiary; (.03) apportionment of the annuity amount in the discretion of the trustee; (.04) the annuity amount as a specific dollar amount; and (.05) designation of an alternate charitable beneficiary in the trust instrument. If a trust is substantially similar to the sample trust in section 4 of this revenue procedure or properly integrates one or more alternate provisions from section 6 into a document substantially similar to the sample trust in section 4, is a valid trust under applicable local law, and operates in a manner consistent with the terms of the instrument, and if all other deductibility requirements are satisfied, the value of the charitable lead interest will be deductible under § 2522(c)(2)(B) and/or § 2055(e)(2)(B) and payments of the annuity amount to the charitable lead beneficiary will be deductible from the gross income of the trust to the extent provided by § 642(c)(1). In addition, a nongrantor CLAT will qualify for the safe harbor created under this revenue procedure if the trust satisfiesall of the requirements set forth in the preceding sentence, except that it defines the annuity amount as an increasing amount for which the value is ascertainable at the creation of the trust and/or provides for a different disposition of trust assets upon the termination of the annuity period. A CLAT is a grantor CLAT if the donor, who is a citizen or resident of the United States, is treated as the owner of the entire CLAT under subpart E, part I of subchapter J, chapter 1, subtitle A. The value of the charitable lead annuity interest in a grantor CLAT may be deductible by the donor under § 170(a) for the year in which thedonor made the contribution to the trust, provided that the other requirements of § 170(f)(2)(B) and the regulations thereunder are satisfied. During theterm of the grantor CLAT, all trust income and capital gains are taxed to the donor and the donor is entitled to no further charitable deduction for income tax purposes as the charitable annuity payments are made to charitable organizations each year. Section 7 of this revenue procedure provides a sample declaration of trust for a grantor CLAT that is created by an individual who is a citizen or resident of the United States. Section 8 of this revenue procedure provides annotations to the provisions of the sample trust. Section 9 of this revenue procedure provides samples of certain alternate provisions concerning: (.01) an annuity period for the life of an individual; (.02) retention of the right to substitute the charitable lead beneficiary; (.03) apportionment of the annuity amount in the discretion of the trustee; (.04) the annuity amount as a specific dollar amount; (.05) designation of an alternate charitable beneficiary in the trust instrument; and (.06) restriction of the charitable beneficiary to a public charity. If a trust is substantially similar July 16, 2007892007–29 I.R.B. to the sample trust in section 7 of this revenue procedure or properly integrates one or more alternate provisions from section 9 into a document substantially similar to the sample trust in section 7, is a valid trust under applicable local law, and operates in a manner consistent with the terms of the instrument, and if all other requirements for deductibility are satisfied, the value of the charitable lead annuity interest will be deductible under §§ 170(a), 2522(c)(2)(B) and/or 2055(e)(2)(B). In addition, a grantor CLAT will qualify for the safe harbor created under this revenue procedure if the trust satisfies all of the requirements set forth in the preceding sentence, except that it: (i) reflects the choice of a different power or provision sufficient to make the donor the owner of the entire CLAT under subpart E, part I, subchapter J, chapter 1, subtitle A, provided that thepower or provision selected is consistent with the requirements of a CLAT; (ii) defines the annuity amount as an increasing amount for which the value is ascertainable at the creation of the trust; and/or (iii) provides for a different disposition of trust assets upon the termination of the annuity period. Except as provided above, a trust that contains substantive provisions in addition to those provided in section 4 or section 7 of this revenue procedure (other than properly integrated alternate provisions from section 6 or section 9, respectively, of this revenue procedure or provisions necessary to establish a valid trust underapplicable local law that are not inconsistent with the applicable federal tax requirements), or that omits any of the provisions of section 4 or section 7 of this revenue procedure (unless an alternate provision from section 6 or section 9, respectively, of this revenue procedure is properly integrated), will not necessarily be ineligible for the relevant charitable deduction(s), but neither will that trust(or contributions to it) be assured of qualification for the appropriate charitable deductions. The Service generally will not issue a letter ruling on whether an inter vivos CLAT created by an individual qualifies for income, estate, and/or gift tax charitable deductions.The Service, however, generally willissue letter rulings relating to the tax consequences of the inclusion in a CLAT of substantive trust provisions other than those contained in sections 4, 6, 7, and 9 of this revenue procedure. SECTION 4. SAMPLE INTER VIVOS NONGRANTOR CHARITABLE LEAD ANNUITY TRUST On thisday of,20,I,(hereinafter “the Donor”), desiring to establish a charitable lead annuity trust within the meaning of Rev. Proc. 2007–45, hereby enter into this trust agreement with as the initial trustee (hereinafter “the Trustee”). This trust shall be known as the Nongrantor Charitable Lead Annuity Trust. All references to “section” or “§” in this instrument shall refer to the Internal Revenue Code of 1986, 26 U.S.C. § 1,et seq. 1.Funding of Trust. The Donor hereby transfers and irrevocably assigns to the Trustee on the above date the property described in Schedule A, and the Trustee accepts the property and agrees to hold, manage, and distribute the property under the terms set forth in this trust instrument. 2.Payment of Annuity Amount. In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [number representing the annual annuity percentage to be paid to the designated charitable recipient] percent of the initial net fair market value of all property transferred to the trust, valued as of the date of the transfer. If [designated charitable recipient] is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the Trustee shall instead distribute such payments to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) as the Trustee shall select, and in such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. The term “the Charitable Organization” shall be used herein to refer collectively to the organization(s) then constituting the charitable recipient, whether named in this paragraph or subsequently selected as the substitute charitable recipient. During the trust term, no payment shall be made to any person other thanthe Charitable Organization. The annuity period is a term of [number of years of annuity period] years. The first day of the annuity period shall be the date the property is transferred to the trust, and the last day of the annuity period shall be the day preceding the [ordinal number corresponding to the length of the annuity period]anniversary of that date. The annuity amount shall be paid in equal quarterly installments at the end of each calendar quarter from income and, to the extent income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal. If the initial net fair market value of the trust assets isincorrectly determined, then within a reasonable period after the value is finally determinedfor federal tax purposes, the Trustee shall pay to the Charitable Organization (in the case of an undervaluation) or receive from the Charitable Organization (in the case of an overvaluation) an amount equal to the difference between the annuity amount(s) properly payable and the annuity amount(s) actually paid. 3.Proration of Annuity Amount. The Trustee shall prorate the annuity amount on a daily basis for any short taxable year. In the taxable year in which the annuity period ends, the Trustee shall prorate the annuity amount on a daily basis for the number of days of the annuity period in that taxable year. 4.Distribution Upon Termination of Annuity Period. At the termination of the annuity period, the Trustee shall distribute all of the then principal and income of the trust (other than any amount due to the Charitable Organization under the provisions above) to [remainder beneficiary]. 5.Additional Contributions. No additional contributions shall be made to the trust after the initial contribution. 6.Prohibited Transactions. The Trustee shall not engage in any act of self-dealing within the meaning of § 4941(d), as modified by § 4947(a)(2), and shall not make any taxable expenditures within the meaning of § 4945(d), as modified by § 4947(a)(2). The Trustee shall not retain any excess business holdings that wouldsubject the trust to tax under § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3). In addition, the Trustee shall not acquire any assets that would subject the trust to tax under § 4944, as modified by 2007–29 I.R.B.90July 16, 2007 §§ 4947(a)(2) and 4947(b)(3), or retain assets which, if acquired by the Trustee, would subject the Trustee to tax under § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). 7.Taxable Year. The taxable year of the trustshall be the calendar year. 8.Governing Law. The operation of the trust shall be governed by the laws of the State of . However, the Trustee is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the requirements for the charitable deductions available to a charitable lead annuity trust or for contributions to a charitable lead annuity trust. 9.Limited Power of Amendment. This trust is irrevocable. However, the Trustee shall have the power, acting alone, to amend the trust from time to time in any manner required for the sole purpose of ensuring that the annuity interest passing to the Charitable Organization is a guaranteed annuity interest under §§ 2055(e)(2)(B) and 2522(c)(2)(B) and the regulations thereunder and that pay- ments of the annuity amount to the Charitable Organization will be deductible from the gross income of the trust to the extent provided by § 642(c)(1) and the regulations thereunder. 10.Investment of Trust Assets. Except as provided in paragraph 6 herein, nothingin this trust instrument shall be construed to restrict the Trustee from investing the trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. 11.Retained Powers and Interests. Notwithstanding any other provision of this trust instrument to the contrary, no person shall hold any power or possess any interest that would cause the Donor to be treated as the owner of any portion of the trust under the provisions of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code. SECTION 5. ANNOTATIONS REGARDING SAMPLE INTER VIVOS NONGRANTOR CHARITABLE LEAD ANNUITY TRUST .01Annotations for Introductory Paragraph and Paragraph 1, Funding of Trust , of the Sample Trust in Section 4. (1)Types of charitable lead trusts. An inter vivos charitable lead trust may be established as either a grantor charitable lead trust or a nongrantor charitable lead trust. The sample trust in section 4 is an example of a nongrantor charitable lead trust. The sample trust in section 7 is an example of a grantor charitable lead trust. (2)Income taxation of nongrantor charitable lead trusts. A nongrantor CLAT is a complex trust that is taxable as a separate entity under the provisions of subchapter J of the Code. The trustee of the trust must apply for a tax identification number for the trust. (3)Deduction under § 642(c)(1) available for amounts paid for a charitable purpose. Under § 642(c)(1), a nongrantor CLAT is allowed a deduction in computing its taxable income for any amount of gross income, without limitation, that under the terms of the trust instrument is paid for a purpose specified in § 170(c) (determined without regard to § 170(c)(2)(A)) during the taxable year. This deduction is in lieu of the charitable deduction allowed by § 170. Section 642(c)(1) and § 1.642(c)–1(a). An amount paid to a corporation, trust, orcommunity chest, fund, or foundation otherwise described in § 170(c)(2) shall be considered paid for a purpose described in § 170(c) even though the corporation, trust, or community chest, fund, or foundation is not created or organized in the United States, any state, the District of Columbia, or any pos- session of the United States. Section 1.642(c)–1(a)(2). With regard to amounts of income paid to the charitable beneficiary after the close of the taxable year in which the income was received (but on or before the last day of the next succeeding taxable year), the trustee of a nongrantor CLAT may elect to take the charitable deduction for that payment for the year in which the income was received, rather than for the year in which the payment was made. Section 642(c)(1). The election is made by filing a statement with the income tax return for thetaxable year in which the charitable contribution is treated as paid. See § 1.642(c)–1(b). (4)Charitable lead beneficiary requirements. A deduction is allowed under § 642(c)(1) for any amount of the gross income of a nongrantor CLAT that is paid for a purpose specified in § 170(c). Note that the class of permissible charitable recipients for obtaining a deduction under § 642(c)(1) differs from the class of permissible charitable recipients for obtaining a deduction under § 170(a). Compare § 170(c) and § 1.642(c)–1(a)(2). (5)Unrelated business taxable income. Under § 681, a nongrantor charitable lead trust’s deduction under § 642(c)(1) is disal- lowed in any year to the extent that the deduction is allocableto the trust’s unrelated business taxable income, as defined in § 512, for that taxable year. See § 1.681(a)–2. However, a partial deduction is allowed under § 512(b)(11) for amounts allocable to unrelated business taxable income. Section 512(b)(11). See § 512(b)(12) and § 1.681(a)–2(a). (6)Computation of estate and gift tax charitable deductions. In general, the estate and gift taxcharitable deductions available under §§ 2055(e)(2)(B) and 2522(c)(2)(B) with respect to contributions to a CLAT are equal to the present value of the annuity interest. Section 7520 requires that an annuity interest must be valued using tables published by the Service. The method for valuing a charitable lead annuity interest is set forth in the regulations. See §§ 20.7520–2 and 25.7520–2. (7)Trustee provisions. The trust instrument may name alternate or successor trustees and/or may include a process for the appointment of unnamed alternate or successor trustees. In addition, the trust instrument may contain certain administrative provisions relating to the trustee’s duties and powers. July 16, 2007912007–29 I.R.B. (8)Identity of donor. For purposes of qualification under this revenue procedure, the donor may be an individual or a husband and wife. Appropriate adjustments should be made to the introductory paragraph if a husband and wife are the donors. Terms such as “grantor” or “settlor” may be substituted for “donor.” .02Annotations for Paragraph 2, Payment of Annuity Amount, of the Sample Trust in Section 4. (1)Guaranteed annuity. To qualify for the applicable estate and gift tax charitable deductions, a nongrantor CLAT must pro- vide for the payment of a guaranteed annuity amount at least annually to a qualified charitable organization for each year during the annuity period. See §§ 2055(e)(2)(B) and 2522(c)(2)(B). A guaranteed annuity isan arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years or for one or more measuring lives. See section 5.02(4) for a discussion of the permissible term of a nongrantor CLAT. An amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer may be ascertained at the time of the transfer to the trust. Sections 20.2055–2(e)(2)(vi)(a) and 25.2522(c)–3(c)(2)(vi)(a). A chari- table interest expressed as the right to receive an annual payment from a trust equal to the lesser of a sum certain or a fixed percentage of the trust assets (determined annually) is nota guaranteed annuity interest. See §§ 20.2055–2(e)(2)(vi)(b)and 25.2522(c)–3(c)(2)(vi)(b). In addition, a charitable lead annuity interest is not a guaranteed annuity interest if the trustee has the discretion to commute and prepay the charitable interest prior to the termination of the annuity period. Rev. Rul. 88–27, 1988–1 C.B. 331. If a charitable interest in the form of a guaranteed annuity interest is in trust and the present value of the charitable interest on the date of gift exceeds 60 percent of the aggregate value of all amounts in the trust, the charitable interest will not be considered a guaranteed annuity interest unless the governing instrument of the trust prohibits the acquisition and retention of assets that would give rise to a tax under § 4943 or 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). Sections 20.2055–2(e)(2)(vi)(e) and 25.2522(c)–3(c)(2)(vi)(e). These prohibitions are contained in the sample trust in section 4. See section 5.06 for a further discussion of the 60 percent test. See section 6.04 for an alternate provision that provides for an annuity amountstated as a specific dollar amount. (2)Payment requirements. CLATs are not subject to any minimum or maximum payout requirements. The governing instru- ment of a CLAT must provide for the payment to a charitable organization of a fixed dollar amount or a fixed percentage of the initial net fair market value of the assets transferred to the trust. Alternatively, the governing instrument of a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period, provided that the value of the annuity amountis ascertainable at the time the trust is funded. The annuity payments may be made in cash or in kind. If the trustee distributes appreciated property in satisfaction of the required annuity payment, the trust will realize capital gain on the assets distributed to satisfy part or all of the annuity payment and the trust will be allowed a § 642(c)(1) deduction for the realized capital gains. Rev. Rul. 83–75, 1983–1 C.B. 114. (3)Rule against perpetuities. An interest payable for a specified term of years may qualify as a guaranteed annuity interest even if the governing instrument contains a savings clause intended to ensure compliance with a rule against perpetuities. However, any such savings clause must utilize a period of vesting of not more than 21 years after the deaths of the mea- suring lives who are selected to maximize, rather than limit, the term of the trust. Sections 20.2055–2(e)(2)(vi)(a)and 25.2522(c)–3(c)(2)(vi)(a). (4)Permissible term. Paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 provides for payment of the annuity amount for a specified term of years. Alternatively, the trust instrument may provide for payment of the annuity amount for the life or lives of one or more measuring lives or for the life or lives of one or more measuring lives plus a term of years. Rev. Rul. 85–49, 1985–1 C.B. 330. Only one or more of the following individuals may be used as measuring lives: the donor, the donor’s spouse, and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170, 2055, or 2522), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. Each person used as a measuring life for the annuity period must be living on the date assets are transferred to the trust. Sections 20.2055–2(e)(2)(vi)(a) and 25.2522(c)–3(c)(2)(vi)(a). See section 6.01 for an alternate provision that provides for an annuity period based on the life of an individual. (5)Permissible recipients. A CLAT must have one or more charitable lead beneficiaries. The failureto designate a specific charitable beneficiary will not preclude the donor from receiving a charitable deduction if the trust instrument provides for the selection by the trustee of a charitable beneficiary described in §§ 170(c), 2055(a), and 2522(a). Rev. Rul. 78–101, 1978–1 C.B. 301. If it is determined that a deduction under § 2055(a) will not be necessary in any event, all references to § 2055(a) in the trust instrument may be deleted. Note, that ifthe donor is serving as trustee of the trust, the trustee’s power to select the charitable beneficiaries will cause the gift of the annuity interest to be incomplete for gift tax purposes and may cause some or all of the trust property (depending on the date ofthe donor’s death) to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). Further note that if the charitable beneficiary is a private foundation and the donor is an officer or director of the private foundation or possesses certain decision making authority in the private foundation, some or all of the trust property may be included in the donor’s gross estate. See § 2036(a)(2). See section 6.02 for an alternate provisionthat provides for a donor’s retained right tosubstitute the charitable beneficiary. 