Internal Revenue Bulletin 2016-51 (PDF rendition): IRS Notices

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# INTERNAL REVENUE BULLETIN

IRS

## 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

### REG-125946-10, page 868.

These proposed regulations relate to the establishment of
dollar-value, last-in, first-out (LIFO) inventory pools by certain
taxpayers that use the inventory price index computation (IPIC)
pooling method. The proposed regulations provide rules re-
garding the proper pooling of manufactured or processed
goods and wholesale or retail (resale) goods.

### Rev. Rul. 2016-28, page 805.

Interest rates: underpayments and overpayments. The rates
for interest determined under section 6621 of the code for the
calendar quarter beginning January 1, 2017, will be 4 percent
for overpayments (3 percent in the case of a corporation), 4
percent for underpayments, and 6 percent for large corporate
underpayments. The rate of interest paid on the portion of a
corporate overpayment exceeding $10,000 will be 1.5 per-
cent.

### Notice 2016-69, page 832.

This notice provides that the IRS will not assert that cash
payments an employer makes to § 170(c) organizations (in
exchange for vacation, sick, or personal leave that its employ-
ees elect to forgo) constitute gross income or wages of the
employees under certain circumstances relating to Hurricane
Matthew.

### Notice 2016-75, page 832.

This notice provides guidance on section 45R of the Internal
Revenue Code (Code) for certain small employers that cannot
offer a qualified health plan (QHP) through a Small Business
Health Options Program (SHOP) Exchange because the em-
ployer's principal business address is in a county in which a
QHP through a SHOP Exchange will not be available for the
2016 calendar year (the counties, which are listed in the
notice, are all in Wisconsin). With respect to those employers,

Bulletin No. 2016-51
December 19, 2016

this notice provides transition relief allowing employers to
claim the credit by satisfying the pre-2014 rules.

### Notice 2016-76, page 834.

The notice provides phased-in the application of the section
871(m) dividend equivalent regulations that were finalized in
September of 2015. The notice provides that the section
871(m) regulations: (1) only apply to delta-one transactions in
calendar year 2017, and (2) will apply to non-delta-one trans-
actions beginning in calendar year 2018. The notice also
provides phased-in enforcement of the section 871(m) regula-
tions, including the qualified derivatives dealer rules.

## EMPLOYEE PLANS

### REG-107424-12, page 861.

These proposed regulations provide guidance relating to the
minimum present value requirements applicable to certain de-
fined benefit pension plans. The proposed regulations would
provide guidance on changes made by the Pension Protection
Act of 2006 and would provide other modifications to these
rules as well.

## ESTATE TAX

### T.D. 9797, page 819.

Final regulations that provide transition rules providing that
executors and other persons required to file or furnish a state-
ment under section 6035(a)(1) or (2) regarding the value of
property included in a decedent's gross estate for federal
estate tax purposes before June 30, 2016, need not have
done so until June 30, 2016. These final regulations are appli-
cable to executors and other persons who file federal estate
tax returns required by section 6018(a) or (b) after July 31,
2015.

## ADMINISTRATIVE

REG-102952-16, page 860.

The proposed regulations implement Congress's recent
changes to the paid preparer due diligence statute, expanding
the due diligence statute to include claims of the child tax
credit, the additional child tax credit, and/or the American
opportunity tax credit, and providing that the amount of the
penalty will be adjusted for inflation.

### Rev. Proc. 2016-58, page 839.

The revenue procedure sets forth the loss payment patterns
and discount factors for accident year 2016 for purposes of
§ 846 of the Internal Revenue Code.

### Rev. Proc. 2016-59, page 849.

This revenue procedure prescribes the salvage discount fac-
tors for the 2016 accident year. These factors must be used
to compute discounted estimated salvage recoverable under
§ 832 of the Internal Revenue Code.

### T.D. 9798, page 821.

This document contains the amendments to the regulations
that provide user fees for installment agreements. The amend-
ments affect taxpayers who wish to pay their liabilities through
installment agreements.

### T.D. 9799, page 827.

The final and temporary regulations implement Congress's
recent changes to the paid preparer due diligence statute,
expanding the due diligence statute to include claims of the
child tax credit, the additional child tax credit, and/or the
American opportunity tax credit, and providing that the amount
of the penalty will be adjusted for inflation.

## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the 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.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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 .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal 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, Legisla-
tion 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 part includes notices of proposed rulemakings, disbar-
ment and 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 contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

Section 6621 .- Determin-
ation of Rate of Interest

26 CFR 301.6621-1: Interest rate.

## Rev. Rul. 2016-28

Section 6621 of the Internal Revenue
Code establishes the interest rates on
overpayments and underpayments of tax.
Under section 6621(a)(1), the overpay-
ment rate is the sum of the federal short-
term rate plus 3 percentage points (2 per-
centage points in the case of a
corporation), except the rate for the por-
tion of a corporate overpayment of tax

exceeding $10,000 for a taxable period is
the sum of the federal short-term rate plus
0.5 of a percentage point. Under section
6621(a)(2), the underpayment rate is the
sum of the federal short-term rate plus 3
percentage points.

Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
"5 percentage points" for "3 percentage
points." See section 6621(c) and section
301.6621-3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and for
the rules for determining the applicable
date. Section 6621(c) and section
301.6621-3 are generally effective for pe-
riods after December 31, 1990.

Section 6621(b)(1) provides that the
Secretary will determine the federal short-
term rate for the first month in each cal-
endar quarter. Section 6621(b)(2)(A) pro-
vides that the federal short-term rate
determined under section 6621(b)(1) for

any month applies during the first calen-
dar quarter beginning after that month.
Section 6621(b)(3) provides that the fed-
eral short-term rate for any month is the
federal short-term rate determined during
that month by the Secretary in accordance
with section 1274(d), rounded to the near-
est full percent (or, if a multiple of 1/2 of
1 percent, the rate is increased to the next
highest full percent).

Notice 88-59, 1988-1 C.B. 546, an-
nounced that in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
pursuant to section 6622, is subject to
daily compounding.

The federal short-term rate determined
in accordance with section 1274(d) during
October 2016 is the rate published in Rev-
enue Ruling 2016-26, 2016-45 IRB 538,
to take effect beginning November 1,
2016. The federal short-term rate, rounded
to the nearest full percent, based on daily
compounding determined during the
month of October 2016 is 1 percent. Ac-
cordingly, an overpayment rate of 4 per-
cent (3 percent in the case of a corpora-
tion) and an underpayment rate of 4
percent are established for the calendar
quarter beginning January 1, 2017. The
overpayment rate for the portion of a cor-
porate overpayment exceeding $10,000
for the calendar quarter beginning January
1, 2017 is 1.5 percent. The underpayment
rate for large corporate underpayments for
the calendar quarter beginning January 1,
2017, is 6 percent. These rates apply to

amounts bearing interest during that cal-
endar quarter.

Sections 6654(a)(1) and 6655(a)(1)
provide that the underpayment rate estab-
lished under section 6621 applies in de-
termining the addition to tax under sec-
tions 6654 and 6655 for failure to pay
estimated tax for any taxable year. Thus,
the 4 percent rate also applies to estimated
tax underpayments for the first calendar
quarter in 2017. Pursuant to section
6621(b)(2)(B), in determining the addi-
tion to tax under section 6654 for any
taxable year for an individual, the federal
short-term rate that applies during the
third month following the taxable year
also applies during the first 15 days of the
4th month following the taxable year. In
addition, pursuant to section 6603(d)(4),
the rate of interest on section 6603 depos-
its is 1 percent for the first calendar quar-
ter in 2017.

Interest factors for daily compound in-
terest for annual rates of 1.5 percent, 3
percent, 4 percent and 6 percent are pub-
lished in Tables 8, 11, 13 and 17 of Rev.
Proc. 95-17, 1995-1 C.B. 562, 565, 567
and 571.

Annual interest rates to be com-
pounded daily pursuant to section 6622
that apply for prior periods are set forth in
the tables accompanying this revenue rul-
ing.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Sarah McLemore of the Office of
Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue ruling, contact Ms.
McLemore at (202) 317-6844 (not a toll-
free number).