2007–29 I.R.B.92July 16, 2007 See section 6.03 for an alternate provision that provides the trustee with the power to apportion the annuity amount among charitable beneficiaries. (6)Payment of annuity amount in installments. Paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 specifies that the annuityamount is to be paid in equal quarterly installments at the end of each calendar quarter. Alterna- tively, the trust instrument may specify that the annuity amount is to be paid in annual or other equal or unequal installments throughout the year. See §§ 20.2055–2(e)(2)(vi)(a) and 25.2522(c)–3(c)(2)(vi)(a). The amount of the charitable deduction will be affected by the frequency of the payment, by whetherthe installments are equal or unequal, and by whether each installment is payable at the beginning or end of the period. See §§ 25.2512–5 and 20.2031–7. (7)Excess income. Trust income in excess of the amount required to pay the annuity may be retained by the trust or distributed currently to the charitable beneficiary. The sample trust in section 4 provides for the retention of excess income by the trust. If, instead, the governing instrument of a nongrantor charitable lead trust provides for the payment of excess income to or for the use of the charitable beneficiary,no additional estate or gift tax charitabledeductions are available for the excess amounts of income distributed to the charitable beneficiary. See §§ 20.2055–2(e)(2)(vi)(d) and 25.2522(c)–3(c)(2)(vi)(d). However, the trust is entitled to a charitable income tax deduction under § 642(c)(1) for any amounts of excess income paid to the charitable beneficiary. See Situation 2 of Rev. Rul. 88–82, 1988–2 C.B. 336, for the gift tax consequences of the payment of excess income to a noncharitable beneficiary. Seesection 5.06 for the private foundation rules applicable to charitable lead trusts. (8)Paymentofpartofannuityforprivatepurposes. In general, no part of a charitablelead annuity interest may be payable for a private purpose before the expiration of all charitable lead annuity interests. However, there are two exceptions to this rule. The first exception arises when the amount payable for a private purposeis in the form of a guaranteed annuity interest and the trust’s governing instrument does not provide for any preference or priority in the payment of the private annuity as opposed to the charitable annuity. The second exception arises when, under the trust’s governing instrument, the amount that may be paid for a private purpose is payableonly from a group of assets that is devoted exclusively to private purposes and to which § 4947(a)(2) is inapplicable by reason of § 4947(a)(2)(B). Note that an amount is not deemed to have been paid for a private purpose if it was paid for full and adequate consideration in money or money’s worth. Sections 20.2055–2(e)(2)(vi)(f) and 25.2522(c)–3(c)(2)(vi)(f). See section 5.06 for the private foundation rules applicable to charitable lead trusts. .03Annotation for Paragraph 3, Proration of Annuity Amount, of the Sample Trust in Section 4. (1)Prorating the annuity amount. Paragraph 3, Proration of Annuity Amount, o f the sample trust in section 4 provides for the proration of the annuity amount in any short taxable year, including the l ast year of the annuity period. .04Annotation for Paragraph 4, Distribution Upon Termination of Annuity Period, of the Sample Trust in Section 4. (1)Generation-skipping transfer tax. If a CLAT has or may have a skip person, as defined in § 2613(a), as a remainder benefi- ciary, the transfer to the trust will be subject to the generation-skipping transfer (GST) tax. Under § 2651(f)(3), a charitable organization is deemed to be in the same generation as the donor to a charitable lead trust.Therefore, the GST potential of a charitable lead trust is dependent upon whether any noncharitable beneficiary is a skip person. GST tax liability is determined by multiplying the taxable amount by the applicable rate. The applicable rate is the inclusion ratio multiplied by the maximum federal estate tax rate. Section 2641(a). Therules for determining the inclusion ratio for a CLAT are set forth in § 2642(e), and confirm that the inclusion ratio is determined at the termination of the annuity period, rather than on the funding of the trust. .05Annotation for Paragraph 5, Additional Contributions, of the Sample Trust in Section 4. (1)Additions to the trust. For purposes of qualification under this revenue procedure, the trust instrument must contain a provision that prohibits additional contributions. A CLAT that permits additionalcontributions will not qualify for safe harbor treatment under this revenue procedure. .06Annotation for Paragraph 6, Prohibited Transactions, of the Sample Trust in Section 4. (1)Prohibitions against certain investments and excess business holdings. Prohibitions against retaining any excess business holdings within the meaning of § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3), and against investments that jeop- ardize the exempt purpose of the trust within the meaning of § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3), are generally required. The sample trust in section 4 contains prohibitions against §§ 4943 and 4944 transactions. If the present value of the charitable interest does not exceed 60 percent of theaggregate value of all amounts in the trust, the trust instru- ment does not provide for the payment of any of the income interest to a noncharitable beneficiary, and the trust instrument July 16, 2007932007–29 I.R.B. does not provide for the payment of excess income to a noncharitable beneficiary, the references to §§ 4943 and 4944 may be removed from the trust instrument. Section 4947(b)(3) and §§ 53.4947–2(b)(1)(i), 20.2055–2(e)(2)(vi)(e), and 25.2522(c)–3(c)(2)(vi)(e). See section 5.02(7) for a discussion of the payment of excess trust income to a noncharitable beneficiary. See section 5.02(8) for a discussion of the payment of part of the annuity for a private purpose. .07Annotation for paragraph 7, Taxable Year, of the Sample Trust in Section 4. (1)Calendar year. The taxable year of a charitable lead trust must be a calendar year. Section 644(a). .08Annotation for paragraph 10, Investment of Trust Assets, of the Sample Trust in Section 4. (1)Capital gains. Gains from the sale or exchange of capital assets may be allocated to the income or the principal of the trust. If the governing instrument is silent, capital gains are allocated in accordance with local law. Even if gains are allocated to principal, they will be deductible under § 642(c)(1) if they are paid to the charitable beneficiary as part of a charitable annuity payment. Rev. Rul. 83–75, 1983–1 C.B. 114. .09Annotation for paragraph 11, Retained Powers and Interests, of the Sample Trust in Section 4. (1)Trust not a grantor trust. Paragraph 11, Retained Powers and Interests, of the sample trust in section 4 prohi bits any person from holding any power or possessing any interest that would cause the donor to be treated as the owner of the tr ust under subpart E, part I, subchapter J, chapter 1, subtitle A ofthe Code. This prohibition should be included only in nongrantor charitable lead trusts. See section 7 for a sample grantor charitable lead annuity trust. SECTION 6. ALTERNATE PROVISIONS FOR SAMPLE INTER VIVOS NONGRANTOR CHARITABLE LEAD ANNUITY TRUST .01Annuity Period for the Life of One Individual. (1)Explanation. As an alternative to establishing a CLAT for a term of years, the trust instrument of a nongrantor CLAT may provide for payment of the annuity amount for the life or livesof an individual or individuals. However, only one or more of the following individuals may be used as measuring lives: the donor, the donor’s spouse, and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170, 2055, or 2522), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. A trust will satisfy the requirement that each measuring life is a lineal ancestor (or the spouse of a lineal ancestor) of all noncharitable remainder beneficiaries if there is a less than 15 percent probability at the time of the contribution to the trust that individuals who are not lineal descendants of an individual who is a measuring life will receive any trust principal. The probability must be computed under the applicable tables in § 20.2031–7. Sections 20.2055–2(e)(2)(vi)(a) and 25.2522(c)–3(c)(2)(vi)(a). (2)Instruction for use. Replace the fifth and sixth sentences of paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 with the following sentences: The annuity period is the lifetime of [designated measuring life]. The first day of the annuity period shall be the date the property is transferred to the trust and the last day of the annuity period shall be the date of death of [designated measuring life]. .02Retention of the Right to Substitute the Charitable Lead Beneficiary. (1)Explanation. The donor to a nongrantor CLAT may retain the right to substitute another charitable beneficiary for the charitable beneficiary named in the trustinstrument. Note, however, that the retention of this right will cause the gift of the annuity interest to be incomplete for gift tax purposes and may cause some or all of the trust property (depending upon the date of the donor’s death) to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). (2)Instruction for use. Replace the third sentence of paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 with the following two sentences: Notwithstanding the preceding sentence,the Donor reserves the right to designate as the charitable annuity recipient, at any time and from time to time, in lieu of [designated charitable recipient], one or more organizations described in §§ 170(c), 2055(a), and 2522(a) and shall make any such designation by giving written notice to the Trustee. The term “the Charitable Organization” shall be used herein to refer collectively to the organization(s) then constituting the charitable recipient, whether named in this paragraph or subsequentlyselected as the substitute charitable recipient. 2007–29 I.R.B.94July 16, 2007 .03Apportionment of the Annuity Amount in the Discretion of the Trustee. (1)Explanation. The donor or the trustee of a nongrantor charitable leadtrust may be granted the power to apportion the annuity payment from time to time among a class of qualifying charitable beneficiaries. See § 674(b)(4). A power to apportion the annuity amount among a class of qualifying charitable beneficiaries that is retained by the donor or the donor’s spouse will not cause the donor to be treated as the owner of the trust for income tax purposes. Section 674(b)(4). Note, however, that a retained power of apportionment by the donor, but not the donor’s spouse, will cause the gift of the annuity interest to be incomplete for gift tax purposes and will cause some or all of thetrust property to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). (2)Instruction for use. Replace the first three sentences of paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 with the following two sentences: In each taxable year of the trust during the annuity period, the Trustee shall pay to one or more members of a class comprised of organizations described in §§ 170(c), 2055(a),and 2522(a) (hereinafter, collectively “the Charitable Or- ganization”) an annuity amount equal to [number representing the annual annuity percentage to be paid to the Charitable Organization] percent of the initial net fair market value of all property transferred to the trust, valued as of the date of the transfer. The Trustee may pay the annuity amount to one or more members of the class, in equal or unequal shares, as the Trustee, in the Trustee’s sole discretion, from time to time may deem advisable. .04Annuity Amount as a Specific Dollar Amount. (1)Explanation. As an alternative to stating the annuity amount as a percentage of the initial net fair market value of the assets transferred to the trust, the annuity amount may instead be stated as a specific dollar amount. (2)Instructions for use. (a)Replace the first sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 with the following sentence: In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [the stated dollar amount]. (b)Delete the last sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 concerning the incorrect valuation of trust assets. .05Designation of an Alternate CharitableBeneficiary in the Trust Instrument. (1)Explanation. The sample trust in section 4 provides that in the event the charitable beneficiary designated in the trust instrument is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the trustee shall distribute such payments to one or moreorganizations described in §§ 170(c), 2055(a), and 2522(a) as the trustee shall select. As an alternative, the trust instrument may specifically designate one or more alternate charitable beneficiaries. (2)Instruction for use. Replace the second sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 4 with the following two sentences: If [designated charitable recipient] is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the Trustee shall instead distribute such payments to [designated substitute charitable re- cipient]. If neither [designated charitable recipient]nor[designated substitutecharitable recipient] is an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the Trustee shall instead distrib- ute such payments to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) as the Trustee shall select, and in such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. SECTION 7. SAMPLE INTER VIVOS GRANTOR CHARITABLE LEAD ANNUITY TRUST On thisday of,20,I,(hereinafter “the Donor”), desiring to establish a charitable lead annuity trust withinthe meaning of Rev. Proc.2007–45 hereby enter into this trust agreement with as the initial trustee (hereinafter “the Trustee”). This trust shall be known as theGrantor Charitable Lead Annuity Trust. All references to “section” or “§” in this instrument shall refer to the Internal Revenue Code of 1986, 26 U.S.C. § 1,et seq. 1.Funding of Trust. The Donor hereby transfers and irrevocably assigns to the Trustee on the above date, the property described in Schedule A, and the Trustee accepts the property and agrees to hold, manage, and distribute the property under the terms set forth in this trust instrument. 2.Payment of Annuity Amount. In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [number representing the annual annuity percentage to be paid to the designated charitable recipient] percent of the initial net fair market value of all property transferred to the trust, valued as of the date of the transfer. If [designated charitable recipient] is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any July 16, 2007952007–29 I.R.B. payment is to be made to it, the Trustee shall instead distribute such payments to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) as the Trustee shall select, and in such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. The term “the Charitable Organization” shall be used herein to refer collectively to the organization(s) then constituting the charitable recipient, whether named in this paragraph or subsequently selected as the substitute charitable recipient. During the trust term, no payment shall be made to any person other thanthe Charitable Organization. The annuity period is a term of [number of years of annuity period] years. The first day of the annuity period shall be the date the property is transferred to the trust, and the last day of the annuity period shall be the day preceding the [ordinal number corresponding to the length of the annuity period]anniversary of that date. The annuity amount shall be paid in equal quarterly installments at the end of each calendar quarter from income and, to the extent income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal. If the initial net fair market value of the trust assets isincorrectly determined, then within a reasonable period after the value is finally determinedfor federal tax purposes, the Trustee shall pay to the Charitable Organization (in the case of an undervaluation) or receive from the Charitable Organization (in the case of an overvaluation) an amount equal to the difference between the annuity amount(s) properly payable and the annuity amount(s) actually paid. 3.Proration of Annuity Amount. The Trustee shall prorate the annuity amount on a daily basis for any short taxable year. In the taxable year in which the annuity period ends, the Trustee shall prorate the annuity amount on a daily basis for the number of days of the annuity period in that taxable year. 4.Distribution Upon Termination of Annuity Period. At the termination of the annuity period, the Trustee shall distribute all of the then principal and income of the trust (other than any amount due to the Charitable Organization under the provisions above) to [remainder beneficiary]. 5.Additional Contributions. No additional contributions shall be made to the trust after the initial contribution. 6.Prohibited Transactions. The Trustee shall not engage in any act of self-dealing within the meaning of § 4941(d), as modified by § 4947(a)(2), and shall not make any taxable expenditures within the meaning of § 4945(d), as modified by § 4947(a)(2). The Trustee shall not retain any excess business holdings that wouldsubject the trust to tax under § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3). In addition, the Trustee shall not acquire any assets that would subject the trust to tax under § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3), or retain assets which, if acquired by the Trustee, would subject the Trustee to tax under § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). 7.Taxable Year. The taxable year of the trustshall be the calendar year. 8.Governing Law. The operation of the trust shall be governed by the laws of the State of . However, the Trustee is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the requirements for the charitable deductions available for contributions to a charitable lead annuity trust. 9.Limited Power of Amendment. This trust is irrevocable. However, the Trustee shall have the power, acting alone, to amend the trust from time to time in any manner required for the sole purpose of ensuring that the annuity interest passing to the Charitable Organization is a guaranteed annuity interestunder §§ 170(f)(2)(B), 2055(e)(2)(B), and 2522(c)(2)(B) and the regulations thereunder. 10.Investment of Trust Assets. Except as provided in paragraph 6 herein, nothingin this trust instrument shall be construed to restrict the Trustee from investing the trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. 11.Retained Powers and Interests. During the Donor’s life, [individual other than the donor, the trustee, or a disqualified person as defined in § 4946(a)(1)] shall have the right, exercisable only in a nonfiduciary capacity and without the consent or approval of any person acting in a fiduciary capacity,toacquireanypropertyheldinthetrustbysubstituting other property of equivalent value. SECTION 8. ANNOTATIONS REGARDING SAMPLE INTER VIVOS GRANTOR CHARITABLE LEAD ANNUITY TRUST .01Annotations for Introductory Paragraph and Paragraph 1, Fundin gofTrust,oftheSampleTrustin Section 7. (1)Types of charitable lead trusts. An inter vivos charitable lead trust may be established as either a grantor charitable lead trust or a nongrantor charitable lead trust. The sample trustin section 7 is an example of a grantor charitable lead trust. The sample trust in section 4 is an example of a nongrantor charitable lead trust. In order for the donor to a charitable lead trust to claim an income tax charitable deduction under § 170(a) in the year of the donor’s contribution to the trust for the present value of the annuity interest passing to charity, the trust must be structured as a grantor charitable lead trust. See § 170(f)(2)(B). The rules governing grantorcharitable lead trusts are similar to thoserelating to nongrantor charitable lead trusts. The most significant difference is the income tax treatment of the trust income. A charitable lead trust is a grantor charitable lead trust if the donor to the trust is treated as the owner of the entire trust for income tax purposes. See section 8.09 for a discussion of the types of powers that maybe used to create a grantor charitable lead trust. (2)Income taxation of grantor charitable lead trusts. The donor to a grantor charitable lead annuity trust may claim a federal income tax charitable deduction under § 170(a) in the year thatassets are irrevocably transferredtothetrust. Duringthe charitable lead annuity period, the donor is taxed on all income earned by the trust and does not receive any charitable 2007–29 I.R.B.96July 16, 2007 deduction under § 170 for the annuity payments to the charitable beneficiary as they are made. In addition, the trust does not receive a charitable deduction under § 642(c)(1). See § 1.671–4 for the income tax reportingrequirements for a grantor charitable lead annuity trust. (3)Income tax deductibility limitations. The donor to a grantor charitable lead trust may claim an income tax charitable de- duction under § 170(a) equal to the present value of all future payments that are to be made to the charitable beneficiary. Section 1.170A–6(c). However, a contribution of a charitable income interest in property for which a deduction is allowable under § 170(a) is considered to be made “for the use of” rather than “to” a charitable organization. Section 1.170A–8(a)(2). Because the charitable lead interest of a grantor charitable lead trust is considered to be made “for the use of” the charita- ble beneficiary, the income tax charitable deduction available to an individual taxpayer is generally limited as set forth in § 170(b)(1)(B) to 30 percent of the taxpayer’s contribution base as defined in § 170(b)(1)(G). However, if the property con- tributed to the CLAT is capital gain property as defined in § 170(b)(1)(C)(iv) and thecharitable beneficiary (including any alternate charitable beneficiaries named in the trust instrument or selected by the trustee) is not limited to an organization de- scribed in § 170(b)(1)(A) (a “public charity”), the individual taxpayer’s income tax charitable deduction generally is limited as set forth in § 170(b)(1)(D) to 20 percent of the taxpayer’s contribution base. Section 170(b)(1)(D). See §§ 1.170A–8(c) and (d). In addition, the amount of a charitable contribution of certain types of property may be reduced under § 170(e). See § 1.170A–4. See section 9.06 for an alternate provision that restricts the charitable beneficiary to apublic charity. (4)Charitable lead beneficiary requirements. A deduction is allowed under § 170(a)for contributions to a grantor CLAT only if the charitable lead beneficiary is an organization described in § 170(c). Note that the class of permissible charitable recipients for obtaining a deduction under § 170(a) differs fromthe class of permissible charitable recipients for obtaining a deduction under § 642(c)(1). Compare § 170(c) with § 1.642(c)–(1)(a)(2). (5)Computation of charitable deduction. In general, the income, estate, and gift tax charitable deductions available under §§ 170(a), 2055(e)(2)(B), and 2522(c)(2)(B) with respectto contributions to a CLAT are equal to the present value of the annuity interest. Section 7520 generally requires that an annuity interest must be valued using tables published by the Service. The method for valuing a charitable lead annuity interest is set forth in the regulations. See §§ 1.7520–2, 20.7520–2, and 25.7520–2. If, however, the circumstances surrounding the transfer to a charitable lead trust suggest that the charitable beneficiary might not receive the beneficial enjoyment of the annuityinterest, an income tax deduction will be allowed only for the minimum possible amount that the charity will receive. Section 1.170A–6(c)(3)(iii). If at any time the donor ceases to be treated as the owner of the trust under subpart E, part I, subchapter J, chapter 1, subtitle A of the Code, the donor shall be considered to have received an amount of income equal to the amount of any deduction the donor received under § 170(a) for the contribution to the trust, reduced by the discounted value (as of the date of the contribution to the trust) of all amounts of income earned by the trust andtaxable to the donor before the time that the donor ceased to be treated as the owner of the trust under subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. Section 170(f)(2)(B). (6)Trustee provisions. The trust instrument may name alternate or successor trustees and/or may include a process for the appointment of unnamed alternate or successor trustees. In addition, the trust instrument may contain certain other admin- istrative provisions relating to the trustee’s duties and powers. (7)Identity of donor. For purposes of qualification under this revenue procedure, the donor to a charitable lead annuity trust may be an individual or a husband and wife. Appropriate adjustments should be made to the introductory paragraph if a husband and wife are the donors. Terms such as “grantor” or “settlor” may be substituted for “donor.” .02Annotations for Paragraph 2, Payment of Annuity Amount, of the Sample Trust in Section 7. (1)Guaranteed annuity. To qualify for the applicable charitable deductions, a grantor CLAT must provide for the payment of a guaranteed annuity amount at least annually to a qualified charitable organization for each year during the annuity pe- riod. See §§ 170(c), 2055(e)(2)(B), and 2522(c)(2)(B). A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years or for one or more measuring lives. See section 8.02(4) for a discussion of the permissible term of a grantor CLAT. An amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer may be ascertained at the time of the transfer to the trust. Sections 1.170A–6(c)(2)(i)(A), 20.2055–2(e)(2)(vi)(a), and 25.2522(c)–3(c)(2)(vi)(a). A chari- table interest expressed as the right to receive an annual payment from a trust equal to the lesser of a sum certain or a fixed percentage of the trust assets (determined annually), is nota guaranteed annuity interest. See §§ 1.170A–6(c)(2)(i)(B), 20.2055–2(e)(2)(vi)(b), and 25.2522(c)–3(c)(2)(vi)(b). In addition, a charitable lead annuity interest is not a guaranteed annuity interest if the trustee has the discretion to commute and prepay the charitable interest prior to the termination of the annuity period. Rev. Rul. 88–27, 1988–1 C.B. 331. If a charitableinterest in the form of a guaranteed annuity interest is in trust and the present value of the charitable interest on the date of gift exceeds 60 percent of the aggregate value of all amounts in the trust, the charitable interest will not be considered a guaranteed annuity interest unless the governing instrument of the trust prohibits the acquisition and retention of assets that would give rise to a tax under § 4943 or 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). Sections 1.170A–6(c)(2)(i)(D), 20.2055–2(e)(2)(vi)(e), and 25.2522(c)–3(c)(2)(vi)(e). July 16, 2007972007–29 I.R.B. These prohibitions are contained in the sample trust in section 7. See section 8.06 for a further discussion of the 60 percent test. See section 9.04 for an alternate provision that provides for an annuity amount statedas a specific dollar amount. (2)Payment requirements. CLATs are not subject to any minimum or maximum payout requirements. The governing instru- ment of a CLAT must provide for the payment to a charitable organization of a fixed dollar amount or a fixed percentage of the initial net fair market value of the assets transferred to the trust. Alternatively, the governing instrument of a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period, provided that the value of the annuity amountis ascertainable at the time the trust is funded. The annuity payments may be made in cash or in kind. If the trustee distributes appreciated property in satisfaction of the required annuity payment, the donor will realize capital gain on the assets distributed to satisfy part or all of the annuity payment. (3)Rule against perpetuities. An interest payable for a specified term of years may qualify as a guaranteed annuity interest even if the governing instrument contains a savings clause intended to ensure compliance with a rule against perpetuities. How- ever, any such savings clause must utilize a period of vesting of not more than 21 years after the deaths of measuring lives who are selected to maximize, rather than limit, the term of thetrust. Sections 1.170A–6(c)(2)(i)(A), 20.2055–2(e)(2)(vi)(a), and 25.2522(c)–3(c)(2)(vi)(a). (4)Permissible term. Paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 provides for payment of the annuity amount for a specified term of years. Alternatively, the trust instrument may provide for payment of the annuity amount for the life or lives of one or more measuring lives or for the life or lives of one or more measuring lives plus a term of years. Rev. Rul. 85–49, 1985–1 C.B. 330. Only one or more of the following individuals may be used as measuring lives: the donor, the donor’s spouse, and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170, 2055, or 2522), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. Each person used as a measuring life for the annuity period must be living on the date assets are transferred to the trust. Sections 1.170A–6(c)(2)(i)(A), 20.2055–2(e)(2)(vi)(a) and 25.2522(c)–3(c)(2)(vi)(a). See section 9.01 for an alternate provision that provides for an annuity period based on the life of an individual. (5)Permissible recipients. A CLAT must have one or more charitable lead beneficiaries. The failureto designate a specific charitable beneficiary will not preclude the donor from receiving a charitable deduction if the trust instrument provides for the selection by the trustee of a charitable beneficiary described in §§ 170(c), 2055(a), and 2522(a). Rev. Rul. 78–101, 1978–1 C.B. 301. If it is determined that a deduction under § 2055(a) will not be necessary in any event, all references to § 2055(a) in the trust instrument may be deleted. Note, that ifthe donor is serving as trustee of the trust, the trustee’s power to select the charitable beneficiaries will cause the gift of the annuity interest to be incomplete for gift tax purposes and may cause some or all of the trust property (depending on the date ofthe donor’s death) to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). Further note that if the charitable beneficiary is a private foundation and the donor is an officer or director of the private foundation or possesses certain decision making authority in the private foundation, some or all of the trust property may be included in the donor’s gross estate. See § 2036(a)(2). See section 8.01(3) for a discussion of the income tax deductibility limitations. See section 9.02 for an alternate provision that provides for a donor’s retained right to substitute the charitable beneficiary. See section 9.03 for an alternate provision that provides the trustee with the power to apportion the annuity amount among charitable beneficiaries. See section 9.06 for an alternate provision that limits the charitable beneficiary to a public charity. (6)Payment of annuity amount in installments. Paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 specifies that the annuityamount is to be paid in equal quarterly installments at the end of each calendar quarter. Alterna- tively, the trust instrument may specify that the annuity amount is to be paid in annual or other equal or unequal installments throughout the year. See §§ 1.170A–6(c)(2)(i)(A), 20.2055–2(e)(2)(vi)(a), and 25.2522(c)–3(c)(2)(vi)(a). The amount of the charitable deduction will be affected by the frequency of the payment, by whether the installments are equal or un- equal, and by whether each installment is payable at the beginning or end of the period. See §§ 1.170A–6, 25.2512–5, and 20.2031–7. (7)Excess income. Trust income in excess of the amount required to pay the annuity may be retained by the trust or distributed to the charitable beneficiary. The sample trust in section 7 provides for the retention of excess income by the trust. If, instead, the governing instrument of a grantor charitable lead trust provides for the payment of excess income to or for the use of the charitable beneficiary, the donor will receive an income tax charitable deduction each year for amounts paid to a charitable beneficiary to the extent that such amounts exceed the guaranteed annuityamount. Section 1.170A–6(d)(2)(ii). However, the donor is not entitled to any additional estate or gift tax charitable deductions for the excess amounts of income distributed to the charitable beneficiary. See §§ 20.2055–2(e)(2)(vi)(d) and 25.2522(c)–3(c)(2)(vi)(d). See Situation 2 of Rev. Rul. 88–82, 1988–2 C.B. 336, for the gift tax consequences of the payment of excess income to a noncharitable beneficiary. See section 8.06 for the private foundation rules applicable to charitable lead trusts. (8)Paymentofpartofannuityforprivatepurposes. In general, no part of a charitablelead annuity interest may be payable for a private purpose before the expiration of all charitable lead annuity interests. However, there are two exceptions to this rule. The first exception arises when the amount payable for a private purposeis in the form of a guaranteed annuity interest and the trust’s governing instrument does not provide for any preference or priority in the payment of the private annuity as opposed to the charitable annuity. The second exception arises when, under the trust’s governing instrument, the 2007–29 I.R.B.98July 16, 2007 amount that may be paid for a private purpose is payable only from a group of assets that is devoted exclusively to private purposes and to which § 4947(a)(2) is inapplicable by reason of § 4947(a)(2)(B). Note that an amount is not deemed to have been paid for a private purpose if it was paid for full and adequate consideration in money or money’s worth. Sections 1.170A–6(c)(2)(i)(E), 20.2055–2(e)(2)(vi)(f), and 25.2522(c)–3(c)(2)(vi)(f). See section 8.06 for the private foundation rules applicable to charitable lead trusts. .03Annotation for Paragraph 3, Proration of Annuity Amount, of the Sample Trust in Section 7. (1)Prorating the annuity amount. Paragraph 3, Proration of Annuity Amount, of the sample trust in section 7 provides for the proration of the annuity amount in any short taxable year, including the last year of the