### APPENDIX A

Days

365 Day Year

0.5% Compound Rate 184 Days

Factor

Days

Factor

Days

0.000013699

0.000863380

125

0.001713784

0.000027397

0.000877091

126

0.001727506

0.000041096

0.000890801

127

0.001741228

0.000054796

0.000904512

128

0.001754951

0.000068495

0.000918223

129

0.001768673

0.000082195

0.000931934

130

0.001782396

365 Day Year 0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000095894

0.000945646

131

0.001796119

0.000109594

0.000959357

132

0.001809843

0.000123294

0.000973069

133

0.001823566

0.000136995

0.000986781

134

0.001837290

0.000150695

0.001000493

135

0.001851013

0.000164396

0.001014206

136

0.001864737

0.000178097

0.001027918

137

0.001878462

0.000191798

0.001041631

138

0.001892186

0.000205499

0.001055344

139

0.001905910

0.000219201

0.001069057

140

0.001919635

0.000232902

0.001082770

141

0.001933360

0.000246604

0.001096484

142

0.001947085

0.000260306

0.001110197

143

0.001960811

0.000274008

0.001123911

144

0.001974536

0.000287711

0.001137625

145

0.001988262

0.000301413

0.001151339

146

0.002001988

0.000315116

0.001165054

147

0.002015714

0.000328819

0.001178768

148

0.002029440

0.000342522

0.001192483

149

0.002043166

0.000356225

0.001206198

150

0.002056893

0.000369929

0.001219913

151

0.002070620

0.000383633

0.001233629

152

0.002084347

0.000397336

0.001247344

153

0.002098074

0.000411041

0.001261060

154

0.002111801

0.000424745

0.001274776

155

0.002125529

0.000438449

0.001288492

156

0.002139257

0.000452154

0.001302208

157

0.002152985

0.000465859

0.001315925

158

0.002166713

0.000479564

0.001329641

159

0.002180441

0.000493269

0.001343358

160

0.002194169

0.000506974

0.001357075

161

0.002207898

0.000520680

100

0.001370792

162

0.002221627

0.000534386

101

0.001384510

163

0.002235356

0.000548092

102

0.001398227

164

0.002249085

0.000561798

103

0.001411945

165

0.002262815

0.000575504

104

0.001425663

166

0.002276544

0.000589211

105

0.001439381

167

0.002290274

0.000602917

106

0.001453100

168

0.002304004

0.000616624

107

0.001466818

169

0.002317734

0.000630331

108

0.001480537

170

0.002331465

0.000644039

109

0.001494256

171

0.002345195

0.000657746

110

0.001507975

172

0.002358926

0.000671454

111

0.001521694

173

0.002372657

0.000685161

112

0.001535414

174

0.002386388

0.000698869

113

0.001549133

175

0.002400120

### 365 Day Year

0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000712578

114

0.001562853

176

0.002413851

0.000726286

115

0.001576573

177

0.002427583

0.000739995

116

0.001590293

178

0.002441315

0.000753703

117

0.001604014

179

0.002455047

0.000767412

118

0.001617734

180

0.002468779

0.000781121

119

0.001631455

181

0.002482511

0.000794831

120

0.001645176

182

0.002496244

0.000808540

121

0.001658897

183

0.002509977

0.000822250

122

0.001672619

184

0.002523710

0.000835960

123

0.001686340

0.000849670

124

0.001700062

Days

365 Day Year 0.5% Compound Rate 184 Days Factor Days Factor Days Factor

0.000013661

0.000861020

125

0.001709097

0.000027323

0.000874693

126

0.001722782

0.000040984

0.000888366

127

0.001736467

0.000054646

0.000902040

128

0.001750152

0.000068308

0.000915713

129

0.001763837

0.000081970

0.000929387

130

0.001777522

0.000095632

0.000943061

131

0.001791208

0.000109295

0.000956735

132

0.001804893

0.000122958

0.000970409

133

0.001818579

0.000136620

0.000984084

134

0.001832265

0.000150283

0.000997758

135

0.001845951

0.000163947

0.001011433

136

0.001859638

0.000177610

0.001025108

137

0.001873324

0.000191274

0.001038783

138

0.001887011

0.000204938

0.001052459

139

0.001900698

0.000218602

0.001066134

140

0.001914385

0.000232266

0.001079810

141

0.001928073

0.000245930

0.001093486

142

0.001941760

0.000259595

0.001107162

143

0.001955448

0.000273260

0.001120839

144

0.001969136

0.000286924

0.001134515

145

0.001982824

0.000300590

0.001148192

146

0.001996512

0.000314255

0.001161869

147

0.002010201

0.000327920

0.001175546

148

0.002023889

0.000341586

0.001189223

149

0.002037578

0.000355252

0.001202900

150

0.002051267

0.000368918

89 0.001216578

151

0.002064957

0.000382584

0.001230256

152

0.002078646

TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS

365 Day Year

Days

0.5% Compound Rate 184 Days

Factor

Days

Factor

Days

0.000396251

0.001243934

153

0.002092336

0.000409917

0.001257612

154

0.002106025

0.000423584

0.001271291

155

0.002119715

0.000437251

0.001284969

156

0.002133405

0.000450918

0.001298648

157

0.002147096

0.000464586

0.001312327

158

0.002160786

0.000478253

0.001326006

159

0.002174477

0.000491921

0.001339685

160

0.002188168

0.000505589

0.001353365

161

0.002201859

0.000519257

100

0.001367044

162

0.002215550

0.000532925

101

0.001380724

163

0.002229242

0.000546594

102

0.001394404

164

0.002242933

0.000560262

103

0.001408085

165

0.002256625

0.000573931

104

0.001421765

166

0.002270317

0.000587600

105

0.001435446

167

0.002284010

0.000601269

106

0.001449127

168

0.002297702

0.000614939

107

0.001462808

169

0.002311395

0.000628608

108

0.001476489

170

0.002325087

0.000642278

109

0.001490170

171

0.002338780

0.000655948

110

0.001503852

172

0.002352473

0.000669618

111

0.001517533

173

0.002366167

0.000683289

112

0.001531215

174

0.002379860

0.000696959

113

0.001544897

175

0.002393554

0.000710630

114

0.001558580

176

0.002407248

0.000724301

115

0.001572262

177

0.002420942

0.000737972

116

0.001585945

178

0.002434636

0.000751643

117

0.001599628

179

0.002448331

0.000765315

118

0.001613311

180

0.002462025

0.000778986

119

0.001626994

181

0.002475720

0.000792658

120

0.001640678

182

0.002489415

0.000806330

121

0.001654361

183

0.002503110

0.000820003

122

0.001668045

184

0.002516806

0.000833675

123

0.001681729

0.000847348

124

0.001695413

PERIOD

RATE

In 1995-1 C.B. DAILY RATE TABLE

Before Jul. 1, 1975

Table 2, pg. 557

Jul. 1, 1975-Jan. 31, 1976

Table 4, pg. 559

# TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

RATE

In 1995-1 C.B. DAILY RATE TABLE

Feb. 1, 1976-Jan. 31, 1978

Table 3, pg. 558

Feb. 1, 1978-Jan. 31, 1980

Table 2, pg. 557

Feb. 1, 1980-Jan. 31, 1982

12%

Table 5, pg. 560

Feb. 1, 1982-Dec. 31, 1982

20%

Table 6, pg. 560

Jan. 1, 1983-Jun. 30, 1983

16%

Table 37, pg. 591

Jul. 1, 1983-Dec. 31, 1983

11%

Table 27, pg. 581

Jan. 1, 1984-Jun. 30, 1984

11%

Table 75, pg. 629

Jul. 1, 1984-Dec. 31, 1984

11%

Table 75, pg. 629

Jan. 1, 1985-Jun. 30, 1985

13%

Table 31, pg. 585

Jul. 1, 1985-Dec. 31, 1985

11%

Table 27, pg. 581

Jan. 1, 1986-Jun. 30, 1986

10%

Table 25, pg. 579

Jul. 1, 1986-Dec. 31, 1986

Table 23, pg. 577

TABLE OF INTEREST RATES FROM JAN. 1, 1987 - Dec. 31, 1998

OVERPAYMENTS

UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

RATE

1995-1 C.B. TABLE

Jan. 1, 1987-Mar. 31, 1987

575

577

Apr. 1, 1987-Jun. 30, 1987

575

577

Jul. 1, 1987-Sep. 30, 1987

575

577

Oct. 1, 1987-Dec. 31, 1987

577

10%

579

Jan. 1, 1988-Mar. 31, 1988

10%

627

11%

629

Apr. 1, 1988-Jun. 30, 1988

625

10%

627

Jul. 1, 1988-Sep. 30, 1988

625

10%

627

Oct. 1, 1988-Dec. 31, 1988

10%

627

11%

629

Jan. 1, 1989-Mar. 31, 1989

10%

579

11%

581

Apr. 1, 1989-Jun. 30, 1989

11%

581

12%

583

Jul. 1, 1989-Sep. 30, 1989

11%

581

12%

583

Oct. 1, 1989-Dec. 31, 1989

10%

579

11%

581

Jan. 1, 1990-Mar. 31, 1990

10%

579

11%

581

Apr. 1, 1990-Jun. 30, 1990

10%

579

11%

581

Jul. 1, 1990-Sep. 30, 1990

10%

579

11%

581

Oct. 1, 1990-Dec. 31, 1990

10%

579

11%

581

Jan. 1, 1991-Mar. 31, 1991

10%

579

11%

581

Apr. 1, 1991-Jun. 30, 1991

577

10%

579

Jul. 1, 1991-Sep. 30, 1991

577

10%

579

Oct. 1, 1991-Dec. 31, 1991

577

10%

579

Jan. 1, 1992-Mar. 31, 1992

623

625

Apr. 1, 1992-Jun. 30, 1992

621

623

Jul. 1, 1992-Sep. 30, 1992

621

623

TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

TABLE OF INTEREST RATES FROM JAN. 1, 1987 - Dec. 31, 1998

OVERPAYMENTS

UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

RATE

1995-1 C.B. TABLE

Oct. 1, 1992-Dec. 31, 1992

619

621

Jan. 1, 1993-Mar. 31, 1993

571

573

Apr. 1, 1993-Jun. 30, 1993

571

573

Jul. 1, 1993-Sep. 30, 1993

571

573

Oct. 1, 1993-Dec. 31, 1993

571

573

Jan. 1, 1994-Mar. 31, 1994

571

573

Apr. 1, 1994-Jun. 30, 1994

571

573

Jul. 1, 1994-Sep. 30, 1994

573

575

Oct. 1, 1994-Dec. 31, 1994

575

577

Jan. 1, 1995-Mar. 31, 1995

575

577

Apr. 1, 1995-Jun. 30, 1995

577

10%

579

Jul. 1, 1995-Sep. 30, 1995

575

577