annuity period. .04Annotation for Paragraph 4, Distribution Upon Termination of Annuity Period, of the Sample Trust in Section 7. (1)Generation-skipping transfer tax. If a CLAT has or may have a skip person, as defined in § 2613(a), as a remainder benefi- ciary, the transfer to the trust will be subject to the generation-skipping transfer (GST) tax. Under § 2651(f)(3), a charitable organization is deemed to be in the same generation as the donor of a charitable lead trust. Therefore, the GST potential of a charitable lead trust is dependent upon whether any noncharitable beneficiary is a skip person. GST tax liability is determined by multiplying the taxable amount by the applicable rate. The applicable rate is the inclusion ratio multiplied by the maximum federal estate tax rate. Section 2641(a). Therules for determining the inclusion ratio for a CLAT are set forth in § 2642(e) and confirm that the inclusion ratio is determined at the termination of the annuity period, rather than on the funding of the trust. .05Annotation for Paragraph 5, Additional Contributions, of the Sample Trust in Section 7. (1)Additions to the trust. For purposes of qualification under this revenue procedure, the tr ustinstrumentmustcontaina provision that prohibits additional contributions. A charitable lead trust that permits additional contributions will not qualify for safe harbor treatment under this revenue procedure. .06Annotation for Paragraph 6, Prohibited Transactions, of the Sample Trust in Section 7. (1)Prohibitions against certain investments and excess business holdings. Prohibitions against retaining any excess business holdings within the meaning of § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3), and against investments that jeopar- dize the exempt purpose of the trust within the meaning of § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3) are generally required. The sample trust in section 7 contains prohibitionsagainst §§ 4943 and 4944 transactions. If the present value of the charitable interest does not exceed 60 percent of the aggregate value of all amounts in the trust, the trust instrument does not provide for the payment of any of the income interest to a noncharitable beneficiary, and the trust instrument does not provide for the payment of excess income to a noncharitable beneficiary, the references to §§ 4943 and 4944 may be removed from the trust instrument. Sections 4947(b)(3), 53.4947–2(b)(1)(i), 1.170A–6(c)(2)(i)(D), 20.2055–2(e)(2)(vi)(e), and 25.2522(c)–3(c)(2)(vi)(e). See section 8.02(7) for a discussion of the payment of excess trust income to a noncharitable beneficiary. See section 8.02(8) for a discussion of the payment of part of the annuity for a private purpose. .07Annotation for paragraph 7, Taxable Year, of the Sample Trust in Section 7. (1)Calendar year. The taxable year of a charitable lead trust must be a calendar year. Section 644(a). .08Annotation for paragraph 10, Investment of Trust Assets, of the Sample Trust in Section 7. (1)Capital gains. Gains from the sale or exchange of capital assets may be allocated to the income or the principal of the trust. If the governing instrument is silent, capital gains are allocated in accordance with local law. .09Annotation for Paragraph 11, Retained Powers and Interests, of the Sample Trust in Section 7. (1)Power to substitute trust assets. The donor to a CLAT may claim an income tax charitable deduction under § 170(a) if the donor is treated as the owner ofthe entire CLAT under the provisions of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. Paragraph 11, Retained Powers and Interests, of the sample trust in section 7 creates a grantor CLAT through the use of a power to substitute trust assets under § 675(4) that is held by a person other than the donor, the trustee, or a disqualified person as defined in § 4946(a)(1), and is exercisable only in a nonfiduciary capacity. The circumstances surrounding the administration of a CLAT will determine whether a § 675(4) substitution power is exercised in a fiduciary July 16, 2007992007–29 I.R.B. or nonfiduciary capacity. This is a question of fact. Note, that the exercise of a § 675(4) power may result in an act of self-dealing under § 4941. (2)Other powers or provisions to create a grantor trust. As noted above, the sample trust in section 7 includes a § 675(4) power that is held by someone other than donor, the trustee, ora disqualified person as defined in § 4946(a)(1), and that may be exercised only in a nonfiduciary capacity. The CLAT instrument may instead incorporate a power or provision, other than the one provided in sample trust in section 7, that will cause the donor to be treated as the owner of the entire CLAT under the provisions of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code. See § 671et seq. However, practitioners should exercise caution when choosing a particular power or provision because certain methods of creating a grantor trust may have unforeseen tax consequences. SECTION 9. ALTERNATE PROVISIONS FOR SAMPLE INTER VIVOS GRANTOR CHARITABLE LEAD ANNUITY TRUST .01Annuity Period for the Life of One Individual. (1)Explanation. As an alternative to establishing a CLAT for a term of years, the trust instrument of a grantor CLAT may provide for payment of the annuity amount for the life or livesof an individual or individuals. However, only one or more of the following individuals may be used as measuring lives: the donor, the donor’s spouse, and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170, 2055, or 2522), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. A trust will satisfy the requirement that each measuring life is a lineal ancestor (or the spouse of a lineal ancestor) of all noncharitable remainder beneficiaries if there is a less than 15 percent probability at the time of the contribution to the trust that individuals who are not lineal descendants of an individual who is a measuring life will receive any trust principal. The probability must be computed under the applicable tables in § 20.2031–7. Sections 1.170A–6(c)(2)(i)(A), 20.2055–2(e)(2)(vi)(a), and 25.2522(c)–3(c)(2)(vi)(a). (2)Instruction for use. Replace the fifth and sixth sentences of paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 with the following sentences: The annuity period is the lifetime of [designated measuring life]. The first day of the annuity period shall be the date the property is transferred to the trust, and the last day of the annuity period shall be the date of death of [designated measuring life]. .02Retention of the Right to Substitute the Charitable Lead Beneficiary. (1)Explanation. The donor to a grantor CLAT may retain the right to substitute another charitable beneficiary for the charitable beneficiary named in the trust instrument and still claim a deduction under § 170(a) in the year of the transfer to the CLAT. Note, however, that the retention of this right will cause the gift of the annuity interest to be incomplete for gift tax purposes and may cause some or all of the trust property (depending on the date of the donor’s death) to be included in the donor’s gross estate. See §§ 2035, 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). See section 8.01(3) for a discussion of the income tax deductibility limitations applicable to contributions to a grantor CLAT. (2)Instruction for use. Replace the third sentence of paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 with the following two sentences: Notwithstanding the preceding sentence,the Donor reserves the right to designate as the charitable annuity recipient, at any time and from time to time, in lieu of [designated charitable recipient named above], one or more organizations described in §§ 170(c), 2055(a), and 2522(a) and shall make any such designation by giving written notice to the Trustee. The term “the Charitable Organization” shall be used herein to refer collectively to the organization(s) then constituting the charitable recipient, whether named in this paragraph or subsequently selected as the substitute charitable recipient. .03Apportionment of the Annuity Amount in the Discretion of the Trustee. (1)Explanation. The donor or the trustee of a grantor charitable lead trust may be granted the power to apportion the annuity payment from time to time among a class of qualifying charitable beneficiaries. Note that a retained power of apportionment by the donor will cause the gift of the annuity interest to be incomplete for gift tax purposes and may cause some or all of the trust property to be included in the donor’s gross estate. See §§ 2035(a), 2036(a)(2), and 2038(a)(1) and § 25.2511–2(c). (2)Instruction for use. Replace the first three sentences of paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 with the following two sentences: In each taxable year of the trust during the annuity period, the Trustee shall pay to one or more members of a class comprised of organizations described in §§ 170(c), 2055(a),and 2522(a) (hereinafter, collectively “the Charitable Or- ganization”) an annuity amount equal to [number representing the annual annuity percentage to be paid to the Charitable Organization] percent of the initial net fair market value of all property transferred to the trust, valued as of the date of 2007–29 I.R.B.100July 16, 2007 the transfer. The Trustee may pay the annuity amount to one or more members of the class, in equal or unequal shares, as the Trustee, in the Trustee’s sole discretion, from time to time may deem advisable. .04Annuity Amount as a Specific Dollar Amount. (1)Explanation. As an alternative to stating the annuity amount as a percentage of the initial net fair market value of the assets transferred to the trust, the annuity amount may be stated as a specific dollar amount. (2)Instructions for use. (a)Replace the first sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 with the following sentence: In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [the stated dollar amount]. (b)Delete the last sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 concerning the incorrect valuation of trust assets. .05Designation of an Alternate CharitableBeneficiary in the Trust Instrument. (1)Explanation. The sample trust in section 7 provides that if the charitable beneficiary designated in the trust instrument is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the trustee shall distribute such payments to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) as the trustee shall select. As an alternative, the trust instrument may specificallydesignate one or more alternate charitable beneficiaries. See section 8.01(3) for a discussion of the income tax deductibility limitations applicable to contributions to a grantor CLAT. (2)Instruction for use. Replace the second sentence in paragraph 2, Payment of Annuity Amount, of the sample trust in section 7 with the following two sentences: If [designated charitable recipient] is not an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the Trustee shall instead distribute such payments to [designated substitute charitable re- cipient]. If neither [designated charitable recipient]nor[designated substitutecharitable recipient] is an organization described in §§ 170(c), 2055(a), and 2522(a) at the time any payment is to be made to it, the Trustee shall instead distrib- ute such payments to one or more organizations described in §§ 170(c), 2055(a), and 2522(a) as the Trustee shall select, and in such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. .06Restriction of the Charitable Beneficiary to a Public Charity. (1)Explanation. Because the charitable lead interest of a grantor charitable lead trust is considered to be made “for the use of” the charitable beneficiary, the income tax charitable deduction available to an individual taxpayer is generally limited as set forth in § 170(b)(1)(B) to 30 percent of the taxpayer’s contribution base as defined in § 170(b)(1)(G). However, if the property contributed to the CLAT is capital gain property as defined in § 170(b)(1)(C)(iv) and the charitable beneficiary (including any alternate charitable beneficiaries named in the trust instrument orselected by the trustee) is not limited to a public charity, the individual taxpayer’s income tax charitable deduction generally is limited as set forth in § 170(b)(1)(D) to 20 percent of the taxpayer’s contribution base. Section 170(b)(1)(D). See §§ 1.170A–8(c) and (d). In addition, the amount of a charitable contribution of certain types of property may be reduced under § 170(e). See § 1.170A–4. (2)Instructions for use. To restrict the charitable beneficiary to a public charity, each and every time the phrase “an organiza- tion described in §§ 170(c), 2055(a), and 2522(a) of the Code”appears in the sample trust, replace it with the phrase “an organization described in §§170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code.” SECTION 10. DRAFTING INFORMATION The principal author of this revenue procedure is Stephanie N. Bland of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further informationregarding this revenue procedure, contact Stephanie N. Bland at (202) 622–3090 or (202) 622–7830 (not a toll-free call). July 16, 20071012007–29 I.R.B. 26 CFR 601.201: Rulings and determination letters. (Also: Part I, §§ 642(c), 2055; § 20.2055–2.) Rev. Proc. 2007–46 SECTION 1. PURPOSE This revenue procedure contains an annotated sample declaration of trus t and alternate provisions that meet the requirements for a testamentary charitable lead annuity trust (CLAT) providing for annu ity payments payable to one or more charitable beneficiaries for the annuity period followed by the distribution of trust assets to one o r more noncharitable remaindermen. SECTION 2. BACKGROUND The Internal Revenue Service (Service) is issuing sample forms for CLATs; annotations and alternate sample provisions are included as further guidance. In addition to the sample trust instrument for a testamentary CLAT that is included in this revenue procedure, samples are provided in a separate revenue procedure for grantor and nongrantor inter vivos CLATs (see Rev. Proc. 2007–45, 2007–29 I.R.B. 89). SECTION 3. SCOPE A CLAT is an irrevocable split-interest trust that provides for a specified amount to be paid to one or more charitable beneficiaries during the term of the trust. The principal remaining in the trust at the end of the term is paid over to, or held in a continuing trust for, a noncharitable beneficiary or beneficiaries identified in the trust. If the terms of a CLAT created on the decedent’s death satisfy the applicable statutory and regulatory requirements, the value of the charitable lead annuity interest will be deductible by the decedent’s estate under § 2055(e)(2)(B) and payments of the annuity amount to the charitable lead beneficiary will be deductible from the gross income of the trust to the extent provided by § 642(c)(1). A testamentary CLAT is subject to the provisions of part I, subchapter J of chapter 1 of subtitle A of the Internal Revenue Code (Code). Under the provisions of part I of subchapter J, a CLAT is allowed a deduction under § 642(c)(1) in determining its taxable income for any amount of gross income paid for purposes specified in § 170(c). Section 4 of this revenue procedure provides a sample declaration of trust for a testamentaryCLAT with a term of years annuity period that is created by a decedent who was a citizen or resident of the United States. Section 5 of this revenue procedure provides annotations to the provisions of the sample trust. Section 6 of this revenue procedure provides samples of certain alternate provisions concerning: (.01) an annuity period for the life of an individual; (.02) apportionment of the annuity amount in the discretion of the trustee; (.03) the annuity amount as a specific dollar amount; and (.04) designation of an alternate charitable beneficiary in the trust instrument. If a trust is substantially similar to the sample trust in section 4 of this revenue procedure or properly integrates one or more alternate provisions from section 6 into a document substantially similar to the sample trust in section 4, is a valid trust under applicable local law, and operates in a manner consistent with the terms of the instrument, and if all other deductibility requirements are satisfied, the value of the charitable lead interest will be deductible by the decedent’s estate under § 2055(e)(2)(B) and payments of the annuity amount to the charitable lead beneficiary will be deductible from the gross income of the trust to the extent provided by § 642(c)(1). In addition, a testamentary CLAT will qualify for the safeharbor created under this revenue procedure if the trust satisfies all of the requirements set forth in the preceding sentence, except that it defines the annuity amountas an increasing amount for which the value is ascertainable at the creation of the trust and/or provides for a different disposition of trust assets upon the termination of the annuity period. Except as provided above, a trust that contains substantive provisions in addition to those provided in section 4 of this revenue procedure (other than properly integrated alternate provisions from section 6 of this revenue procedure or provisions necessary to establish a valid trust under applicable local law that are not inconsistent with the applicable federal tax requirements), or that omits any of the provisions of section 4 of this revenue procedure (unless analternate provision from section 6 of this revenue procedure is properly integrated), will not necessarily be ineligible for the relevant charitable deduction(s), but neither will that trust (or contribu- tions to it) be assured of qualification for the appropriate charitable deductions. The Service generally will not issue a letter ruling on whether a testamentary CLAT qualifies for income and estate tax charitable deductions. The Service, however, generally will issue letter rulings relating to the tax consequences of the inclusion in a CLAT of substantive trust provisions other than those contained in sections 4 and 6 of this revenue procedure. SECTION 4. SAMPLE TESTAMENTARY CHARITABLE LEAD ANNUITY TRUST I give, devise, and bequeath [property bequeathed] to my Trustee in trust to be administered under this provision. I intend this bequest to establish a charitable lead annuity trust, within themeaning of Rev. Proc.2007–46. This trust shall be known as the 2007–29 I.R.B.102July 16, 2007 Charitable Lead Annuity Trust, and I hereby designateas the initial trustee (hereinafter “the Trustee”). All references to “section” or “§” in this instrument shall refer to the Internal Revenue Code of 1986, 26 U.S.C. § 1,et seq. 1.Payment of Annuity Amount. In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [number representing the annual annuity percentage to be paid to the designated charitable recipient] percent of the initial net fair market value of all propertypassing to this trust, as finally determined for federal estate tax purposes. If [designated charitable recipient] is not an organization described in §§ 170(c) and 2055(a) at the time any payment is to be made to it, the Trustee shall instead distribute such payments to one or more organizations described in §§ 170(c) and 2055(a) as the Trustee shall select, andin such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. The term “the Charitable Organization” shall be used herein to refer collectively to the organization(s) then constituting the charitable recipient, whether named in this paragraph or subsequently selected as the substitute charitable recipient. During the trust term, no payment shall be made to any person other than the Charitable Organization. The annuity period is a term of [number of years of annuity period] years. The first day of the annuity period shall be the date of my death, and the last day of the annuity period shall be the day preceding the [ordinal number corresponding to the length of the annuity period] anniversary of that date. The annuity amount shall be paid in equal quarterly installments at the end of each calendar quarter from income and, to the extent income is not sufficient, from principal. Any income of the trust for a taxable year in excess of the annuity amount shall be added to principal. If the initial net fair market value of the trust assets is incorrectly determined, then within a reasonable period after the value is finally determined for federal estate tax purposes, the Trustee shall payto the Charitable Organization (in the case of an undervaluation) or receive from the Charitable Organization (in the case of an overvaluation) an amount equal to thedifference between the annuity amount(s) properly payable and theannuity amount(s) actually paid. 2.Deferral Provision. The obligation to pay the annuity amount shall commence with the date of my death, but payment of the annuity amount may be deferred from this date until the end of the taxable year in which the trust is completely funded. Within a reasonable time after the end of the taxable year in which the trust is completely funded, the Trustee must pay to the Charitable Organization the difference between any annuity amounts actually paid and the annuity amounts payable, plus interest. The interest for any period shall be computed at the § 7520 rate of interest in effect for the date of my death. All interest shall be compounded annually. 3.Proration of Annuity Amount. The Trustee shall prorate the annuity amount on a daily basis for any short taxable year. In the taxable year in which the annuity period ends, the Trustee shall prorate the annuity amount on a daily basis for the number of days of the annuity period in that taxable year. 4.Distribution Upon Termination of Annuity Period. At the termination of the annuity period, the Trustee shall distribute all of the then principal and income of the trust (other than any amount due to the Charitable Organization under the provisions above) to [remainder beneficiary]. 5.Additional Contributions. No additional contributions shall be made to the trust after the initial contribution. The initial contri- bution, however, shall be deemed to consist of all property passing to the trust by reason of my death. 6.Prohibited Transactions. The Trustee shall not engage in any act of self-dealing within the meaning of § 4941(d), as modified by § 4947(a)(2), and shall not make any taxable expenditures within the meaning of § 4945(d), as modified by § 4947(a)(2). The Trustee shall not retain any excess business holdings that wouldsubject the trust to tax under § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3). In addition, the Trustee shall not acquire any assets that would subject the trust to tax under § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3), or retain assets which, if acquired by the Trustee, would subject the Trustee to tax under § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). 7.Taxable Year. The taxable year of the trustshall be the calendar year. 8.Governing Law. The operation of the trust shall be governed by the laws of the State of . However, the Trustee is prohibited from exercising any power or discretion granted under said laws that would be inconsistent with the requirements for the charitable deductions available to a charitable lead annuity trust or for contributions to a charitable lead annuity trust. 9.Limited Power of Amendment. This trust is irrevocable. However, the Trustee shall have the power, acting alone, to amend the trust from time to time in any manner required for the sole purpose of ensuring that the annuity interest passing to the Charitable Organization is a guaranteed annuity interest under § 2055(e)(2)(B)and the regulations thereunder and that payments of the annuity amount to the Charitable Organization will be deductible from the gross income of the trust to the extent provided by § 642(c)(1) and the regulations thereunder. 10.Investment of Trust Assets. Except as provided in paragraph 6 herein, nothingin this trust instrument shall be construed to restrict the Trustee from investing the trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets. July 16, 20071032007–29 I.R.B. SECTION 5. ANNOTATIONS REGARDING SAMPLE TESTAMENTARY CHARITABLE LEAD ANNUITY TRUST .01Annotations for Introductory Paragraph of the Sample Trust. (1)Income taxation of testamentary charitable lead trusts. A testamentary CLAT is a complex trust that is taxable as a separate entity under the provisions of subchapter J of the Code. The trustee of the trust must apply for a tax identification number for the trust. (2)Deduction under § 642(c)(1) available for amounts paid for a charitable purpose. Under § 642(c)(1), a testamentary CLAT is allowed a deduction in computing its taxable income for any amount of gross income, without limitation, that under the terms of the trust instrument is paid for a purpose specified in §170(c) (determined without regard to § 170(c)(2)(A)) during the taxable year. Section 642(c)(1) and § 1.642(c)–1(a). An amount paid to a corporation, trust, or community chest, fund, or foundation otherwise described in § 170(c)(2) shall be considered paid for a purpose described in § 170(c) even though the corporation, trust, or community chest, fund, or foundation is not created or organized in the United States, any state, the District of Columbia, or any possession of the United States. Section 1.642(c)–1(a)(2). With regard to amounts of income paid to the charitable beneficiary after the close of the taxable year in which the income was received (but on or before the last day of the next succeeding taxable year), the trustee of a testamentary CLAT mayelect to take the charitable deduction for that payment for the year in which the income was received, rather than for the year in which the payment was made. Section 642(c)(1). The election is made by filing a statement with the income tax return for the taxable year in which the charitable contribution is treated as paid. See § 1.642(c)–1(b). (3)Charitable lead beneficiary requirements. A deduction is allowed under § 642(c)(1) for any amount of the gross income of a testamentary CLAT that is paid for a purpose specified in § 170(c). Note that the class of permissible charitable recipients for obtaining a deduction under § 642(c)(1) differs from the class of permissible charitable recipients for obtaining a deduction under § 170(a). Compare § 170(c) and § 1.642(c)–1(a)(2). (4)Unrelated business taxable income. Under § 681, a testamentary charitable lead trust’s deduction under § 642(c)(1) is disallowed in any year to the extent that the deduction is allocable to the trust’s unrelated business taxable income, as defined in § 512, for that taxable year. See § 1.681(a)–2. However, a partial deduction is allowed under § 512(b)(11) for amounts allocable to unrelated business taxable income. Section 512(b)(11). See § 512(b)(12) and § 1.681(a)–2(a). (5)Computation of estate tax charitable deduction. In general, the estate tax charitable deduction available under § 2055(e)(2)(B) with respect to contributions to a CLAT is equalto the present value of the annuity interest. Section 7520 requires that an annuity interest must be valued using tables published by the Service. The method for valuing a charitable lead annuity interest is set forth in theregulations. See § 20.7520–2. If estate or other death taxes are paid from the assets used to fund a testamentary CLAT, the amount deductible under § 2055 is the amount that passes to charity, reduced by the amount of estate or death taxes paid. Section 2055(c). (6)Trustee provisions. The trust instrument may name alternate or successor trustees and/or may include a process for the appointment of unnamed alternate or successor trustees. In addition, the trust instrument may contain certain administrative provisions relating to the trustee’s duties and powers. .02Annotations for Paragraph 1, Payment of Annuity Amount, of the Sample Trust. (1)Guaranteed annuity. To qualify for an estate tax charitable deduction, a CLAT must provide for the payment of a guaran- teed annuity amount at least annually to aqualified charitable organization for each year during the annuity period. See § 2055(e)(2)(B). A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years or forone or more measuring lives. See section 5.02(4) for a dis- cussion of the permissible term of a testamentary CLAT. An amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer maybe ascertained as of the appropriate valuation date. Section 20.2055–2(e)(2)(vi)(a). A charitable interest expressed as the right to receive an annual payment from a trust equal to the lesser of a sum certain or a fixed percentage of the trust assets(determined annually) is not a guaranteed annuity interest. See § 20.2055–2(e)(2)(vi)(b). In addition, a charitable lead annuity interest is not a guaranteed annuity interest if the trustee has the discretion to commute and prepay the charitable interest prior to the termination of the annuity period. Rev. Rul. 88–27, 1988–1 C.B. 331. If a charitable interest in the form of a guaranteed annuity interest is in trust and the present value of the charitable interest on the appropriate valuation date exceeds 60 percent of the aggregate value of all amounts in the trust, the charitable interest will not be considered a guaranteed annuity interest unless the governing instrument of the trust prohibits the acquisition and retention of assets that would give rise to a tax under § 4943 or 4944, as modified by §§ 4947(a)(2) and 4947(b)(3). Section 20.2055–2(e)(2)(vi)(e). These prohibitions are contained in the sample trust in section 4. See section 5.07 for a further discussion of the 60 percent test. See section 6.03 for an alternate provision that provides for an annuity amount stated as a specific dollar amount. 2007–29 I.R.B.104July 16, 2007 (2)Payment requirements. CLATs are not subject to any minimum or maximum payout requirements. The governing instru- ment of a CLAT must provide for the payment to a charitable organization of a fixed dollar amount or a fixed percentage of the initial net fair market value of the assets transferred to the trust. Alternatively, the governing instrument of a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period, provided that the value of the annuity amount is ascertainable at the time of the decedent’s death. The an- nuity payments may be made in cash or in kind. If the trustee distributes appreciated property insatisfaction of the required annuity payment, the trust will realize capital gain on the assets distributed to satisfy part or all of the annuity payment and the trust will be allowed a § 642(c)(1) deduction for the realized capital gains. Rev. Rul. 83–75, 1983–1 C.B. 114. See section 5.03 for a discussion of the deferral of the requirement to pay the annuity amount until the end of the taxable year in which the trust is completely funded. (3)Rule against perpetuities. An interest payable for a specified term of years may qualify as a guaranteed annuity interest even if the governing instrument contains a savings clause intended to ensure compliance with a rule against perpetuities. However, any such savings clause must utilize a period of vesting of not more than 21 years after the deaths of the measuring lives who are selected to maximize, rather than limit, the term of the trust. Section 20.2055–2(e)(2)(vi)(a). (4)Permissible term. Paragraph 1, Payment of Annuity Amount, of the sample trust provides for payment of the annuity amount for a specified term of years. Alternatively, the trust instrument may provide for payment of the annuity amount for the life or lives of one or more measuring lives or for the life or lives of one or more measuring lives plus a term of years. Rev. Rul. 85–49, 1985–1 C.B. 330. Only one or more of the following individuals maybe used as measuring lives: the decedent’s spouse and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170 or 2055), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. Each person used as a measuring life for the annuity period must be living on thedecedent’s date of death. Section 20.2055–2(e)(2)(vi)(a). See section 6.01 for an alternate provision that provides for an annuity period based on the life of an individual. (5)Permissible recipients. A CLAT must have one or more charitable lead beneficiaries. The failureto designate a specific charitable beneficiary willnot preclude the decedent’s estate from receiving a charitable deduction if the trust instrument provides for the selection by the trustee of a charitable beneficiary described in §§ 170(c) and 2055(a). Rev. Rul. 78–101, 1978–1 C.B. 301. See section 6.02 for analternate provision that provides thetrustee with the power to apportion the annuity amount among charitable beneficiaries. (6)Payment of annuity amount in installments. Paragraph 1, Payment of Annuity Amount, of the sample trust specifies that the annuity amount is to be paid in equal quarterly installments at the end of each calendar quarter. Alternatively, the trust instrument may specify that the annuity amount is to be paid in annual or other equal or unequal installments throughout the year. See § 20.2055–2(e)(2)(vi)(a). The amount of the charitable deduction will be affected by the frequency of the payment, by whether the installments are equal or unequal,and by whether each installment is payable at the beginning or end of the period. See § 20.2031–7. (7)Excess income.Trust income in excess of the amount required to pay the annuity may be retained by the trust or distributed currently to the charitable beneficiary. The sample trust in section 4 provides for the retention of excess income by the trust. If, instead, the governing instrument provides for the payment of excess income to or for the use of the charitable beneficiary, no additional estate tax charitable deduction is available for the excess amounts of income distributed to the charitable beneficiary.See § 20.2055–2(e)(2)(vi)(d). However, the trust is entitled to a charitable income tax deduction under § 642(c)(1) for any amounts of excess income paid to thecharitable beneficiary. See Situation 2 of Rev. Rul. 88–82, 1988–2 C.B. 336, for the transfer tax consequences of the payment of excess income to a noncharitable beneficiary. See section 5.07 for the private foundation rules applicable to charitable lead trusts. (8)Paymentofpartofannuityforprivatepurposes. In general, no part of a charitablelead annuity interest may be payable for a private purpose before the expiration of all charitable lead annuity interests. However, there are two exceptions to this rule. The first exception arises when the amount payable for a private purposeis in the form of a guaranteed annuity interest and the trust’s governing instrument does not provide for any preference or priority in the payment of the private annuity as opposed to the charitable annuity. The second exception arises when, under the trust’s governing instrument, the amount that may be paid for a private purpose is payable only from a group of assets that is devoted exclusively to private purposes and to which § 4947(a)(2) is inapplicable by reason of § 4947(a)(2)(B). Note that an amount is not deemed to have been paid for a private purpose if it was paid for full and adequate consideration in money or money’s worth. Section 20.2055–2(e)(2)(vi)(f). See section 5.07 for the private foundation rules applicable to charitable lead trusts. .03Annotations for Paragraph 2, Deferral Provision, of the Sample Trust. (1)Deferral of requirement to pay annuity amount. The deferral provision in paragraph 2 of the sample trust authorizes the trustee to defer the payment of the annuity amount until the end of the taxable year of the trust in which the trust is com- pletely funded. (2)Interest on annuity payments. The deferral provision in paragraph 2 of the sample trust provides for the payment of interest, compounded annually, with respect to any underpayment of theannuity amount during the period of estate administration. July 16, 20071052007–29 I.R.B. The sample trust requires that interest be computed at the § 7520 rate in effect on the date of the decedent’s death. To the extent that interest payable under state law exceeds the applicable § 7520 rate, the payment of interest at the rate prescribed by state law will be deemed to satisfy the interest payment requirement set forth in the trust instrument. .04Annotation for Paragraph 3, Proration of Annuity Amount, of the Sample Trust. (1)Prorating the annuity amount. Paragraph 3, Proration of Annuity Amount, of the sample trust provides for the proration of the annuity amount in any short taxable year, including the last year of the annuity period. .05Annotation for Paragraph 4, Distribution Upon Termination of Annuity Period, of the Sample Trust. (1)Generation-skipping transfer tax. If a CLAT has or may have a skip person, as defined in § 2613(a), as a remainder benefi- ciary, the transfer to the trust will be subject to the generation-skipping transfer (GST) tax. Under § 2651(f)(3), a charitable organization is deemed to be in the same generation