Oct. 1, 1995-Dec. 31, 1995

575

577

Jan. 1, 1996-Mar. 31, 1996

623

625

Apr. 1, 1996-Jun. 30, 1996

621

623

Jul. 1, 1996-Sep. 30, 1996

623

625

Oct. 1, 1996-Dec. 31, 1996

623

625

Jan. 1, 1997-Mar. 31, 1997

575

577

Apr. 1, 1997-Jun. 30, 1997

575

577

Jul. 1, 1997-Sep. 30, 1997

575

577

Oct. 1, 1997-Dec. 31, 1997

575

577

Jan. 1, 1998-Mar. 31, 1998

575

577

Apr. 1, 1998-Jun. 30, 1998

573

575

Jul. 1, 1998-Sep. 30, 1998

573

575

Oct. 1, 1998-Dec. 31, 1998

573

575

RATE

1995-1 C.B. TABLE

PAGE

Jan. 1, 1999-Mar. 31, 1999

573

Apr. 1, 1999-Jun. 30, 1999

575

Jul. 1, 1999-Sep. 30, 1999

575

Oct. 1, 1999-Dec. 31, 1999

575

Jan. 1, 2000-Mar. 31, 2000

623

Apr. 1, 2000-Jun. 30, 2000

625

Jul. 1, 2000-Sep. 30, 2000

625

Oct. 1, 2000-Dec. 31, 2000

625

Jan. 1, 2001-Mar. 31, 2001

577

Apr. 1, 2001-Jun. 30, 2001

575

# TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

PAGE

Jul. 1, 2001-Sep. 30, 2001

573

Oct. 1, 2001-Dec. 31, 2001

573

Jan. 1, 2002-Mar. 31, 2002

571

Apr. 1, 2002-Jun. 30, 2002

571

Jul. 1, 2002-Sep. 30, 2002

571

Oct. 1, 2002-Dec. 31, 2002

571

Jan. 1, 2003-Mar. 31, 2003

569

Apr. 1, 2003-Jun. 30, 2003

569

Jul. 1, 2003-Sep. 30, 2003

569

Oct. 1, 2003-Dec. 31, 2003

567

Jan. 1, 2004-Mar. 31, 2004

615

Apr. 1, 2004-Jun. 30, 2004

617

Jul. 1, 2004-Sep. 30, 2004

615

Oct. 1, 2004-Dec. 31, 2004

617

Jan. 1, 2005-Mar. 31, 2005

569

Apr. 1, 2005-Jun. 30, 2005

571

Jul. 1, 2005-Sep. 30, 2005

571

Oct. 1, 2005-Dec. 31, 2005

573

Jan. 1, 2006-Mar. 31, 2006

573

Apr. 1, 2006-Jun. 30, 2006

573

Jul. 1, 2006-Sep. 30, 2006

575

Oct. 1, 2006-Dec. 31, 2006

575

Jan. 1, 2007-Mar. 31, 2007

575

Apr. 1, 2007-Jun. 30, 2007

575

Jul. 1, 2007-Sep. 30, 2007

575

Oct. 1, 2007-Dec. 31, 2007

575

Jan. 1, 2008-Mar. 31, 2008

621

Apr. 1, 2008-Jun. 30, 2008

619

Jul. 1, 2008-Sep. 30, 2008

617

Oct. 1, 2008-Dec. 31, 2008

619

Jan. 1, 2009-Mar. 31, 2009

569

Apr. 1, 2009-Jun. 30, 2009

567

Jul. 1, 2009-Sep. 30, 2009

567

Oct. 1, 2009-Dec. 31, 2009

567

Jan. 1, 2010-Mar. 31, 2010

567

Apr. 1, 2010-Jun. 30, 2010

567

Jul. 1, 2010-Sep. 30, 2010

567

Oct. 1, 2010-Dec. 31, 2010

567

Jan. 1, 2011-Mar. 31, 2011

565

Apr. 1, 2011-Jun. 30, 2011

567

Jul. 1, 2011 -- Sep. 30, 2011

567

Oct. 1, 2011-Dec. 31, 2011

565

# TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

PAGE

Jan. 1, 2012-Mar. 31, 2012

613

Apr. 1, 2012-Jun. 30, 2012

613

Jul. 1, 2012-Sep. 30, 2012

613

Oct. 1, 2012-Dec. 31, 2012

613

Jan. 1, 2013-Mar. 31, 2013

565

Apr. 1, 2013-Jun. 30, 2013

565

Jul. 1, 2013-Sep. 30, 2013

565

Oct. 1, 2013-Dec. 31, 2013

565

Jan. 1, 2014-Mar. 31, 2014

565

Apr. 1, 2014-Jun. 30, 2014

565

Jul. 1, 2014-Sep. 30, 2014

565

Oct. 1, 2014-Dec. 31, 2014

565

Jan. 1, 2015-Mar. 31, 2015

565

Apr. 1, 2015-Jun. 30, 2015

565

Jul. 1, 2015-Sep. 30, 2015

565

Oct. 1. 2015-Dec. 31, 2015

565

Jan. 1, 2016-Mar. 31, 2016

613

Apr. 1, 2016-Jun. 30, 2016

615

Jul. 1, 2016-Sep. 30, 2016

615

Oct. 1, 2016-Dec. 31, 2016

615

Jan. 1, 2017-Mar. 31, 2017

567

TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS

UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

RATE

1995-1 C.B. TABLE PG

Jan. 1, 1999-Mar. 31, 1999

571

573

Apr. 1, 1999-Jun. 30, 1999

573

575

Jul. 1, 1999-Sep. 30, 1999

573

575

Oct. 1, 1999-Dec. 31, 1999

573

575

Jan. 1, 2000-Mar. 31, 2000

621

623

Apr. 1, 2000-Jun. 30, 2000

623

625

Jul. 1, 2000-Sep. 30, 2000

623

625

Oct. 1, 2000-Dec. 31, 2000

623

625

Jan. 1, 2001-Mar. 31, 2001

575

577

Apr. 1, 2001-Jun. 30, 2001

573

575

Jul. 1, 2001-Sep. 30, 2001

571

573

Oct. 1, 2001-Dec. 31, 2001

571

573

Jan. 1, 2002-Mar. 31, 2002

569

571

## TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS

UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

RATE

1995-1 C.B. TABLE

Apr. 1, 2002-Jun. 30, 2002

569

571

Jul. 1, 2002-Sep. 30, 2002

569

571

Oct. 1, 2002-Dec. 31, 2002

569

571

Jan. 1, 2003-Mar. 31, 2003

567

569

Apr. 1, 2003-Jun. 30, 2003

567

569

Jul. 1, 2003-Sep. 30, 2003

567

569

Oct. 1, 2003-Dec. 31, 2003

565

567

Jan. 1, 2004-Mar. 31, 2004

613

615

Apr. 1, 2004-Jun. 30, 2004

615

617

Jul. 1, 2004-Sep. 30, 2004

613

615

Oct. 1, 2004-Dec. 31, 2004

615

617

Jan. 1, 2005-Mar. 31, 2005

567

569

Apr. 1, 2005-Jun. 30, 2005

569

571

Jul. 1, 2005-Sep. 30, 2005

569

571

Oct. 1, 2005-Dec. 31, 2005

571

573

Jan. 1, 2006-Mar. 31, 2006

571

573

Apr. 1, 2006-Jun. 30, 2006

571

573

Jul. 1, 2006-Sep. 30, 2006

573

575

Oct. 1, 2006-Dec. 31, 2006

573

575

Jan. 1, 2007-Mar. 31, 2007

573

575

Apr. 1, 2007-Jun. 30, 2007

573

575

Jul. 1, 2007-Sep. 30, 2007

573

575

Oct. 1, 2007-Dec. 31, 2007

573

575

Jan. 1, 2008-Mar. 31, 2008

619

621

Apr. 1, 2008-Jun. 30, 2008

617

619

Jul. 1, 2008-Sep. 30, 2008

615

617

Oct. 1, 2008-Dec. 31, 2008

617

619

Jan. 1, 2009-Mar. 31, 2009

567

569

Apr. 1, 2009-Jun. 30, 2009

565

567

Jul. 1, 2009-Sep. 30, 2009

565

567

Oct. 1, 2009-Dec. 31, 2009

565

567

Jan. 1, 2010-Mar. 31, 2010

565

567

Apr. 1, 2010-Jun. 30, 2010

565

567

Jul. 1, 2010-Sep. 30, 2010

565

567

Oct. 1, 2010-Dec. 31, 2010

565

567

Jan. 1, 2011-Mar. 31, 2011

563

565

Apr. 1, 2011-Jun. 30, 2011

565

567

Jul. 1, 2011-Sep. 30, 2011

565

567

Oct. 1, 2011-Dec. 31, 2011

563

565

Jan. 1, 2012-Mar. 31, 2012

611

613

Apr. 1, 2012-Jun. 30, 2012

611

613

TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS

UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

RATE

1995-1 C.B. TABLE

Jul. 1, 2012-Sep. 30, 2012

611

613

Oct. 1, 2012-Dec. 31, 2012

611

613

Jan. 1, 2013-Mar. 31, 2013

563

565

Apr. 1, 2013-Jun. 30, 2013

563

565

Jul. 1, 2013-Sep. 30, 2013

563

565

Oct. 1, 2013-Dec. 31, 2013

563

565

Jan. 1, 2014-Mar. 31, 2014

563

565

Apr. 1, 2014-Jun. 30, 2014

563

565

Jul. 1, 2014-Sep. 30, 2014

563

565

Oct. 1, 2014-Dec. 31, 2014

563

565

Jan. 1, 2015-Mar. 31, 2015

563

565

Apr. 1, 2015 -- Jun.30, 2015

563

565

Jul. 1. 2015-Sep. 30, 2015

563

565

Oct. 1, 2015-Dec. 31, 2015

563

565

Jan. 1, 2016-Mar. 31, 2016

611

613

Apr. 1, 2016-Jun. 30, 2016

613

615

Jul. 1, 2016-Sep. 30, 2016

613

615

Oct. 1, 2016-Dec. 31, 2016

613

615

Jan. 1, 2017-Mar. 31, 2017

565

567

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 - PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 1991-Mar. 31, 1991

13%

585

Apr. 1, 1991-Jun. 30, 1991

12%

583

Jul. 1, 1991-Sep. 30, 1991

12%

583

Oct. 1, 1991-Dec. 31, 1991

12%

583

Jan. 1, 1992-Mar. 31, 1992

11%

629

Apr. 1, 1992-Jun. 30, 1992

10%

627

Jul. 1, 1992-Sep. 30, 1992

10%

627

Oct. 1, 1992-Dec. 31, 1992

625

Jan. 1, 1993-Mar. 31, 1993

577

Apr. 1, 1993-Jun. 30, 1993

577

Jul. 1, 1993-Sep. 30, 1993

577

Oct. 1, 1993-Dec. 31, 1993

577

Jan. 1, 1994-Mar. 31, 1994

577

Apr. 1, 1994-Jun. 30, 1994

577

Jul. 1, 1994-Sep. 30, 1994

10%

579

Oct. 1, 1994-Dec. 31, 1994

11%

581

# TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 - PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 1995-Mar. 31, 1995

11%

581

Apr. 1, 1995-Jun. 30, 1995

12%

583

Jul. 1, 1995-Sep. 30, 1995

11%

581

Oct. 1, 1995-Dec. 31, 1995

11%

581

Jan. 1, 1996-Mar. 31, 1996

11%

629

Apr. 1, 1996-Jun. 30, 1996

10%

627

Jul. 1, 1996-Sep. 30, 1996

11%

629

Oct. 1, 1996-Dec. 31, 1996

11%

629

Jan. 1, 1997-Mar. 31, 1997

11%

581

Apr. 1, 1997-Jun. 30, 1997

11%

581

Jul. 1, 1997-Sep. 30, 1997

11%

581

Oct. 1, 1997-Dec. 31, 1997

11%

581

Jan. 1, 1998-Mar. 31, 1998

11%

581

Apr. 1, 1998-Jun. 30, 1998

10%

579

Jul. 1, 1998-Sep. 30, 1998

10%

579

Oct. 1, 1998-Dec. 31, 1998

10%

579

Jan. 1, 1999-Mar. 31, 1999

577

Apr. 1, 1999-Jun. 30, 1999

10%

579

Jul. 1, 1999-Sep. 30, 1999

10%

579

Oct. 1, 1999-Dec. 31, 1999

10%

579

Jan. 1, 2000-Mar. 31, 2000

10%

627

Apr. 1, 2000-Jun. 30, 2000

11%

629

Jul. 1, 2000-Sep. 30, 2000

11%

629

Oct. 1, 2000-Dec. 31, 2000

11%

629

Jan. 1, 2001-Mar. 31, 2001

11%

581

Apr. 1, 2001-Jun. 30, 2001

10%

579

Jul. 1, 2001-Sep. 30, 2001

577

Oct. 1, 2001-Dec. 31, 2001

577

Jan. 1, 2002-Mar. 31, 2002

575

Apr. 1, 2002-Jun. 30, 2002

575

Jul. 1, 2002-Sep. 30, 2002

575

Oct. 1, 2002-Dec. 31, 2002

575

Jan. 1, 2003-Mar. 31, 2003

573

Apr. 1, 2003-Jun. 30, 2003

573

Jul. 1, 2003-Sep. 30, 2003

573

Oct. 1, 2003-Dec. 31, 2003

571

Jan. 1, 2004-Mar. 31, 2004

619

Apr. 1, 2004-Jun. 30, 2004

621

Jul. 1, 2004-Sep. 30, 2004

619

Oct. 1, 2004-Dec. 31, 2004

621

Jan. 1, 2005-Mar. 31, 2005

573

Apr. 1, 2005-Jun. 30, 2005

575

Jul. 1, 2005-Sep. 30, 2005

575

Oct. 1, 2005-Dec. 31, 2005

577

# TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 - PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 2006-Mar. 31, 2006