as the decedent/donor of a charitable leadtrust. Therefore, the GST po- tential of a charitable lead trust is dependent upon whether any noncharitable beneficiary is a skip person. GST tax liability is determined by multiplying the taxable amount by the applicable rate. The applicable rate is the inclusion ratio multiplied by the maximum federal estate tax rate. Section 2641(a). Therules for determining the inclusion ratio for a CLAT are set forth in § 2642(e) and confirm that the inclusion ratio is determined at the termination of the annuity period, rather than on the funding of the trust. .06Annotation for Paragraph 5, Additional Contributions, of the Sample Trust. (1)Additions to the trust. For purposes of qualification under this revenue procedure, the trust instrument must contain a provision that prohibits additional contributions. A CLAT that permits additionalcontributions will not qualify for safe harbor treatment under this revenue procedure. .07Annotation for Paragraph 6, Prohibited Transactions, of the Sample Trust. (1)Prohibitions against certain investments and excess business holdings. Prohibitions against retaining any excess business holdings within the meaning of § 4943, as modified by §§ 4947(a)(2) and 4947(b)(3), and against investments that jeop- ardize the exempt purpose of the trust within the meaning of § 4944, as modified by §§ 4947(a)(2) and 4947(b)(3), are generally required. The sample trust in section 4 contains prohibitions against §§ 4943 and 4944 transactions. If the present value of the charitable interest does not exceed 60 percent of theaggregate value of all amounts in the trust, the trust instru- ment does not provide for the payment of any of the income interest to a noncharitable beneficiary, and the trust instrument does not provide for the payment of excess income to a noncharitable beneficiary, the references to §§ 4943 and 4944 may be removed from the trust instrument. Section 4947(b)(3) and §§ 53.4947–2(b)(1)(i) and 20.2055–2(e)(2)(vi)(e). See sec- tion 5.02(7) for a discussion of the payment of excess trust income to a noncharitable beneficiary. See section 5.02(8) for a discussion of the payment of part of the annuity for a private purpose. .08Annotation for paragraph 7, Taxable Year, of the Sample Trust. (1)Calendar year. The taxable year of a charitable lead trust must be a calendar year. Section 644(a). .09Annotation for paragraph 10, Investment of Trust Assets, of the Sample Trust. (1)Capi tal gains. Gains from the sale or exchange of capital assets may be allocated to the income or the principal of the trust. If t he governing instrument is silent, capital gains are allocated in accordance with local law. Even if gains are allocated to p rincipal, they will be deductible under § 642(c)(1) if they arepaid to the charitable beneficiary as part of a charitable ann uity payment. Rev. Rul. 83–75, 1983–1 C.B. 114. SECTION 6. ALTERNATE PROVISIONS FOR SAMPLE TESTAMENTARY CHARITABLE LEAD ANNUITY TRUST .01Annuity Period for the Life of One Individual . (1)Explanation.AsanalternativetoestablishingaCLATforatermofyears, the trust instrument of a testamentary CLAT may provide for payment of the annuity amount for the life or livesof an individual or individuals. However, only one or more of the following individuals may be used as measuring lives: the decedent’s spouse and an individual who, with respect to all remainder beneficiaries (other than charitable organizations described in § 170 or 2055), is either a lineal ancestor or the spouse of a lineal ancestor of those beneficiaries. A trustwill satisfy the requirement that each measuring life is a lineal 2007–29 I.R.B.106July 16, 2007 ancestor (or the spouse of a linealancestor) of all noncharitable remainder beneficiaries, if on decedent’s date of death there is a less than 15 percent probability that individuals who arenot lineal descendants of an individual who is a measuring life will receive any trust principal. The probability must be computed under the applicable tables in § 20.2031–7. Section 20.2055–2(e)(2)(vi)(a). (2)Instruction for use. Replace the fifth and sixth sentences of paragraph 1, Payment of Annuity Amount, of the sample trust with the following sentences: The annuity period is the lifetime of [designated measuring life]. The first day of the annuity period shall be the date of my death, and the last day of the annuity period shall be the date of death of [designated measuring life]. .02Apportionment of the Annuity Amount in the Discretion of the Trustee. (1)Explanation. The trustee of a testamentary charitable lead trust may be granted the power to apportion the annuity payment from time to time among a class of qualifying charitable beneficiaries. (2)Instruction for use. Replace the first three sentences of paragraph 1, Payment of Annuity Amount, of the sample trust with the following two sentences: In each taxable year of the trust during the annuity period, the Trustee shall pay to one or more members of a class comprised of organizations described in §§ 170(c) and 2055(a) (hereinafter, collectively “the Charitable Organization”) an annuity amount equal to [number representing the annual annuity percentage to be paid to the Charitable Organiza- tion] percent of the initial net fair market value of all property passing to this trust,as finally determined for federal tax purposes. The Trustee may pay the annuity amount to one or more members of the class, in equal or unequal shares, as the Trustee, in the Trustee’s sole discretion, from time to time may deem advisable. .03Annuity Amount as a Specific Dollar Amount. (1)Explanation. As an alternative to stating the annuity amount as a percentage of the initial net fair market value of the assets transferred to the trust, the annuity amount may instead be stated as a specific dollar amount. (2)Instructions for use. (a)Replace the first sentence in paragraph 1, Payment of Annuity Amount, of the sample trust with the following sentence: In each taxable year of the trust during the annuity period, the Trustee shall pay to [designated charitable recipient] an annuity amount equal to [the stated dollar amount]. (b)Delete the last sentence in paragraph 1, Payment of AnnuityAmount, of the sample trust concerning the incorrect valu- ation of trust assets. .04Designation of an Alternate CharitableBeneficiary in the Trust Instrument. (1)Explanation. The sample trust provides that in the event the charitable beneficiary designated in the trust instrument is not an organization described in §§ 170(c) and 2055(a) at the time any payment is to be made to it, the trustee shall distribute such payments to one or more organizations described in §§ 170(c) and 2055(a) as the trustee shall select. As an alternative, the trust instrument may specifically designate one or more alternate charitable beneficiaries. (2)Instruction for use. Replace the second sentence in paragraph 1, Payment of Annuity Amount, of the sample trust with the following two sentences: If [designated charitable recipient] is not an organization described in §§ 170(c) and 2055(a) at the time any payment is to be made to it, the Trustee shall instead distribute such payments to [designated substitute charitable recipient]. If neither [designated charitable recipient] nor [designated substitute charitable recipient] is an organization described in §§ 170(c) and 2055(a) at the time any payment is to be made to it, the Trustee shall insteaddistribute such payments to one or more organizations described in §§ 170(c) and 2055(a)as the Trustee shall select, and in such proportions as the Trustee shall decide, from time to time, in the Trustee’s sole discretion. SECTION 7. DRAFTING INFORMATION The principal author of this revenue procedure is Stephanie N. Bland of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further informationregarding this revenue procedure, contact Stephanie N. Bland at (202) 622–3090 or (202) 622–7830 (not a toll-free call). July 16, 20071072007–29 I.R.B. 26 CFR 1.141–3: Definition of private business use. (Also: §§ 103, 141,145; 1.141–3, 1.145–2.) Rev. Proc. 2007–47 SECTION 1. PURPOSE The purpose of this revenue procedure is to set forth conditions under which a re- search agreement does not result in private business use under § 141(b) of the Inter- nal Revenue Code of 1986 (the Code). This revenue procedure also addresses whether a research agreement causes the modified private business use test in § 145(a)(2)(B) of the Code to be met for qualified 501(c)(3) bonds. This revenue procedure modifies and supersedes Rev. Proc. 97–14, 1997–1 C.B. 634. SECTION 2. BACKGROUND .01Private Business Use. (1) Under § 103(a) of the Code, gross income does not include interest on any State or local bond. Under § 103(b)(1), however, § 103(a) does not apply to a pri- vate activity bond, unless it is a qualified bond under § 141(e). Section 141(a)(1) defines “private activity bond” as any bond issued as part of an issue that meets both the private business use and the pri- vate security or payment tests. Under § 141(b)(1), an issue generally meets the private business use test if more than 10 percent of the proceeds of the issue aretobeusedforanyprivatebusiness use. Under § 141(b)(6)(A), private busi- ness use means direct or indirect use in a trade or business carried on by any person other than a governmental unit. Section 150(a)(2) provides that the term “govern- mental unit” does not include the United States or any agency or instrumentality thereof. Section 145(a) also applies the private business use test of § 141(b)(1) to qualified 501(c)(3) bonds, with certain modifications. (2) Section 1.141–3(b)(1) of the Income Tax Regulations provides that both actual and beneficial use by a nongovernmental person may be treated as private business use. In most cases, the private business use test is met only if a nongovernmental per- son has special legal entitlements to use the financed property under an arrangement with the issuer. In general, a nongovern- mental person is treated as a private busi- ness user of proceeds and financed prop- erty as a result of ownership; actual or beneficial use of property pursuant to a lease, or a management or incentive pay- ment contract; or certain other arrange- ments such as a take or pay or other out- put-type contract. (3) Section 1.141–3(b)(6)(i) provides generally that an agreement by a non- governmental person to sponsor research performed by a governmental person may result in private business use of the prop- erty used for the research, based on all the facts and circumstances. (4) Section 1.141–3(b)(6)(ii) provides generally that a research agreement with respect to financed property results in pri- vate business use of that property if the sponsor is treated as the lessee or owner of financed property for Federal income tax purposes. (5) Section 1.141–1(b) provides that the term “governmental person” means a State or local governmental unit as defined in § 1.103–1 or any instrumentality thereof. Section 1.141–1(b) further provides that governmental person does not include the United States or any agency or instrumen- tality thereof. Section 1.141–1(b) further provides that “nongovernmental person” means a person other than a governmen- tal person. (6) Section 1.145–2 provides that §§ 1.141–0 through 1.141–15 apply to qualified 501(c)(3) bonds under § 145(a) of the Code with certain modifications and exceptions. (7) Section 1.145–2(b)(1) provides that, in applying §§ 1.141–0 through 1.141–15 to § 145(a) of the Code, references to gov- ernmental persons include § 501(c)(3) or- ganizations with respect to their activities that do not constitute unrelated trades or businesses under § 513(a). .02Federal Government rights under the Bayh-Dole Act. (1) The Patent and Trademark Law Amendments Act of 1980, as amended, 35 U.S.C. § 200et seq.(2006) (the “Bayh-Dole Act”), generally applies to any contract, grant, or cooperative agree- ment with any Federal agency for the performance of research funded by the Federal Government. (2) The policies and objectives of the Bayh-Dole Act include promoting the uti- lization of inventions arising from feder- ally supported research and development programs, encouraging maximum partic- ipation of small business firms in feder- ally supported research and development efforts, promoting collaboration between commercial concerns and nonprofit orga- nizations, ensuring that inventions made by nonprofit organizations and small busi- ness firms are used in a manner to pro- mote free competition and enterprise, and promoting the commercialization and pub- lic availability of inventions made in the United States by United States industry and labor. (3) Under the Bayh-Dole Act, the Fed- eral Government and sponsoring Federal agencies receive certain rights to inven- tions that result from federally funded research activities performed by non-spon- soring parties pursuant to contracts, grants, or cooperative research agreements with the sponsoring Federal agencies. The rights granted to the Federal Government and its agencies under the Bayh-Dole Act generally include, among others, nonexclusive, nontransferable, irrevoca- ble, paid-up licenses to use the products of federally sponsored research and certain so-called “march-in rights” over licensing under limited circumstances. Here, the term “march-in rights” refers to certain rights granted to the sponsoring Federal agencies under the Bayh-Dole Act, 35 U.S.C. § 203 (2006), to take certain ac- tions, including granting licenses to third parties to ensure public benefits from the dissemination and use of the results of federally sponsored research in circum- stances in which the original contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the product of that research. The general purpose of these rights is to ensure the expenditure of Federal research funds in accordance with the policies and objec- tives of the Bayh-Dole Act. SECTION 3. DEFINITIONS .01Basic research, for purposes of § 141 of the Code, means any original investigation for the advancement of sci- entific knowledge not having a specific commercial objective. For example, prod- uct testing supporting the trade or business of a specific nongovernmental person is not treated as basic research. 2007–29 I.R.B.108July 16, 2007 .02Qualified usermeans any State or local governmental unit as defined in § 1.103–1 or any instrumentality thereof. The term also includes a § 501(c)(3) or- ganization if the financed property is not used in an unrelated trade or business under § 513(a) of the Code. The term does not include the United States or any agency or instrumentality thereof. .03Sponsormeans any person, other than a qualified user, that supports or spon- sors research under a contract. SECTION 4. CHANGES This revenue procedure modifies and supersedes Rev. Proc. 97–14 by making changes that are described generally as fol- lows: .01 Section 6.03 of this revenue pro- cedure modifies the operating guidelines on cooperative research agreements to include agreements regarding industry or federally sponsored research with either a single sponsor or multiple sponsors. .02 Section 6.04 of this revenue pro- cedure provides special rules for applying the revised operating guidelines under sec- tion 6.03 of this revenue procedure to fed- erally sponsored research. These special rules provide that the rights of the Federal Government and its agencies mandated by the Bayh-Dole Act will not cause research agreements to fail to meet the requirements of section 6.03, upon satisfaction of the re- quirements of section 6.04 of this revenue procedure. Thus, under the stated condi- tions, such rights themselves will not re- sult in private business use by the Fed- eral Government or its agencies of prop- erty used in research performed under re- search agreements. These special rules do not address the use by third parties that actually receive more than non-exclusive, royalty-free licenses as the result of the ex- ercise by a sponsoring Federal agency of its rights under the Bayh-Dole Act, such as its march-in rights. SECTION 5. SCOPE This revenue procedure applies when, under a research agreement, a sponsor uses property financed with proceeds of an is- sue of State or local bonds subject to § 141 or § 145(a)(2)(B) of the Code. SECTION 6. OPERATING GUIDELINES FOR RESEARCH AGREEMENTS .01In general. If a research agree- ment is described in either section 6.02 or 6.03 of this revenue procedure, the re- search agreement itself does not result in private business use. In applying the op- erating guidelines under section 6.03 of this revenue procedure to federally spon- sored research, the special rules under sec- tion 6.04 of this revenue procedure (re- garding the effect of the rights of the Fed- eral Government and its agencies under the Bayh-Dole Act) apply. .02Corporate-sponsored research.A research agreement relating to property used for basic research supported or spon- sored by a sponsor is described in this section 6.02 if any license or other use of resulting technology by the sponsor is permitted only on the same terms as the recipient would permit that use by any unrelated, non-sponsoring party (that is, the sponsor must pay a competitive price for its use), and the price paid for that use must be determined at the time the license or other resulting technology is available for use. Although the recipient need not permit persons other than the sponsor to use any license or other resulting technol- ogy, the price paid by the sponsor must be no less than the price that would be paid by any non-sponsoring party for those same rights. .03Industry or federally-sponsored re- search agreements. A research agreement relating to property used pursuant to an in- dustry or federally-sponsored research ar- rangement is described in this section 6.03 if the following requirements are met, tak- ing into account the special rules set forth in section 6.04 of this revenue procedure in the case of federally sponsored research — (1) A single sponsor agrees, or multi- ple sponsors agree, to fund governmentally performed basic research; (2) The qualified user determines the research to be performed and the manner in which it is to be performed (for example, selection of the personnel to perform the research); (3) Title to any patent or other prod- uct incidentally resulting from the basic re- search lies exclusively with the qualified user; and (4) The sponsor or sponsors are enti- tled to no more than a nonexclusive, roy- alty-free license to use the product of any of that research. .04Federal Government rights under the Bayh-Dole Act. In applying the op- erating guidelines on industry and feder- ally-sponsored research agreements under section 6.03 of this revenue procedure to federally sponsored research, the rights of the Federal Government and its agencies mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the requirements of section 6.03, provided that the requirements of sections 6.03(2), and (3) are met, and the license granted to any party other than the qualified user to use the product of the research is no more than a nonexclusive, royalty-free li- cense. Thus, to illustrate, the existence of march-in rights or other special rights of the Federal Government or the spon- soring Federal agency mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the requirements of section 6.03 of this revenue procedure, provided that the qualified user determines the subject and manner of the research in accordance with section 6.03(2), the qualified user retains exclusive title to any patent or other product of the research in accordance with section 6.03(3), and the nature of any license granted to the Fed- eral Government or the sponsoring Federal agency (or to any third party nongovern- mental person) to use the product of the research is no more than a nonexclusive, royalty-free license. SECTION 7. EFFECT ON OTHER DOCUMENTS Rev. Proc. 97–14 is modified and su- perseded. SECTION 8. EFFECTIVE DATE This revenue procedure is effective for any research agreement entered into, ma- terially modified, or extended on or after June 26, 2007. In addition, an issuer may apply this revenue procedure to any re- search agreement entered into prior to June 26, 2007. July 16, 20071092007–29 I.R.B. SECTION 9. DRAFTING INFORMATION The principal authors of this rev- enue procedure are Vicky Tsilas and Johanna Som de Cerff of the Office of Associate Chief Counsel (Financial In- stitutions & Products). For further infor- mation regarding this revenue procedure, contact Johanna Som de Cerff at (202) 622–3980 (not a toll-free call). 