577

Apr. 1, 2006-Jun. 30, 2006

577

Jul. 1, 2006-Sep. 30, 2006

10%

579

Oct. 1, 2006-Dec. 31, 2006

10%

579

Jan. 1, 2007-Mar. 31, 2007

10%

579

Apr. 1, 2007-Jun. 30, 2007

10%

579

Jul. 1, 2007-Sep. 30, 2007

10%

579

Oct. 1, 2007-Dec. 31, 2007

10%

579

Jan. 1, 2008-Mar. 31, 2008

625

Apr. 1, 2008-Jun. 30, 2008

623

Jul. 1, 2008-Sep. 30, 2008

621

Oct. 1, 2008-Dec. 31, 2008

623

Jan. 1, 2009-Mar. 31, 2009

573

Apr. 1, 2009-Jun. 30, 2009

571

Jul. 1, 2009-Sep. 30, 2009

571

Oct. 1, 2009-Dec. 31, 2009

571

Jan. 1, 2010-Mar. 31, 2010

571

Apr. 1, 2010-Jun. 30, 2010

571

Jul. 1, 2010-Sep. 30, 2010

571

Oct. 1, 2010-Dec. 31, 2010

571

Jan. 1, 2011-Mar. 31, 2011

569

Apr. 1, 2011-Jun. 30, 2011

571

Jul. 1, 2011-Sep. 30, 2011

571

Oct. 1, 2011-Dec. 31, 2011

569

Jan. 1, 2012-Mar. 31, 2012

617

Apr. 1, 2012-Jun. 30, 2012

617

Jul. 1, 2012-Sep. 30, 2012

617

Oct. 1, 2012-Dec. 31, 2012

617

Jan. 1, 2013-Mar. 31, 2013

569

Apr. 1, 2013-Jun. 30, 2013

569

Jul. 1, 2013-Sep. 30, 2013

569

Oct. 1, 2013-Dec. 31, 2013

569

Jan. 1, 2014-Mar. 31, 2014

569

Apr. 1, 2014-Jun. 30, 2014

569

Jul. 1, 2014-Sep. 30, 2014

569

Oct. 1, 2014-Dec. 31, 2014

569

Jan. 1, 2015-Mar. 31, 2015

569

Apr. 1, 2015-Jun. 30, 2015

569

Jul. 1, 2015-Sep. 30, 2015

569

Oct. 1, 2015-Dec. 31, 2015

569

Jan. 1, 2016-Mar. 31, 2016

617

Apr. 1, 2016 -- Jun.30, 2016

619

Jul. 1, 2016 -- Sep. 30, 2016

619

# TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 - PRESENT

TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 - PRESENT

RATE

1995-1 C.B. TABLE

Oct. 1, 2016 -- Dec.31, 2016

619

Jan. 1, 2017-Mar. 31, 2017

571

RATE

1995-1 C.B. TABLE

Jan. 1, 1995-Mar. 31, 1995

6.5%

572

Apr. 1, 1995-Jun. 30, 1995

7.5%

574

Jul. 1, 1995-Sep. 30, 1995

6.5%

572

Oct. 1, 1995-Dec. 31, 1995

6.5%

572

Jan. 1, 1996-Mar. 31, 1996

6.5%

620

Apr. 1, 1996-Jun. 30, 1996

5.5%

618

Jul. 1, 1996-Sep. 30, 1996

6.5%

620

Oct. 1, 1996-Dec. 31, 1996

6.5%

620

Jan. 1, 1997-Mar. 31, 1997

6.5%

572

Apr. 1, 1997-Jun. 30, 1997

6.5%

572

Jul. 1, 1997-Sep. 30, 1997

6.5%

572

Oct. 1, 1997-Dec. 31, 1997

6.5%

572

Jan. 1, 1998-Mar. 31, 1998

6.5%

572

Apr. 1, 1998-Jun. 30, 1998

5.5%

570

Jul. 1. 1998-Sep. 30, 1998

5.5%

570

Oct. 1, 1998-Dec. 31, 1998

5.5%

570

Jan. 1, 1999-Mar. 31, 1999

4.5%

568

Apr. 1, 1999-Jun. 30, 1999

5.5%

570

Jul. 1, 1999-Sep. 30, 1999

5.5%

570

Oct. 1, 1999-Dec. 31, 1999

5.5%

570

Jan. 1, 2000-Mar. 31, 2000

5.5%

618

Apr. 1, 2000-Jun. 30, 2000

6.5%

620

Jul. 1, 2000-Sep. 30, 2000

6.5%

620

Oct. 1, 2000-Dec. 31, 2000

6.5%

620

Jan. 1, 2001-Mar. 31, 2001

6.5%

572

Apr. 1, 2001-Jun. 30, 2001

5.5%

570

Jul. 1, 2001-Sep. 30, 2001

4.5%

568

Oct. 1, 2001-Dec. 31, 2001

4.5%

568

Jan. 1, 2002-Mar. 31, 2002

3.5%

566

Apr. 1, 2002-Jun. 30, 2002

3.5%

566

Jul. 1, 2002-Sep. 30, 2002

3.5%

566

Oct. 1, 2002-Dec. 31, 2002

3.5%

566

Jan. 1, 2003-Mar. 31, 2003

2.5%

564

Apr. 1, 2003-Jun. 30, 2003

2.5%

564

Jul. 1, 2003-Sep. 30, 2003

2.5%

564

## TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 - PRESENT

RATE

1995-1 C.B. TABLE

Oct. 1, 2003-Dec. 31, 2003

1.5%

562

Jan. 1, 2004-Mar. 31, 2004

1.5%

610

Apr. 1, 2004-Jun. 30, 2004

2.5%

612

Jul. 1, 2004-Sep. 30, 2004

1.5%

610

Oct. 1, 2004-Dec. 31, 2004

2.5%

612

Jan. 1, 2005-Mar. 31, 2005

2.5%

564

Apr. 1, 2005-Jun. 30, 2005

3.5%

566

Jul. 1, 2005-Sep. 30, 2005

3.5%

566

Oct. 1, 2005-Dec. 31, 2005

4.5%

568

Jan. 1, 2006-Mar. 31, 2006

4.5%

568

Apr. 1, 2006-Jun. 30, 2006

4.5%

568

Jul. 1, 2006-Sep. 30, 2006

5.5%

570

Oct. 1, 2006-Dec. 31, 2006

5.5%

570

Jan. 1, 2007-Mar. 31, 2007

5.5%

570

Apr. 1, 2007-Jun. 30, 2007

5.5%

570

Jul. 1, 2007-Sep. 30, 2007

5.5%

570

Oct. 1, 2007-Dec. 31, 2007

5.5%

570

Jan. 1, 2008-Mar. 31, 2008

4.5%

616

Apr. 1, 2008-Jun. 30, 2008

3.5%

614

Jul. 1, 2008-Sep. 30, 2008

2.5%

612

Oct. 1, 2008-Dec. 31, 2008

3.5%

614

Jan. 1, 2009-Mar. 31, 2009

2.5%

564

Apr. 1, 2009-Jun. 30, 2009

1.5%

562

Jul. 1, 2009-Sep. 30, 2009

1.5%

562

Oct. 1, 2009-Dec. 31, 2009

1.5%

562

Jan. 1, 2010-Mar. 31, 2010

1.5%

562

Apr. 1, 2010-Jun. 30, 2010

1.5%

562

Jul. 1, 2010-Sep. 30, 2010

1.5%

562

Oct. 1, 2010-Dec. 31, 2010

1.5%

562

Jan. 1, 2011-Mar. 31, 2011

0.5%*

Apr. 1, 2011-Jun. 30, 2011

1.5%

562

Jul. 1, 2011 -- Sep. 30, 2011

1.5%

562

Oct. 1, 2011-Dec. 31, 2011

0.5%*

Jan. 1, 2012-Mar. 31, 2012

0.5%*

Apr. 1, 2012-Jun. 30, 2012

0.5%*

Jul. 1, 2012-Sep. 30, 2012

0.5%*

Oct. 1, 2012-Dec. 31, 2012

0.5%*

Jan. 1, 2013-Mar. 31, 2013

0.5%*

Apr. 1, 2013-Jun. 30, 2013

0.5%*

Jul. 1, 2013-Sep. 30, 2013

0.5%*

Oct. 1, 2013-Dec. 31, 2013

0.5%*

Jan. 1, 2014-Mar. 31, 2014

0.5%*

Apr. 1, 2014-Jun. 30, 2014

0.5%*

TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 - PRESENT

RATE

1995-1 C.B. TABLE

Jul. 1, 2014-Sep. 30, 2014

0.5%*

Oct. 1, 2014-Dec. 31, 2014

0.5%*

Jan. 1, 2015-Mar. 31, 2015

0.5%*

Apr. 1, 2015-Jun. 30, 2015

0.5%*

Jul. 1, 2015-Sep. 30, 2015

0.5%*

Oct. 1, 2015-Dec. 31, 2015

0.5%*

Jan. 1, 2016-Mar. 31, 2016

0.5%*

Apr. 1, 2016-Jun. 30, 2016

1.5%

610

Jul. 1, 2016-Sep. 30, 2016

1.5%

610

Oct. 1, 2016-Dec. 31, 2016

1.5%

610

Jan. 1, 2017-Mar. 31, 2017

1.5%

562

\* The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent published in
Appendix A of this Revenue Ruling.

26 CFR 1.6035-2

# DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

TD 9797

# Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations that provide transition
rules providing that executors and other
persons required to file or furnish a state-
ment under section 6035(a)(1) or (2) re-
garding the value of property included in a
decedent's gross estate for federal estate
tax purposes before June 30, 2016, need
not have done so until June 30, 2016.
These final regulations are applicable to
executors and other persons who file fed-

eral estate tax returns required by section
6018(a) or (b) after July 31, 2015.

DATES: Effective Date. These regula-
tions are effective on December 2, 2016.

Applicability Dates: For date of appli-
cability, see § 1.6035-2(b).

FOR FURTHER INFORMATION
CONTACT: Theresa Melchiorre (202)
317-6859 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

## Background

Section 6018(a) requires executors to
file federal estate tax returns with respect
to (1) certain estates of citizens or resi-
dents of the United States and (2) certain
estates of nonresidents that are not citi-
zens of the United States. If an executor is
unable to make a complete federal estate
tax return as to any property that is a part
of a decedent's gross estate, section
6018(b) requires every person or benefi-
ciary holding such property, upon notice
from the Secretary, to make a federal es-
tate tax return as to such part of the gross
estate.

On July 31, 2015, the President of the
United States signed into law H.R. 3236,
The Surface Transportation and Veterans

Health Care Choice Improvement Act of
2015, Public Law 114-41, 129 Stat. 443
(Act). Section 2004 of the Act added new
section 6035.

Section 6035 imposes reporting re-
quirements with regard to the value of
property included in a decedent's gross
estate for federal estate tax purposes. Sec-
tion 6035(a)(1) provides that the executor
of any estate required to file a return under
section 6018(a) must file with the Secre-
tary and furnish to the person acquiring
any interest in property included in the
decedent's gross estate, a statement iden-
tifying the value of each interest in such
property as reported on such return and
such other information with respect to
such interest as the Secretary may pre-
scribe.

Section 6035(a)(2) provides that each
other person required to file a return under
section 6018(b) must file with the Secre-
tary and furnish to each person who holds
a legal or beneficial interest in the prop-
erty to which such return relates, a state-
ment identifying the same information de-
scribed in section 6035(a)(1).

Section 6035(a)(3)(A) provides that
each statement required to be filed or fur-
nished under section 6035(a)(1) or (2) is
to be filed or furnished at such time as the
Secretary may prescribe, but in no case at

a time later than the earlier of (i) the date
that is 30 days after the date on which the
return under section 6018 was required to
be filed (including extensions actually
granted, if any) or (ii) the date which is 30
days after the date such return is filed.

On August 21, 2015, the Treasury De-
partment and the IRS issued Notice 2015-
57, 2015-36 IRB 294. That notice delayed
until February 29, 2016, the due date for
any statements required by section 6035.

On February 11, 2016, the Treasury
Department and the IRS issued Notice
2016-19, 2016-09 IRB 362. That notice
provided that executors or other persons
required to file or furnish a statement un-
der section 6035(a)(1) or (2) before March
31, 2016, need not have done so until
March 31, 2016.

On March 4, 2016, the Treasury De-
partment and the IRS published temporary
regulations (TD 9757) in the Federal
Register (81 FR 11431-01) providing
transition relief under § 1.6035-2T. The
temporary regulations extended the due
date for statements required by section
6035 to March 31, 2016, as provided in
Notice 2016-19.

Also on March 4, 2016, the Treasury
Department and the IRS published in the
Federal Register (81 FR 11486-01) pro-
posed regulations (REG-127923-15).
The text of TD 9757 served as the text of
the proposed regulations regarding the
transition relief provided under § 1.6035-
2T.

On March 23, 2016, the Treasury De-
partment and the IRS issued Notice 2016-
27, 2016-15 IRB 576. That notice pro-
vided that executors or other persons
required to file or furnish a statement un-
der section 6035(a)(1) or (2) before June
30, 2016, need not have done so until June
30, 2016.

On June 27, 2016, the Treasury De-
partment and the IRS held a public hear-
ing on the proposed regulations. In addi-
tion to the comments received at the
hearing, the Treasury Department and the
IRS received numerous written com-
ments. Both at the hearing and in written
comments, commenters commented fa-
vorably on the transition relief providing
extensions of time to file and furnish the
statements required by section 6035(a)(1)
or (2) that the Treasury Department and
the IRS had granted in TD 9757 and the

notices (including Notice 2016-27 issued
after TD 9757 was published in the Fed-
eral Register).

## Explanation of Provisions

These final regulations reiterate the
statement in Notice 2016-27 and provide
that executors or other persons required to
file or furnish a statement under section
6035(a)(1) or (2) before June 30, 2016,
need not have done so until June 30, 2016.
These final regulations are issued within
18 months of the date of the enactment of
the statutory provisions to which the final
regulations relate and, as authorized by
section 7805(b)(2), are applicable to ex-
ecutors and other persons who file a return
required by section 6018(a) or (b) after
July 31, 2015.

## Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance cited
in this preamble are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Printing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.

## Special Analyses

In addition, section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) did not apply to TD 9757 be-
cause TD 9757 was excepted from the
notice and comment requirements of sec-
tion 553(b) and (c) of the Administrative
Procedure Act under the interpretative
rule and good cause exceptions provided
by section 553(b)(3)(A) and (B). The Act
included an immediate effective date, thus
making the first required statements due
30 days after enactment. It was necessary
to provide more time to provide the state-
ments required by section 6035(a), to al-
low the Treasury Department and the IRS
sufficient time to issue both substantive
and procedural guidance on how to com-

ply with the section 6035(a) requirement,
and to provide executors and other af-
fected persons the opportunity to review
this guidance before preparing the re-
quired statements. TD 9757 reiterated the
relief in Notice 2016-19 and, because of
the immediate need to provide relief, no-
tice and public comment pursuant to 5
U.S.C. 553(b) and (c) was impracticable,
unnecessary, and contrary to the public
interest. Public comment, however, was
received on TD 9757 and all the notices,
including Notice 2016-27, at the public
hearing held on June 27, 2016, and in
written comments submitted on the pro-
posed regulations that cross-referenced
and included the text of TD 9757.

It has been certified that the collection
of information in these final regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. This certification is based on the
fact that this rule primarily affects indi-
viduals (or their estates) and trusts, which
are not small entities as defined by the
Regulatory Flexibility Act (5 U.S.C. 601).
Although it is anticipated that there may
be an incremental economic impact on
executors that are small entities, including
entities that provide tax and legal services
that assist individuals in preparing tax re-
turns, any impact would not be significant
and would not affect a substantial number
of small entities. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required.

Pursuant to section 7805(f) of the
Code, TD 9757 and notice of the proposed
rulemaking that cross-referenced and in-
cluded the text of TD 9757 was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business. No
comments were received.

## Drafting Information

The principal author of these final reg-
ulations is Theresa Melchiorre, Office of
the Associate Chief Counsel (Pass-
throughs and Special Industries). Other
personnel from the Treasury Department
and the IRS participated in their develop-
ment.

* * * * *

## Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U. S. C. 7805
* * * * *

Section 1.6035-2 also issued under 26
U.S.C. 6035(b).
* * * * *

#### § 1.6035-2T [Removed]

Par. 2. Section 1.6035-2T is removed.
Par. 3. Section 1.6035-2 is revised to
read as follows:

#### § 1.6035-2 Transitional relief.

(a) Statements due before June 30,
2016. Executors and other persons re-
quired to file or furnish a statement under
section 6035(a)(1) or (2) after July 31,
2015 and before June 30, 2016, need not
have done so until June 30, 2016.

(b) Applicability Date. This section is
applicable to executors and other persons
who file a return required by section
6018(a) or (b) after July 31, 2015.

John Dalrymple
Deputy Commissioner for Services and
Enforcement.
Approved: November 16, 2016.

Mark J. Mazur
Assistant Secretary of the Treasury (Tax
Policy).

(Filed by the Office of the Federal Register on December 1,
2016, 8:45 a.m., and published in the issue of the Federal
Register for December 2, 2016, 81 F.R. 86953)

26 CFR 300.1, amended; 26 CFR 300.2, amended

T.D. 9798
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

## User Fees for Installment Agreements

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations that provide user fees for
installment agreements. The final regu-
lations affect taxpayers who wish to pay
their liabilities through installment
agreements.

DATES: Effective date: These regulations
are effective on December 2, 2016.

Applicability date: These regulations
apply to installment agreements entered
into, restructured, or reinstated on or after
January 1, 2017.

FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Maria Del Pilar Austin at (202) 317-5437;
concerning cost methodology, Eva Wil-
liams, at (202) 803-9728 (not toll-free
numbers).

### SUPPLEMENTARY INFORMATION: Background and Explanation of Provisions

This document contains amendments
to the User Fee Regulations under 26 CFR
part 300. On August 22, 2016, the Trea-
sury Department and the IRS published in
the Federal Register (81 FR 56550) a
notice of proposed rulemaking (REG-
108792-16) relating to the user fees
charged for entering into and reinstating
and restructuring installment agreements.
The Independent Offices Appropriations
Act of 1952 (IOAA), which is codified at
31 U.S.C. 9701, authorizes agencies to
prescribe regulations establishing user
fees for services provided by the agency.
Regulations prescribing user fees are sub-
ject to the policies of the President, which

are currently set forth in the Office of
Management and Budget Circular A-25
(the OMB Circular), 58 FR 38142 (July
15, 1993). The OMB Circular allows
agencies to impose user fees for services
that confer a special benefit to identifiable
recipients beyond those accruing to the
general public. The agency must calculate
the full cost of providing those benefits,
and, in general, the amount of a user fee
should recover the full cost of providing
the service, unless the Office of Manage-
ment and Budget (OMB) grants an excep-
tion under the OMB Circular.

The notice of proposed rulemaking
proposed to increase the user fees under
§ 300.1 for entering into an installment
agreement from $120 to $225 and for en-
tering into a direct debit installment agree-
ment from $52 to $107. The notice of
proposed rulemaking proposed to increase
the user fee under § 300.2 for restructur-
ing or reinstating an installment agree-
ment from $50 to $89. The notice of
proposed rulemaking proposed the intro-
duction of two new types of online install-
ment agreements under § 300.1, each sub-
ject to a separate user fee: (1) an online
payment agreement with a fee of $149 and
(2) a direct debit online payment agree-
ment with a fee of $31. Under the notice
of proposed rulemaking, the user fee for
low-income taxpayers, as defined in
§ 300.1(b)(3), would continue to be $43
for entering into a new installment agree-
ment, except that the lower fee of $31 for
a direct debit online payment agreement
would apply to all taxpayers. Under
§ 300.2(b), the fee for low-income taxpay-
ers restructuring or reinstating an install-
ment agreement would be reduced to $43
from $50. The new user fee rates were
proposed to be effective beginning on Jan-
uary 1, 2017. As explained in the notice of
proposed rulemaking, the proposed fees
bring user fee rates for installment agree-
ments in line with the full cost to the IRS
of providing these taxpayer-specific ser-
vices. In particular, the new user fee struc-
ture offers taxpayers more tailored install-
ment agreement options, including a $31
user fee for direct debit online payment
agreements, which ensures that taxpayers
are not charged more for their chosen in-
stallment agreement option than the actual
cost incurred by the IRS in providing the
type of installment agreement selected by

taxpayers. Because OMB has granted an
exception to the full cost requirement for
low-income taxpayers, low-income tax-
payers would continue to pay the reduced
fee of $43 for any new installment agree-
ment, except where they request a $31
direct debit online payment agreement,
and would pay the reduced $43 fee for
restructuring or reinstating an installment
agreement.

No public hearing on the notice of pro-
posed rulemaking was held because one
was not requested. Five comments were
received. After careful consideration of
the comments, this Treasury Decision
adopts the proposed regulations without
change.

### Summary of Comments

The first comment suggested that filing
a tax return and requesting an installment
agreement should not be a two-step pro-
cess and that taxpayers requesting an in-
stallment agreement with the filing of
their returns should not be subject to a
higher user fee. The comment expressed
concern with tying eligibility for the $31
user fee to submitting a request for a di-
rect debit online payment agreement. The
comment also noted the length of time it
takes the IRS to initiate direct debit in-
stallment agreement payments. The com-
ment asserted that taxpayers requesting
installment agreements with the filing of
their tax returns and paying via direct
debit should be entitled to the $31 user
fee.

These regulations deal with only the
user fees for installment agreements and
not the administration of the installment
agreement program generally, and so this
comment is addressed only to the extent it
relates to user fees for installment agree-
ments. As explained in the notice of pro-
posed rulemaking, agencies are required
to set user fees at an amount that recovers
the full cost of providing the service un-
less an agency requests, and the OMB
grants, an exception to the full cost re-
quirement. The proposed installment
agreement fees are structured to reflect the
full cost to the IRS to establish and mon-
itor the different types of installment
agreements associated with each user fee.
The costs to the IRS for installment agree-
ments are the same to the IRS whether the
taxpayer requests an installment agree-

ment at the same or a different time from
filing its tax return. The regulations now
offer taxpayers additional types of install-
ment agreements to choose from, includ-
ing a low-cost user fee of $31 for a direct
debit online payment agreement. A tax-
payer may file a return and then request a
direct debit online payment agreement
and would be charged a fee of only $31.
As discussed in the notice of proposed
rulemaking, the IRS incurs higher costs in
establishing and monitoring all other
forms of installment agreements. If a tax-
payer chooses to request an installment
agreement other than a direct debit online
payment agreement, that taxpayer must
pay the full cost of that user fee unless the
taxpayer qualifies as a low-income tax-
payer. The length of time required to es-
tablish direct debit installment agreements
that the comment described is due to IRS
budget cuts in recent years that have re-
sulted in lower staffing levels combined
with increased workloads. During peak
times of the year, the IRS has more in-
stallment agreements to process than
available staff to process them and back-
logs occur. In addition, there are Federal
e-pay requirements that also add time in
processing installment agreements paid by
direct debit. However, taxpayers using the
online payment agreement service receive
immediate confirmation of direct debit on-
line payment agreements. Taxpayers re-
questing installment agreements via a
Form 9465 when e-filing are not entitled
to the lower $31 user fee under the pro-
posed regulations because the costs asso-
ciated with processing the Form 9465 are
greater than those incurred for taxpayers
using the online payment agreement ser-
vice. At the time taxpayers submit Form
9465 with their e-filed returns, the IRS has
no way of determining whether the tax-
payers qualify for an installment agree-
ment or whether the payment proposal
meets streamlined processing criteria.
While the IRS continues to explore ways
to make this process completely auto-
mated, at this time the process to review a
regular installment agreement request re-
quires IRS staff involvement that direct
debit online payment agreements do not.