26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part I, §§ 167, 168, 446, 481; 1.446–1, 1.481–1.) Rev. Proc. 2007–48 SECTION 1. PURPOSE This revenue procedure provides a safe harbor method of accounting to treat rotable spare parts as depreciable assets in accordance with Rev. Rul. 2003–37, 2003–1 C.B. 717, and provides proce- dures for taxpayers to obtain the automatic consent of the Commissioner of Inter- nal Revenue to change to the safe harbor method of accounting. SECTION 2. BACKGROUND .01InbothHewlett-Packard Co.. v. United States, 71 F.3d 398 (Fed. Cir. 1995),rev’g Apollo Computer, Inc. v. United States, 32 Fed. Cl. 334 (1994), andHoneywell, Inc. v. Commissioner, T.C. Memo. 1992–453,aff’d per curiam, 27 F.3d 571 (8 th Cir. 1994), the courts held that the taxpayers properly treated their pools of rotable spare parts as de- preciable assets, rather than as inventory. The taxpayers inHewlett-Packardand Honeywellwere engaged in the trade or business of manufacturing computers and computer parts, and also in the business of repairing and servicing computers pur- chased or leased by their customers. Most of the taxpayers’ computer maintenance operations were conducted pursuant to standardized maintenance agreements that obligated the taxpayers to provide all parts and labor, product upgrades, preventive maintenance, and telephone assistance necessary to keep a customer’s computer operational for the duration of the con- tract (usually one year) in exchange for a predetermined fee. In conducting their computer maintenance operations, the taxpayers sent repair technicians to a cus- tomer’s location to diagnose and repair the customer’s computer. The taxpayers’ repair technicians used a supply of rotable spare parts to diagnose problems in a customer’s equipment, and then would exchange a working part for any mal- functioning part. The malfunctioning part removed from the customer’s equipment would then be repaired and placed in the taxpayers’ rotable spare parts pools for continued use in the maintenance opera- tion. The taxpayers followed this practice of exchanging their rotable spare parts for malfunctioning parts in a customer’s computer to avoid rendering a customer’s computer inoperative while the original part was being repaired. The parts in the taxpayers’ rotable spare parts pools were obtained from the taxpayers’ manufacturing facilities. However, the taxpayers operated their computer maintenance operations sepa- rate from their manufacturing operations and at all times the rotable spare parts were physically segregatedfrom the taxpayers’ regular manufacturing inventories. .02 In Rev. Rul. 2003–37, the Inter- nal Revenue Service announced that it will follow the judgments inHewlett-Packard andHoneywell, and that a taxpayer may treat rotable spare parts as depreciable as- sets, provided the taxpayer’s facts are sub- stantially similar to the facts in those cases. .03 The Service and Department of the Treasury are aware that the treatment of rotable spare parts as depreciable assets has continued to be the subject of contro- versy in situations when a taxpayer, as part of its maintenance operations, sells rotable spare parts from the taxpayer’s pool of rotable spare parts that are treated as de- preciable assets. For reasons of admin- istrative convenience, and to reduce fur- ther controversy, if a taxpayer within the scope of this revenue procedure maintains one or more pools of rotable spare parts that it treats as depreciable assets and sells rotable spare parts from these pools, the Service will not challenge the taxpayer’s treatment of the pools of rotable spare parts as depreciable assets for a particular tax- able year if, for that year, the taxpayer uses the method of accounting provided in sec- tion 4 of this revenue procedure. .04 Section 167(a) of the Internal Rev- enue Code provides a depreciation al- lowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business. The depreciation deduction provided by § 167(a) for tangi- ble property placed inservice after 1986 generally is determined under § 168. De- preciation allowances under § 168 are determined using either: (1) the general depreciation system (GDS) in § 168(a); or (2) the alternative depreciation system (ADS) in § 168(g). Under either depreci- ation system, the depreciation deduction is computed by using a prescribed de- preciation method, recovery period, and convention. For purposes of either GDS or ADS, the applicable recovery period is determined by reference to class life or by statute. .05 Rev. Proc. 87–56, 1987–2 C.B. 674, as clarified and modified by Rev. Proc. 88–22, 1988–1 C.B. 785, sets forth the class lives of depreciable tangible property that are necessary to determine the recovery period of that property under § 168. The revenue procedure establishes two broad categories of depreciable assets: (1) asset classes 00.11 through 00.4 that consist of specific assets used in all busi- ness activities; and (2) asset classes 01.1 through 80.0 that consist of assets used in specific business activities. .06 Pursuant to § 167(c), the basis on which exhaustion, wear and tear, and ob- solescence are to be allowed in respect of any property generally is the adjusted basis provided in § 1011 for the purpose of determining the gain on the sale or other disposition of such property. See also § 1.168(b)–1(a)(3) and (a)(4) of the Income Tax Regulations for the defini- tions of unadjusted depreciable basis and adjusted depreciable basis, respectively, for purposes of § 168. .07 Under § 446(b), the Commissioner has broad authority to determine whether a method of accounting clearly reflects in- come. Section 1.446–1(c)(2)(ii) provides that the Commissioner may authorize a taxpayer to adopt or change to a permis- sible method of accounting although the method is not specifically permitted if, in the opinion of the Commissioner, that method clearly reflects income. 2007–29 I.R.B.110July 16, 2007 .08 Section 446(e) and § 1.446– 1(e)(2)(i) state that, except as otherwise provided, a taxpayer must secure the con- sent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions neces- sary to obtain the Commissioner’s consent to effect the change in method of account- ing and to prevent amounts from being duplicated or omitted. The terms and con- ditions the Commissioner may prescribe include the year of change, whether the change is to be made with a § 481(a) adjustment or on a cut-off basis, and the § 481(a) adjustment period. .09 Rev. Proc. 2002–9, 2002–1 C.B. 327 (as modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, mod- ified and clarified by Announcement 2002–17, 2002–1 C.B. 561, and ampli- fied, clarified, and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432), provides pro- cedures by which a taxpayer may obtain automatic consent to change to a method of accounting described in the Appendix of Rev. Proc. 2002–9. .10 Section 481(a) requires adjust- ments necessary to prevent amounts from being duplicated or omitted by reason of a change in method of accounting. SECTION 3. SCOPE This revenue procedure applies to a tax- payer that — (1) repairs customer-owned (or cus- tomer-leased) equipment under warranty or maintenance agreements that are pro- vided to the customer for either no charge or a predetermined fee that does not change during the term of the agreement (regardless of the taxpayer’s costs to com- ply with the agreement); (2) is obligated under the warranty or maintenance agreements to repair the cus- tomer’s equipment (including all parts and labor related to the repair) for either no charge or a nominal service fee that is un- related to the actual cost of parts and labor provided; (3) maintains a pool or pools of spare parts that are used primarily in the tax- payer’s maintenance operation of repair- ing customer-owned (or customer-leased) equipment under warranty or maintenance agreements, exchanges the spare parts for defective parts in the customer-owned (or customer-leased) equipment, and gener- ally repairs and reuses the defective parts in its pool of spare parts (the “rotable spare parts”); and (4) has a depreciable interest in the rotable spare parts and has placed in ser- vice the rotable spare parts after 1986. SECTION 4. SAFE HARBOR METHOD OF ACCOUNTING FOR ROTABLE SPARE PARTS .01In General. This section 4 describes a safe harbor method of accounting for rotable spare parts. A taxpayer is eligible to use the safe harbor method of account- inginanytaxableyearinwhichthetax- payer — (a) is within the scope of section 3 of this revenue procedure; and (b) has gross sales (less returns) of rotable spare parts from the taxpayer’s maintenance operation that do not exceed 10 percent of the taxpayer’s total gross revenues (less returns) from its mainte- nance operation for the taxable year. .02Description of Safe Harbor Method of Accounting. A taxpayer using the safe harbor method of accounting for rotable spare parts must — (1) capitalize the cost of the rotable spare parts under § 263(a) and depreciate these parts under § 168 in accordance with section 4.03 of this revenue procedure; (2) establish one or more pools for the rotable spare parts in accordance with sec- tion 4.04 of this revenue procedure; (3) identify the disposed rotable spare parts in accordance with section 4.05 of this revenue procedure; and (4) determine the depreciable basis of the rotable spare parts for depreciation pur- poses in accordance with § 167(c), § 1011, and § 1.168(b)–1(a)(3) and (a)(4). .03Depreciation Allowable. (1)In general. For purposes of deter- mining the depreciation allowable for the rotable spare parts under the safe harbor method of accounting described in section 4.02 of this revenue procedure, the appli- cable depreciation method for the rotable spare parts is determined under § 168(b)(1) or (2), as applicable, unless either (a) the taxpayer made a timely valid election un- der § 168(b)(5) to use the straight line method of depreciation for the class of property (as set forth in § 168(e)) in which the rotable spare parts are included, or (b) the rotable spare parts are required to be depreciated under the alternative de- preciation system in § 168(g). Rotable spare parts required to be depreciated un- der the alternative depreciation system in- clude rotable spare parts in a class of prop- erty (as set forth in § 168(e)) for which the taxpayer made a timely valid election un- der § 168(g)(7). In addition, the applicable recovery period for the rotable spare parts is determined under § 168(c) or 168(g), as applicable, by including the rotable spare parts in the following asset class of Rev. Proc. 87–56: (a) the asset class in Rev. Proc. 87–56 applicable to the taxpayer’s man- ufacturing activity if the taxpayer, under warranty or maintenance agreements, repairs only customer-owned (or cus- tomer-leased) equipment that is manufac- turedonlybythetaxpayer;or (b) asset class 57.0,Distributive Trades or Services, if: (i) the taxpayer, un- der warranty or maintenance agreements, repairs both customer-owned (or cus- tomer-leased) equipment that is manufac- tured by the taxpayer and customer-owned (or customer-leased) equipment that is manufactured by others; (ii) the taxpayer is not a manufacturer of the type of cus- tomer-owned (or customer-leased) equip- ment that is being repaired; or (iii) the taxpayer (including a taxpayer described in section 4.03(1)(a) of this revenue pro- cedure) charges the customer a nominal service fee (that is unrelated to the actual cost of parts and labor provided) to re- pair customer-owned (or customer-leased) equipment under warranty or maintenance agreements. (2)Additional first year depreciation deduction. In determining the amount of the § 481(a) adjustment as described in section 5.04 of this revenue procedure, the additional first year depreciation deduc- tion allowable under § 168(k), 1400L(b), or 1400N(d) is taken into account for any qualifying rotable spare part. How- ever, the deemed placed-in-service date referred to in section 5.04(2)(b) of this rev- enue procedure for the rotable spare part is not the acquisition date of the rotable spare part for purposes of the acquisition date requirement in § 168(k), 1400L(b), or 1400N(d). July 16, 20071112007–29 I.R.B. .04Establishment of Pools. (1)In general. Under the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must establish one or more pools for the rotable spare parts. Each pool must in- clude only the rotable spare parts that are placed in service by the taxpayer in the same taxable year and have the same: (a) asset class under Rev. Proc. 87–56, (b) applicable depreciation method, (c) appli- cable recovery period, and (d) applicable convention. Additionally, rotable spare parts subject to the mid-quarter conven- tion may only be grouped into a pool with rotable spare parts that are placed in ser- vice in the same quarter of the taxable year. (2)Generalassetaccountelection.If a taxpayer within the scope of this rev- enue procedure is changing the treatment of its rotable spare parts to the safe harbor method of accounting described in section 4.02 of this revenue procedure, the tax- payer also may elect to establish general asset accounts for the rotable spare parts beginning in the year of change, provided the terms and conditions in section 5.02(5) of this revenue procedure are satisfied be- ginning in the year of change. .05Dispositions. (1)In general. Under the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must use a method of accounting provided in this section 4.05 for identifying the dis- posed rotable spare parts. Any method other than one provided in this section 4.05 (including the “net additions” method) is not a permissible method of accounting for dispositions. (2)Permissible methods of identifying disposed rotable spare parts. For purposes of the safe harbor method of accounting described in section 4.02 of this revenue procedure, a taxpayer must use one of the following methods of accounting to iden- tify its disposed rotable spare parts: (a) Specific identification of each disposed rotable spare part; or (b) A first-in, first-out method of accounting if, in the case of rotable spare parts that are mass assets, the total rotable spare parts dispositions during a particular taxable year are readily determined from a taxpayer’s records but it is impractica- ble for the taxpayer to maintain records from which the taxpayer can determine the particular taxable year in which the dis- posed rotable spare parts were placed in service by the taxpayer. A taxpayer using the first-in, first-out method of accounting under this section 4.05(2)(b) must identify the rotable spare parts disposed of in a tax- able year from the pool with the earliest placed-in-service year existing at the be- ginning of the taxable year of the disposi- tion. For purposes of this paragraph, mass assets are a mass or group of individual items of depreciable property — (i) that are not necessarily homogeneous; (ii) each of which is minor in value relative to the total value of the mass or group; (iii) numerous in quantity; (iv) usually accounted for only on a total dollar or quantity basis; (v) with respect to which sep- arate identification is impracticable; and, (vi) that are placed in service by the taxpayer in the same taxable year. SECTION 5. CHANGES IN METHOD OF ACCOUNTING .01In General. Any change in a tax- payer’s treatment of rotable spare parts pursuant to this revenue procedure is a change in method ofaccounting to which § 446 and (except as otherwise provided in this section 5) § 481, and the regulations thereunder, apply. This section 5 applies to a taxpayer within the scope of this rev- enue procedure that — (1) currently does not capitalize and depreciate the cost of its rotable spare parts and wants to changetothesafeharbor method of accounting described in section 4.02 of this revenue procedure; (2) currently treats its rotable spare parts in accordance with sections 4.02(1), (3), and (4) of this revenue procedure and wants to establish rotable spare parts pools in accordance with section 4.04(1) of this revenue procedure; (3) currently treats its rotable spare parts in accordance with sections 4.02(1), (2), and (4) of this revenue procedure and wants to change to a method of account- ing described in section 4.05(2) of this revenue procedure for identifying the dis- posed rotable spare parts; or (4) currently treats its rotable spare parts in accordance with sections 4.02(1) and (4) of this revenue procedure