The second comment expressed con-
cern that the proposed increase in user
fees was too high and asked whether "any
consideration [has] been given to increas-

ing the time frame for an exten[s]ion
[from] 120[]days to 180[]days." It appears
that the latter part of this comment is
referring to the full pay agreement that has
no user fee but requires the taxpayer to
full pay within 120 days. The extension of
the time period for full pay agreements is
unrelated to the proposed increase in the
user fees for installment agreements. With
regard to the increase in fee, the fee in-
crease is consistent with the requirement
under the OMB Circular that agencies that
confer special benefits on identifiable re-
cipients beyond those accruing to the gen-
eral public are to establish user fees that
recover the full cost of providing those
services. In the notice of proposed rule-
making, the IRS provided a detailed anal-
ysis of how it calculated the full cost of
this service and the fee is consistent with
the full cost of the particular service.

The third comment provided examples
of taxpayers with varying circumstances
and opined that increasing the user fee for
installment agreements would be unfair to
taxpayers who are so situated. For taxpay-
ers whose income falls at or below 250
percent of the poverty level as established
by the U.S. Department of Health and
Human Services and updated annually,
the proposed regulations continue to offer
a reduced fee for low-income taxpayers of
$43, and extend the $43 fee to low-income
taxpayers restructuring or reinstating in-
stallment agreements. In addition, the pro-
posed regulations establish a lower fee of
$31 for online direct debit installment
agreements that is available to all taxpay-
ers. Thus, even if taxpayers do not qualify
for the reduced low-income taxpayer fee,
the proposed regulations permit all tax-
payers the option to pay the lower $31 fee
by establishing direct debit online pay-
ment agreements.

The fourth comment had four main
concerns and additional concerns with re-
spect to each of these main concerns.

The fourth comment's first main con-
cern challenged the IRS's application of
the OMB Circular. The comment opined
that an installment agreement is not a spe-
cial benefit as provided under the OMB
Circular for several reasons. Specifically,
the comment noted that if a taxpayer does
not have assets to levy, then relief of levy
is not a benefit to that taxpayer. The com-
ment suggested that the IRS receives a

benefit when a taxpayer enters into an
installment agreement and as a result, the
installment agreement does not provide a
special benefit for purposes of the OMB
Circular. The comment questioned how
many installment agreements resulted in
payments that the IRS would not have
otherwise received. The comment also
questioned whether installment agreement
income is a benefit to the fisc or whether
the IRS could use levies to secure the
same amount of payment. The comment
stated that the IRS is required to enter into
certain installment agreements pursuant to
section 6159(c) and questioned how a
statutory requirement could be considered
a special benefit. The comment quoted
Section 6(1)(4) of the OMB Circular,
which provides that "[n]o charge should
be made for a service when the identifi-
cation of the specific beneficiary is ob-
scure, and the service can be considered
primarily as benefiting broadly the general
public." The comment opined that be-
cause the IRS may receive some benefit,
the specific beneficiary of an installment
agreement is incompletely identified. Fi-
nally, the comment noted that the OMB
Circular allows for exceptions to charging
full cost and questioned whether it is good
public policy to increase the user fee con-
sidering that some installment agreements
are statutorily required and help bring
noncompliant taxpayers into compliance.

As described in the preamble to the
proposed regulations, each taxpayer enter-
ing into an installment agreement receives
the special benefit of paying an outstand-
ing tax obligation over time rather than
immediately. This special benefit does not
accrue to the general public because tax-
payers are otherwise obligated to pay any
outstanding taxes immediately when due.
The taxpayer receives this special benefit
regardless of whether the taxpayer has any
assets on which the IRS could levy. In
addition to paying an outstanding tax ob-
ligation over time rather than immedi-
ately, there are also the special benefits of
avoiding enforcement action generally
and, for timely filed returns, a reduction of
the section 6651 failure to pay penalty to
0.25 percent during any month during
which an installment agreement is in ef-
fect. The enforcement actions that are put
on hold during the pendency of an install-
ment agreement include wage garnish-

ments, the filing of notices of federal tax
liens, and the making of levies. Even if it
is argued that the government derives
some general benefit from collecting out-
standing tax liabilities to which it is inar-
guably entitled, it is still appropriate under
the OMB Circular to charge a user fee for
entering into, reinstating, or restructuring
an installment agreement because install-
ment agreements provide "specific ser-
vices to specific individuals." Seafarers
Int'l Union of N. Am. v. U.S. Coast Guard,
81 F.3d 179, 183 (D.C. Cir. 1996). The
benefit to the government generally of
collecting on outstanding tax liabilities is
a benefit that accrues to the public gener-
ally and does not diminish the special
benefit provided to an identifiable tax-
payer who requests an installment agree-
ment. As noted in the notice of proposed
rulemaking, the IOAA permits the IRS to
charge a user fee for providing a "service
or thing of value." 31 U.S.C. 9701(b). A
government activity constitutes a "service
or thing of value" when it provides "spe-
cial benefits to an identifiable recipient
beyond those that accrue to the general
public." See the OMB Circular Section
6(a)(1). Among other things, a "special
benefit" exists when a government service
is performed at the request of a taxpayer
and is beyond the services regularly re-
ceived by other members of the same
group or the general public. See OMB
Circular Section 6(a)(1)(c). Under the
IOAA, agencies may impose "specific
charges for specific services to specific
individuals or companies." See Fed.
Power Comm'n v. New England Power
Co., 415 U.S. 345, 349 (1974); see also
Seafarers, 81 F.3d at 182-83 (D.C. Cir.
1996) ("[A] user fee will be justified un-
der the IOAA if there is a sufficient nexus
between the agency service for which the
fee is charged and the individuals who are
assessed.").

Section 6(a)(3) of the OMB Circular
explains that "when the public obtains
benefits as a necessary consequence of an
agency's provision of special benefits to
an identifiable recipient (i.e., the public
benefits are not independent of, but
merely incidental to, the special benefits),
an agency need not allocate any costs to
the public and should seek to recover from
the identifiable recipient either the full
cost to the Federal Government of provid-

ing the special benefit or the market price,
whichever applies." While it is true that
installment agreements benefit tax admin-
istration and collection, and by extension
the public fisc, the benefit is incidental
to the special benefits of allowing taxpay-
ers to satisfy their Federal tax liabilities
over time rather than when due as re-
quired by the Code and avoiding enforce-
ment actions.

By the very nature of government ac-
tion, the general public will almost always
experience some benefit from an activity
that is subject to a user fee. See, e.g.,
Seafarers, 81 F.3d at 184-85 (D.C. Cir.
1996). However, as long as the activity
confers a specific benefit upon an identi-
fiable beneficiary, it is permissible for the
agency to charge the beneficiary a fee
even though the public will also experi-
ence an incidental benefit. See Engine
Mfrs. Ass'n v. E.P.A., 20 F.3d 1177, 1180
(D.C. Cir. 1994) ("If the agency does con-
fer a specific benefit upon an identifiable
beneficiary ... then it is of no moment
that the service may incidentally confer a
benefit upon the general public as well.")
citing Nat'l Cable Television Ass'n v.
FCC, 554 F.2d 1094, at 1103 (D.C. Cir.
1976). It is permissible for a service for
which a user fee is charged to generate an
"incidental public benefit," and there is no
requirement that the agency weigh this
public benefit against the specific benefit
to the identifiable recipient. Seafarers, 81
F.3d at 183-84 (D.C. Cir. 1996). Further-
more, the benefit to the fisc of collecting
outstanding taxes is not an additional ben-
efit to the government because the IRS
would collect those amounts through
other means absent the installment agree-
ment. Even so, an agency is still entitled
to charge for services that assist a person
in complying with her statutory duties.
See In Elec. Indus Ass'n v. FCC, 554 F.2d
1109, 1115 (D.C. Cir. 1976).

While the IRS is required to enter into
certain installment agreements pursuant to
section 6159(c), the IRS may still charge a
fee for providing that service. In fact, un-
der the OMB Circular, there are several
examples of special benefits (e.g., pass-
port, visa, patent) for which the issuing
agency may charge a fee even though the
agency is required to issue such benefit if
the individual meets certain statutory or
regulatory requirements. In addition, a

taxpayer meeting the criteria in section
6159(c) must still submit a request for an
installment agreement before one is estab-
lished. Section 6159(c) requires that the
IRS enter into the installment agreement
provided that the taxpayer establishes its
eligibility for such an agreement. In that
situation, the IRS incurs the costs of es-
tablishing and monitoring these install-
ment agreements as with any other install-
ment agreement. Therefore, it is proper
under the OMB Circular to charge a user
fee for providing this service.

The IRS has taken public policy into
consideration and is providing multiple
user fee options to tailor the user fees to
the specific IRS costs in establishing and
monitoring the installment agreements.
As a result, the IRS has introduced a re-
duced fee of $31 for direct debit online
payment agreements. This $31 reduced
fee is available to all taxpayers choosing
to obtain the special benefits of install-
ment agreements by using this service.
The $31 reduced fee reflects the substan-
tially lower costs the IRS incurs for estab-
lishing and monitoring direct debit online
payment agreements. Thus, the install-
ment agreement user fee structure now
more closely reflects the full cost of pro-
cessing each specific type of installment
agreement.

The fourth comment's second main
concern was that the IRS charges user fees
inconsistently because, for example, the
IRS does not charge user fees for toll-free
telephone service, estimated income tax
payments, walk-in service, notice letters,
annual filing season program record of
completion, and administrative appeals
within the IRS.

The IRS's user fee policies are consis-
tent with the OMB Circular. The IOAA
authorizes agencies to prescribe regula-
tions that establish charges for services
provided by the agency, that is, user fees
that "are subject to policies prescribed by
the President. . . . " One of the OMB
Circular's stated objectives is to "ensure
that each service . . . provided by an
agency to specific recipients be self-
sustaining." OMB Circular Section 5(a).
The General Policy of the OMB Circular
states that "a user charge . . . will be
assessed against each identifiable recipi-
ent for special benefits derived from Fed-
eral activities beyond those received by

the general public." OMB Circular Sec-
tion 6. The presumption under the OMB
Circular is that agencies are encouraged,
but not mandated, to charge user fees
where special benefits are provided to
identifiable individuals. Installment agree-
ments are such special benefits. For pur-
poses of these regulations, the IRS need
only take into consideration comments re-
lating to the installment agreement user
fees and need not address comments re-
lating to other services for which no fee is
charged. With respect to installment
agreement user fees, the IRS has charged
fees since 1995 in accordance with the
OMB Circular that requires full cost un-
less an exception is granted. The OMB
Circular requires the IRS to review the
user fees it charges for special services
biennially to ensure that the fees are ad-
justed for cost. See OMB Circular Section
8(e). The new installment agreement user
fee structure is consistent with that re-
quirement.

The fourth comment's third main con-
cern questioned the "optics" of increasing
installment agreement user fees because
of IRS budget constraints. As discussed in
this Summary of Comments, the IRS has
determined that the proposed installment
agreement user fees are appropriate and
consistent with the OMB Circular, and the
question of "optics" raised in this com-
ment is not relevant in this analysis. Sec-
tion 6(a)(2)(a) of the OMB Circular pro-
vides that user fees will be sufficient to
recover the full cost to the Government of
providing the service except as provided
in Section 6(c) of the OMB Circular. The
exceptions in Section 6(c)(2) of the OMB
Circular provide that agency heads may
recommend to the OMB that exceptions to
the full cost requirement be made when
either (1) the cost of collecting the user
fee would represent an unduly large part
of the fee or (2) any other condition exists
that, in the opinion of the agency head,
justifies an exception. The cost of collect-
ing the proposed user fees for the various
types of installment agreements will not
represent an unduly large part of the fee
for the activity because it occurs automat-
ically with the first installment payment.
As noted above, Section 6(a)(2)(a) of the
OMB Circular requires that user fees re-
cover the full cost to the government of
providing the service and nothing in the

OMB Circular mandates agency heads to
seek an exception to the full cost require-
ment. Nonetheless, the Commissioner of
Internal Revenue has determined that
there is a compelling tax administration
reason for seeking an exception to the full
cost requirement for low-income taxpay-
ers.

The fourth comment's fourth main
concern focused on the overall amount of
the proposed user fees and included a
number of related comments on the size of
the fees, the agency's methodology in cal-
culating the fees, and the efforts the IRS
has taken to minimize the costs of provid-
ing these services. The comment ques-
tioned why the IRS decided not to change
the $43 user fee for low-income taxpay-
ers. The comment asked why the increase
in costs of these services exceeded the rate
of inflation during the past two years. The
comment also questioned the IRS's effi-
ciency in providing this special benefit
and the IRS's concern in ensuring that its
costs are driven down when providing this
service. The comment expressed concern
that if installment agreement volumes re-
mained the same, the agency would in-
crease its user fee receipts by tens of mil-
lions of dollars. Finally, the comment
noted that the user fees do not depend on
the balance due under an installment
agreement and questioned why the user
fee is taken from the first payments due
under the installment agreement.

Contrary to what the comment as-
serted, the per-unit cost of the installment
agreement program has not generally in-
creased, rather it has generally decreased.
In the 2013 biennial review, the IRS de-
termined that the full cost of an install-
ment agreement was $282, the full cost of
an installment agreement paid by way of
direct debit was $122, and the full cost of
restructuring and reinstating an install-
ment agreement was $85. See 78 FR
53702 (2013 Regulations). In connection
with the 2013 biennial review and the
2013 Regulations, the IRS had requested
and received an exception to the full cost
requirement under the OMB Circular for
the installment agreement user fees. As a
result, the 2013 Regulations did not
charge full cost for any of the installment
agreement options. Requesting an excep-
tion to the full cost requirement of the
OMB Circular is within the discretion of

the agency head and must be approved by
the Office of Management and Budget. In
the 2015 biennial review, the IRS deter-
mined that the full cost of an installment
agreement is $225, the full cost of an
installment agreement paid by way of di-
rect debit is $107, and the full cost of
restructuring and reinstating an install-
ment agreement is $89. Thus, contrary to
the comment's assertion, the cost of the
installment agreement program has gener-
ally decreased rather than generally in-
creased during the span of two years. Fur-
thermore, the IRS always strives to make
its services cost-effective. The decrease in
the installment agreement costs since
2013 demonstrates one of the ways the
IRS seeks to make its services most cost
effective for the public. The IRS also
seeks new ways to makes its services
more accessible to taxpayers. The IRS has
worked to improve the usability of the
online payment agreement application
that provides for significantly lower costs.
The user fee for the online payment agree-
ment is $149, and if the installment agree-
ment is paid by way of direct debit, is only
$31. Practitioners can submit an online
payment agreement application on behalf
of their clients to secure lower fees. For
smaller tax liabilities, the IRS has estab-
lished procedures for setting up install-
ment agreements utilizing guaranteed,
streamlined, or in-business express crite-
ria that are quicker to process and do not
require securing a collection of informa-
tion statement. See I.R.M. 5.14.5. The IRS
has never based its user fee on the amount
of liability due under the agreement,
which would be inconsistent with the full
cost requirement under the OMB Circular.
The IRS, however, has provided taxpayers
the option to pay their liability in full over
120 days without being charged any user
fee. Furthermore, under the new fee struc-
ture, taxpayers choose a specific install-
ment agreement service and pay the cost
of the service. For example, a taxpayer
may choose a direct debit online payment
agreement and pay only $31 or a taxpayer
may choose a regular installment agree-
ment and pay $225. With regard to the
user fee being taken from the first pay-
ments due under the installment agree-
ment, this is not relevant for purposes of
the regulations as this is not addressed in
the regulations. Regardless, the OMB Cir-

cular requires user fees to be "collected in
advance of, or simultaneously with, the
rendering of services unless appropria-
tions and authority are provided in ad-
vance to allow reimbursable services."
Section 6(a)(2)(C) of the OMB Circular.
Instead of requiring the taxpayer to pay
the entire fee in advance of the IRS enter-
ing into the installment agreement, the
IRS allows the taxpayer to pay the fee
with the first installment agreement pay-
ments, thereby lessening the burden on the
taxpayer and making installment agree-
ments more accessible to taxpayers.

The fifth comment had three sugges-
tions: (1) eliminate installment agreement
user fees for low-income taxpayers, (2)
revise internal guidelines to place less em-
phasis on speedy collection practices and
more emphasis on viable collection prac-
tices, and (3) increase the transparency of
the installment agreement user fees in
publications.

The fifth comment's first suggestion
was that the IRS should waive the entire
user fee for low-income taxpayers and
thereby incentivize them to enter into in-
stallment agreements instead of being
placed in currently not collectible status or
entering into an offer in compromise. Ac-
cording to the comment, this would in-
crease the amount of revenue that the IRS
collects and encourage taxpayers to enter
into compliance. The comment pointed
out that there is no user fee for a low-
income taxpayer entering an offer in com-
promise. The IRS's response to a similar
comment made to the installment agree-
ment fee increase proposed in the 2013
notice of proposed rulemaking pointed out
that the offer in compromise fee is
charged for mere consideration of the of-
fer and is not refunded if it is not accepted.
The comment claimed that the IRS con-
tradicted itself by further responding that
the purpose of a user fee is to recover the
cost to the government for a particular
service to the recipient.

The comment opined that by waiving
the low-income taxpayer user fee entirely,
the number of low-income taxpayers mak-
ing payments on their tax liabilities could
increase. By way of example, the com-
ment posited the possibility of a low-
income taxpayer submitting an offer in
compromise, paying no fee, and the IRS
ultimately collecting less than it would

have if it had allowed the low-income
taxpayer to enter into an installment
agreement with a complete fee waiver.
According to the comment, if a low-
income taxpayer enters into currently not
collectible status and makes voluntary
payments, those payments will be spo-
radic and less than would be collected
from an installment agreement since the
taxpayer would not receive monthly re-
minders. The comment referenced the
IRS's response to a similar comment
made to the installment agreement fee in-
crease proposed in the 2013 notice of pro-
posed rulemaking, to which the IRS re-
sponded that generally taxpayers who
have the ability to pay their tax liability
over time (and thus are eligible for install-
ment agreements) will not qualify for cur-
rently not collectible status. In response,
the comment suggested that many taxpay-
ers that qualify for currently not collect-
ible status may be mistakenly placed into
installment agreements because the tax-
payers may feel pressured to make pay-
ments, the taxpayers misstate their ex-
penses and income, or the taxpayers are
willing to cut back on their monthly living
expenses. The comment provided exam-
ples to show how the $43 fee created
disincentives for low-income taxpayers to
enter into installment agreements in cases
where the liability was relatively small.
The comment requested that the IRS clar-
ify that the user fee does not have to be
paid up front but may be paid in install-
ments if the taxpayer's monthly install-
ment payment is less than the user fee.

The IRS considered the effect of the
user fee on low-income taxpayers in 2006
and 2013 when the installment agreement
user fees were updated. Both times, the
IRS determined that the user fee should
remain $43 for low-income taxpayers.
The IRS again has determined that the
user fee for installment agreements (other
than for a direct debit online payment
agreement) should remain at $43 for low-
income taxpayers, both because requiring
the full rate would be financially burden-
some to low-income taxpayers and be-
cause waiving the fee entirely is not fis-
cally sustainable for the IRS given the
constraints on its resources for tax admin-
istration. Typically, a taxpayer that is able
to pay in full the liability under an install-
ment agreement is not eligible to enter

into an offer in compromise. As discussed
in the preamble to T.D. 9647, 78 FR
72016-01, a taxpayer that is in currently
not collectible status is typically not eligi-
ble to enter into an installment agreement.
The low-income taxpayers that enter into
installment agreements described in the
examples the comment presented do so as
a result of the taxpayers' choices or erro-
neous submissions of information to the
IRS. Thus, the comment's hypothetical
low-income taxpayer is the exception not
the general rule. To ensure that low-
income taxpayers are more aware of the
fee options for the various types of install-
ment agreements, the IRS will be revising
its publications to make them consistent
with the final regulations.

The fifth comment's second main con-
cern was that low-income taxpayers are
not always aware of the availability of the
reduced fee and as a consequence some
low-income taxpayers pay the regular fee.
The comment suggested that IRS employ-
ees could do more to make low-income
taxpayers aware of their options. The
comment also asserted that installment
agreements are set up not to allow low-
income taxpayers to modify payments
based on unforeseen changes in economic
circumstances. The comment stated this
can result in low-income taxpayers de-
faulting and either become subject to col-
lection action or subject to the installment
agreement reinstatement fee of $89 under
the proposed regulations.

The comment requested that the IRS
revise its procedures in the Internal Rev-
enue Manual to place less emphasis on
timely collection practices and more em-
phasis on viable collection practices.

The fifth comment's concerns about
tax administration are generally beyond
the scope of these regulations. However,
for purposes of clarification, under the
proposed regulations the user fee for rein-
stating an installment agreement for a
low-income taxpayer would be $43, not
$89. Furthermore, while these concerns
do not affect the content of these final
regulations, the IRS will consider these
comments when updating the procedures
in the Internal Revenue Manual for enter-
ing into installment agreements.

The fifth comment's third suggestion
was for the IRS to clearly communicate
to the public both through the internet

and in hard copy publications the re-
vised fee schedule so that taxpayers may
make informed decisions when deciding
the manner of setting up an installment
agreement. The comment suggested that
taxpayers who lack access to the inter-
net, lack computer efficiency, lack a
bank account, or have other disabilities
or barriers should not be subjected to the
higher user fees.

The IRS will be updating its electronic
and hard copy publications to reflect the
user fees in the final regulations. As ex-
plained in the proposed notice of rulemak-
ing and in this Summary of Comments,
the purpose of the user fees for installment
agreements is to recover the full cost to
the IRS of providing this special benefit to
specific beneficiaries and the user fees in
these final regulations are in accordance
with the OMB Circular.