and wants to establish rotable spare parts pools in accordance with section 4.04(1) of this revenue procedure and change to a method of accounting described in section 4.05(2) of this revenue procedure for identifying the disposed rotable spare parts. .02Automatic Change. A taxpayer within the scope of this revenue procedure is granted the consent of the Commis- sioner to make a change in method of accounting described in section 5.01 of this revenue procedure provided that the taxpayer follows the automatic change in method of accounting provisions in Rev. Proc. 2002–9 (or any successor), with the following modifications: (1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to a taxpayer that wants to make the change in method of accounting for its first or second taxable year ending on or after December 31, 2006, provided the tax- payer’s method of accounting for rotable spare parts is not an issue under consider- ation for taxable years under examination, within the meaning of section 3.09 of Rev. Proc. 2002–9, at the time the Form 3115, Application for Change in Accounting Method, is filed with the national office. (2) For purposes of completing line 1a of Form 3115, the designated automatic accounting method change number for the changes in method ofaccounting provided in section 5.01 of this revenue procedure is No. 109. (3) The taxpayer must compute any applicable § 481(a) adjustment in accor- dance with section 5.04 of this revenue procedure. (4) The taxpayer must own the rotable spare parts as of the beginning of the year of change and must determine the adjusted depreciable basis of the rotable spare parts as of the beginning of the year of change in accordance with § 167(c), § 1011(a), and § 1.168(b)–1(a)(3) and (a)(4). The reduc- tions required by § 1016(a)(2) for the de- preciation allowable for the rotable spare parts must be determined under the method of accounting for depreciation allowable under section 4.03 of this revenue proce- dure for all open and closed taxable years prior to the year of change. (5) If a taxpayer described in section 4.04(2) of this revenue procedure elects to establish general asset accounts for the rotable spare parts, the taxpayer must meet all of the following requirements begin- ning in the year of change: 2007–29 I.R.B.112July 16, 2007 (a) The taxpayer must consent to, and agree to apply, all of the provi- sions of § 1.168(i)–1 to the rotable spare parts included in the general asset ac- counts, beginning with the year of change. Thus, pursuant to § 1.168(i)–1(k)(1), the establishment of general asset accounts beginning with the year of change is ir- revocable and will be binding on the taxpayer for computing taxable income for the year of change and for all subse- quent taxable years, except as provided in § 1.168(i)–1(c)(1)(ii)(A), (e)(3), (g), or (h)(1). (b) The taxpayer must use a method of accounting described in sec- tion 4.05(2) of this revenue procedure for identifying the disposed rotable spare parts for purposes of applying § 1.168(i)–1(i). (c) The taxpayer must group the rotable spare parts into one or more general asset accounts in accordance with the rules in § 1.168(i)–1(c) and each general asset account must include a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the general asset account. The beginning balance for the unadjusted depreciable basis of each general asset account is equal to the sum of the unadjusted depreciable bases as of the beginning of the year of change for all rotable spare parts included in that general asset account. The beginning balance of the depreciation reserve of each general as- set account is equal to the portion of the ac- cumulated depreciation component of the net § 481(a) adjustment that is allocable to the rotable spare parts included in that gen- eral asset account. .03Changes Made on a Cut-off Method. A taxpayer making a change in method of accounting described in section 5.01(2), (3), or (4) of this revenue procedure must make the change on a cut-off method. Thus, the new method of accounting applies to rotable spare parts placed in service, or disposed of, by the taxpayer beginning in the year of change. .04ChangesMadeUsinga§481(a) Adjustment. (1)In general. A taxpayer making a change in method of accounting under section 5.01(1) of this revenue procedure to the safe harbor method of accounting must make the change using a § 481(a) adjustment. As required by the Form 3115, the taxpayer must attach a summary of the computation and an explanation of the methodology used to determine the § 481(a) adjustment. To use the safe har- bor method of accounting, the taxpayer also must include in the required attach- ment the amount of the taxpayer’s total gross sales (less returns)ofrotablespare parts and gross revenues (less returns) from the taxpayer’s maintenance opera- tion for the year of change and every year of the qualifying period used to compute the § 481(a) adjustment. (2)Computation of § 481(a) Adjust- ment. (a) In computing the § 481(a) adjustment, the taxpayer must use the adjusted depreciable basis of the rotable spare parts computed under the safe har- bor method, as of the first day of the year of change taking into account the placed-in-service date provided for in sub- paragraph (2)(b) of this section 5.04 and the qualifying period described in sub- paragraph (3) of this section 5.04. (b) Any rotable spare parts that were: (i) placed in service by the taxpayer after 1986 and in a taxable year prior to the earliest taxable year of the qualifying pe- riod, and (ii) owned by the taxpayer as of the beginning of the earliest taxable year of the qualifying period, must be treated as placed in service by the taxpayer in the earliest taxable year of the qualifying pe- riod. A taxpayer that does not have the books and records to determine whether it meets the requirements of section 4.01 of this revenue procedure in every year in which the rotable spare parts on hand as of the beginning of the year of change were placed in service and in every subsequent year prior to the year of change, must com- pute the § 481(a) adjustment using a qual- ifying period that can be established based onitsbooksandrecords. (3)Qualifying period. For purposes of this section 5.04, a “qualifying period” consists of the taxableyear, or consecutive taxable years, immediately preceding the year of change during which the taxpayer can establish that it meets the requirements of section 4.01 of this revenue procedure. .05Nonautomatic Changes.Ifatax- payer is not eligible to change to the safe harbor method of accounting provided in this revenue procedure, the taxpayer may request to change its method of account- ing for treating rotable spare parts by fil- ing a Form 3115 with the Commissioner in accordance with the requirements of § 1.446–1(e)(3)(i) and Rev. Proc. 97–27, 1997–1 C.B. 680 (as modified and ampli- fied by Rev. Proc. 2002–19, 2002–1 C.B. 696, and amplified and clarified by Rev. Proc. 2002–54, 2002–2 C.B. 432). .06Requirement to Change From the Safe Harbor Method. A taxpayer that changes to the safe harbor method un- der this revenue procedure and subse- quently fails to meet the requirements of section 4.01 of this revenue procedure must change its method of accounting for rotable spare parts to an appropri- ate inventory method of accounting for the first taxable year in which the tax- payer becomes ineligible to use the safe harbor method of accounting for rotable spare parts. A taxpayer that is required to change its method of accounting under this section 5.06 must file a Form 3115 in accordance with the automatic change in method of accounting provisions of Rev. Proc. 2002–9 (or any successor), with the following modifications: (1) the scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply; and (2) the designated automatic account- ing method change number for changes in method of accounting from the safe har- bor method of accounting made pursuant to this section 5.06 is No. 110. SECTION 6. EFFECT ON OTHER DOCUMENTS .01 Rev. Proc. 2002–9 is modified and amplified to include the accounting method changes described in this revenue procedure in section 3 of the APPENDIX. .02 Section 2.01(1)(d)(xiii)(A) of the APPENDIX of Rev. Proc. 2002–9 (as modified by Rev. Proc. 2004–11, 2004–1 C.B. 311) is modified to read as follows: (A) a change in inventory costs (for example, when property is reclassified from inventory property to depreciable property, or vice versa) (but see section 3.02 of this APPENDIX for making a change in method of accounting from in- ventory property to depreciable property for unrecoverable line pack gas or unre- coverable cushion gas, and Rev. Proc. 2007–48, 2007–29 I.R.B. 110, for making achangeinmethodofaccountingfrom inventory property to depreciable property for rotable spare parts); July 16, 20071132007–29 I.R.B. SECTION 7. EFFECTIVE DATE This revenue procedure is effective for taxable years ending on or after December 31, 2006. The Service will not challenge a taxpayer’s use of the safe harbor method of accounting described in section 4.02 of this revenue procedure in an earlier tax- able year if the taxpayer, for that taxable year, meets the requirements of section 4.01 of this revenue procedure. Moreover, if a taxpayer currently uses the safe harbor method of accounting described in section 4.02 of this revenue procedure and the use of such method is an issue under consider- ation (within the meaning of section 3.09 of Rev. Proc. 2002–9) in examination, be- fore an appeals office, or before the U.S. Tax Court and the taxpayer meets the re- quirements of section 4.01 of this revenue procedure for the taxable years under ex- amination, before an appeals office, or be- fore the U.S. Tax Court, the issue will not be further pursued. SECTION 8. PAPERWORK REDUCTION ACT The collection of information con- tained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accor- dance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–2070. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information un- less the collection of information displays a valid OMB control number. The collection of information in this revenue procedure is in section 5.04(1). This information is required to determine whether the taxpayer qualifies to use the safe harbor method of accounting. The collection of information is required to obtain a benefit. The likely respondents are business or other for-profit institu- tions. The estimated total annual reporting and/or recordkeeping burden is 75 hours. The estimated annual frequency of re- sponses is 300. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax information are confidential, as required by 26 U.S.C. 6103. DRAFTING INFORMATION The principal author of this revenue procedure is Gwen Turner of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, con- tact Ms. Turner at (202) 622–5020 (not a toll-free call). For further information regarding the method of computing depre- ciation for rotable spare parts, the estab- lishment of pools or general asset accounts for rotable spare parts, or the method of identifying the disposed rotable spare parts, contact Douglas Kim of the Office of Associate Chief Counsel (Income Tax and Accounting) at (202) 622–4930 (not a toll-free call). 2007–29 I.R.B.114July 16, 2007 Part IV. Items of General Interest Proposed Form 1118, Foreign Tax Credit — Corporations Announcement 2007–62 The Internal Revenue Service (IRS) announces that it is requesting comments from the public on proposed revisions to Form 1118,“Foreign Tax Credit — Corporations.”This Form is used by U.S. corporate taxpayers to compute the foreign tax credit for certain taxes paid or accrued to foreign countries or U.S. possessions. Form 1118 is being revised as a result of amendments to section 904 of the Internal Revenue Code (Code) relating to the num- ber of separate foreigntax credit limitation categories and the effect of overall domes- tic losses. Attached to this announcement is a copy of the proposed form, with respect to which the IRS is requesting comments from the public. The proposed revisions have also been posted on the IRS website, athttp://www.irs.gov/taxpros/ lists/0,,id=97782,00.html. BACKGROUND Section 404 of the American Jobs Cre- ation Act of 2004, Public Law 108–357, 118 Stat. 1418 (October 22, 2004) (AJCA) generally reduced the number of separate categories under section 904(d) from eight to two, effective for tax years beginning after December 31, 2006. This provision does not, however, affect the separate com- putation of foreign tax credit limitations under special provisions of the Code relat- ing to, for example, treaty-based sourcing rules or specified countries under section 901(j). Section 402(a) of the AJCA added new section 904(g), which provides for the recharacterization of U.S. source income as foreign source income in cases in which a taxpayer’s foreign tax credit limitation has been reduced in an earlier year as a re- sult of an overall domestic loss. The new section 904(g) provides parity in the treat- ment of overall foreign losses and overall domestic losses in order to mitigate the double taxation of foreign source income. PROPOSED REVISIONS TO FORM 1118 Form 1118 has generally been revised to eliminate information reporting regard- ing section 904(d) separate categories that have been eliminated by the AJCA. In ad- dition, several other revisions have been made to the Form to reflect the overall domestic loss provisions of new section 904(g). For example, a new column has been added to Schedule A to more clearly reflect deductions for NOL carryovers and several other specific revisions have been made to Schedule J. A new column has been added to Schedule J for U.S. source income or loss. This column is intended to be helpful in determining U.S. income subject to rechar- acterization from the recapture of overall domestic losses and otherwise tracking the balances of overall domestic losses. In Part I, the step for allocating current year U.S. source losses on line 10 of the current Schedule J is moved to line 5 and renamed “allocation of domestic losses.” Placing this step before the recapture of overall foreign losses is a departure from the ordering rules set forth in Notice 89–3, 1989–1 C.B. 623. A new step has also been added to Part I on line 10 for the re- capture of overall domestic losses now re- quired under the new section 904(g). The instructions to Schedule J will clarify that the recapture amount is determined based on the U.S. income subtotal from line 6, which does not take into account the effect of any recapture of overall foreign losses. A new Part IV has been added to Sched- ule J to track additions and reductions to overall domestic loss account balances that are needed in applying the provisions of new section 904(g). REQUEST FOR PUBLIC COMMENT The IRS requests comments on the pro- posed revisions to the current Form 1118. The IRS is particularly interested in receiv- ing comments on the ordering rules as re- flected on the proposed Schedule J. Such comments will be useful in the drafting of proposed regulations under section 904(f) and (g), which will include detailed order- ing rules as well as other guidance under these provisions. Written comments should be sent to: Tax Products Coordinating Com- mittee, Internal Revenue Service, SE:W:CAR:MP:T, Room 6406, 1111 Con- stitution Avenue, N.W., Washington, D.C. 20224. Alternatively, comments may be e-mailed totfpmail@publish.no.irs.gov. Comments must be received by September 10, 2007. The principal author of this announce- ment is Jeffrey L. Parry of the Office of Associate Chief Counsel (International). However, other personnel from the Trea- sury Department and the IRS participated in its development. For further informa- tion regarding this announcement, contact Jeffrey L. Parry at (202) 622–3850 (not a toll-free call). July 16, 20071152007–29 I.R.B. 2007–29 I.R.B.116July 16, 2007 July 16, 20071172007–29 I.R.B. 2007–29 I.R.B.118July 16, 2007 July 16, 20071192007–29 I.R.B. 2007–29 I.R.B.120July 16, 2007 July 16, 20071212007–29 I.R.B. 2007–29 I.R.B.122July 16, 2007 July 16, 20071232007–29 I.R.B. 2007–29 I.R.B.124July 16, 2007 Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code Announcement 2007–64 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 July 16, 2007, and would end on the date the court first deter- mines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For indi- vidual contributors, the maximum deduc- tion protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in wholeorinpart,fortheactsoromissions of the organization that were the basis for revocation. South Carolina Benevolent Society, Inc. Columbia, SC Home Buyers Assistance Foundation, Inc. Woodstock, GA Angel Wings Cat Rescue and Sanctuary Kingston, KY Brian Lees Sports Spectrum Grand Rapids, MI July 16, 20071252007–29 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is be- ing made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the new ruling does nothing more than re- state the substance and situation of a previ- ously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published 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. 2007–29 I.R.B.iJuly 16, 2007 Numerical Finding List 1 Bulletins 2007–27 through 2007–29 Announcements: 2007-61, 2007-28 I.R.B.84 2007-62, 2007-29 I.R.B.115 2007-64, 2007-29 I.R.B.125 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 Proposed Regulations: REG-119097-05, 2007-28 I.R.B.74 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 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 Treasury Decisions: 9327, 2007-28 I.R.B.50 9328, 2007-27 I.R.B.1 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. July 16, 2007ii2007–29 I.R.B. Finding List of Current Actions on Previously Published Items 1 Bulletins 2007–27 through 2007–29 Notices: 2007-26 Modified by Notice 2007-56, 2007-27 I.R.B.15 Revenue Procedures: 97-14 Modified and superseded by Rev. Proc. 2007-47, 2007-29 I.R.B.108 2002-9 Modified and amplified by Rev. Proc. 2007-48, 2007-29 I.R.B.110 2005-16 Modified by Rev. Proc. 2007-44, 2007-28 I.R.B.54 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 2006-55 Superseded by Rev. Proc. 2007-43, 2007-27 I.R.B.26 Revenue Rulings: 92-17 Modified by Rev. Rul. 2007-42, 2007-28 I.R.B.44 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. 2007–29 I.R.B.iiiJuly 16, 2007 July 16, 20072007–29 I.R.B. 2007–29 I.R.B.July 16, 2007 July 16, 20072007–29 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
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