### Special Analyses

Certain IRS regulations, including
this one, are exempt from the require-
ments of Executive Order 12866, as sup-
plemented and reaffirmed by Executive
Order 13563. Therefore, a regulatory
impact assessment is not required. It is
hereby certified that these regulations
will not have a significant economic im-
pact on a substantial number of small
entities. This certification is based on
the information that follows. The eco-
nomic impact of these regulations on
any small entity would result from the
entity being required to pay a fee pre-
scribed by these regulations in order to
obtain a particular service. The dollar
amount of the fee is not, however, sub-
stantial enough to have a significant
economic impact on any entity subject
to the fee. Low-income taxpayers and
taxpayers entering into direct debit on-
line payment agreements will be
charged a lower fee, which lessens the
economic impact of these regulations.
Accordingly, a regulatory flexibility
analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business and no comments were
received.

### Drafting Information

The principal author of these regula-
tions is Maria Del Pilar Austin of the
Office of the Associate Chief Counsel
(Procedure and Administration). Other
personnel from the Treasury Department
and the IRS participated in their develop-
ment.

* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 300 is
amended as follows:

#### PART 300-USER FEES

Paragraph 1. The authority citation for
part 300 continues to read as follows:
Authority: 31 U.S.C. 9701.

Par. 2. In § 300.1, paragraphs (b) and
(d) are revised to read as follows:

§ 300.1 Installment agreement fee.

* * * * *

(b) Fee. The fee for entering into an
installment agreement before January 1,
2017, is $120. The fee for entering into an
installment agreement on or after January
1, 2017, is $225. A reduced fee applies in
the following situations:

(1) For installment agreements en-
tered into before January 1, 2017, the
fee is $52 when the taxpayer pays by
way of a direct debit from the taxpayer's
bank account. The fee is $107 when the
taxpayer pays by way of a direct debit
from the taxpayer's bank account for
installment agreements entered into on
or after January 1, 2017;

(2) For online payment agreements
entered into before January 1, 2017, the
fee is $120, except that the fee is $52
when the taxpayer pays by way of a
direct debit from the taxpayer's bank
account. The fee is $149 for entering
into online payment agreements on or
after January 1, 2017, except that the fee
is $31 when the taxpayer pays by way of
a direct debit from the taxpayer's bank
account; and

(3) Notwithstanding the type of install-
ment agreement and method of payment,
the fee is $43 if the taxpayer is a low-
income taxpayer, that is, an individual

who falls at or below 250 percent of the
dollar criteria established by the poverty
guidelines updated annually in the Fed-
eral Register by the U.S. Department of
Health and Human Services under author-
ity of section 673(2) of the Omnibus Bud-
get Reconciliation Act of 1981 (95 Stat.
357, 511), or such other measure that is
adopted by the Secretary, except that the
fee is $31 when the taxpayer pays by way
of a direct debit from the taxpayer's bank
account with respect to online payment
agreements entered into on or after Janu-
ary 1, 2017;

* * * * *

(d) Applicability date. This section is
applicable beginning January 1, 2017.

Par. 3. In § 300.2, paragraphs (b) and
(d) are revised to read as follows:

##### § 300.2 Restructuring or reinstatement of installment agreement fee.

* * * * *

(b) Fee. The fee for restructuring or
reinstating an installment agreement be-
fore January 1, 2017, is $50. The fee for
restructuring or reinstating an install-
ment agreement on or after January 1,
2017, is $89. If the taxpayer is a low-
income taxpayer, that is, an individual
who falls at or below 250 percent of the
dollar criteria established by the poverty
guidelines updated annually in the Fed-
eral Register by the U.S. Department of
Health and Human Services under au-
thority of section 673(2) of the Omnibus
Budget Reconciliation Act of 1981 (95
Stat. 357, 511), or such other measure
that is adopted by the Secretary, then the
fee for restructuring or reinstating an
installment agreement on or after Janu-
ary 1, 2017 is $43.

* * * * *

(d) Applicability date. This section is
applicable beginning January 1, 2017.

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Approved: November 16, 2016.

Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).

(Filed by the Office of the Federal Register on November
29, 2016, 11:15 a.m., and published in the issue of the
Federal Register for December 2, 2016, 81 F.R. 86955)

26 CFR 1.6695-2 and 26 CFR 1.6695-2T: Tax re-
turn preparer due diligence requirements for certain
credits

#### Tax Return Preparer Due Diligence Penalty under Section 6695(g)

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602

[TD 9799]

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains
temporary regulations that modify exist-
ing regulations related to the penalty un-
der section 6695(g) of the Internal Reve-
nue Code (Code) relating to tax return
preparer due diligence. These temporary
regulations implement recent law changes
that expand the tax return preparer due
diligence penalty under section 6695(g) so
that it applies to the child tax credit
(CTC), additional child tax credit
(ACTC), and the American Opportunity
Tax Credit (AOTC), in addition to the
earned income credit (EIC). The tempo-
rary regulations affect tax return prepar-
ers. The substance of the temporary regu-
lations is included in the proposed
regulations set forth in the notice of pro-
posed rulemaking on this subject in the
Proposed Rules section in this issue of the
Internal Revenue Bulletin.

DATES: Effective Date: These regula-
tions are effective on December 5, 2016.

Applicability Date: For dates of appli-
cability, see § 1.6695-2T(e).

FOR FURTHER INFORMATION
CONTACT: Rachel L. Gregory, 202-
317-6845 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

##### Paperwork Reduction Act

The collection of information con-
tained in these temporary and final regu-
lations is in § § 1.6695-2(b) and 1.6695-
2T(b) and is reported on Form 8867, "Paid
Preparer's Due Diligence Checklist." Re-
sponses to this collection of information
are mandatory. The collection of informa-
tion in current § 1.6695-2 was previously
reviewed and approved under control
number 1545-1570. Control number
1545-1570 was discontinued in 2014, as
the burden for the collection of informa-
tion contained in § 1.6695-2 is reflected in
the burden on Form 8867 under control
number 1545-1629.

##### Background

This document contains amendments
to 26 CFR parts 1 and 602 under section
6695(g) of the Code, imposing a penalty
on tax return preparers who fail to comply
with the due diligence requirements im-
posed by the Secretary by regulations with
respect to determining the eligibility for,
or the amount of, the EIC. Section
6695(g) was added to the Code because
Congress believed more thorough efforts
by tax return preparers are important to
improving EIC compliance. H.R. Rep.
No. 105-148, 105th Cong. 1st Sess., p. 512
(June 24, 1997).

Enacted by section 1085(a)(2) of the
Taxpayer Relief Act of 1997, Pub. L.
105-34 (11 Stat. 788, 955 (1997)), and
effective for taxable years beginning after
December 31, 1996, section 6695(g) orig-
inally imposed a $100 penalty on an in-
come tax return preparer who failed to
meet the EIC due diligence requirements
set forth in regulations prescribed by the
Secretary. Section 8246 of the Small Busi-
ness and Work Opportunity Tax Act of
2007, Pub. L. 110-28 (121 Stat. 112, 200
(2007)) amended the penalty to apply to
all tax return preparers. Section 501(a) of
the United States-Korea Free Trade
Agreement Implementation Act, Pub. L.
112-41 (125 Stat. 428, 459 (2011)),
amended section 6695(g) to increase the
amount of the penalty to $500, effective
for returns required to be filed after De-
cember 31, 2011. Section 208(c), Div. B
of the Tax Increase Prevention Act of

2014, Pub. L. 113-295 (128 Stat. 4010,
4073 (2014)) (2014 Act), added section
6695(h), which indexes the penalty
amount for inflation, effective for returns
or claims for refund filed after December
31, 2014.

Section 1.6695-2 implements section
6695(g) by imposing due diligence re-
quirements on persons who are tax return
preparers under section 7701(a)(36) with
respect to determining eligibility for, or
the amount of, the EIC. The due diligence
requirements set forth in § 1.6695-2(b)
are that the preparer must: (1) complete
and submit Form 8867, "Paid Preparer's
Earned Income Credit Checklist;" (2)
complete the Earned Income Credit
Worksheet (Worksheet), as contained in
the Form 1040 instructions or record the
preparer's computation of the credit, in-
cluding the method and information used
to make the computation; (3) not know or
have reason to know that any information
used by the preparer in determining eligi-
bility for, and the amount of, the EIC is
incorrect and make reasonable inquiries
when required, documenting those inqui-
ries and responses contemporaneously
(knowledge requirement); and (4) retain,
for three years from the applicable date,
the Form 8867, the Worksheet (or alter-
native records), and the record of how and
when the information used to determine
eligibility for, and the amount of, the EIC
was obtained by the preparer, including
the identity of any person furnishing in-
formation and a copy of any document
relied on by the preparer.

To comply with the knowledge re-
quirement under § 1.6695-2(b)(3), the tax
return preparer may not ignore the impli-
cations of information furnished to, or
known by, the tax return preparer, and
must make reasonable inquiries if the in-
formation furnished to the tax return pre-
parer appears to be incorrect, inconsistent,
or incomplete. Examples in § 1.6695-
2(b)(3)(ii) illustrate this requirement. This
knowledge requirement is consistent with
the verification requirement imposed on
all tax return preparers with respect to
preparation of any tax return or claim for
refund under the accuracy-related stan-
dards set forth in § 1.6694-1(e).

A tax return preparer is required to
submit the Form 8867 to the IRS when the
preparer electronically files the tax return.

If a tax return preparer required to com-
plete the Form 8867 is not electronically
filing the taxpayer's return with the IRS,
§ 1.6695-2(b)(1) provides rules for sub-
mission of the form. If the tax return pre-
parer required to complete the Form 8867
is not the signing tax return preparer, the
preparer satisfies the submission require-
ment by providing a copy of the com-
pleted Form 8867 to the signing tax return
preparer. If the tax return preparer re-
quired to complete the Form 8867 is the
signing tax return preparer but the tax-
payer is not electronically filing the return,
the preparer must provide a copy of the
completed Form 8867 to the taxpayer to
be attached to the return being filed with
the IRS.

Section 1.6695-2(c) provides that a
firm that employs a tax return preparer
subject to a penalty under section 6695(g)
is also subject to a penalty if certain con-
ditions apply. Under this rule, a firm will
be subject to a penalty if and only if one or
more members of principal management
(or principal officers) of the firm or branch
participated in, or prior to the time the
return was filed, knew of the failure to
comply with the due diligence require-
ments; the firm failed to establish reason-
able and appropriate procedures to ensure
compliance with the due diligence re-
quirements; or, through willfulness, reck-
lessness, or gross indifference (including
ignoring facts that would lead a person of
reasonable prudence and competence to
investigate or ascertain) the firm disre-
garded its own reasonable and appropriate
compliance procedures. A firm subject to
a section 6695(g) penalty under this sec-
tion is not eligible for the exception to the
penalty in § 1.6695-2(d). Under this ex-
ception, the penalty will not be applied if
the tax return preparer can demonstrate to
the satisfaction of the IRS that, consider-
ing all of the facts and circumstances, the
tax return preparer's normal office proce-
dures are reasonably designed and rou-
tinely followed to ensure compliance with
the due diligence requirements, and the
failure to meet the due diligence require-
ments with respect to the particular tax
return or claim for refund was isolated and
inadvertent.

Section 207, Div. Q of the Protecting
Americans from Tax Hikes Act of 2015,
Pub. L. 114-113 (129 Stat. 2242, 3082

(2015)) (PATH Act) amended section
6695(g) by expanding the scope of the due
diligence requirements to also include
claims of the CTC/ACTC under section
24 and the AOTC under section
25A(a)(1), effective for taxable years be-
ginning after December 31, 2015.

These temporary regulations reflect the
changes made to section 6695(g) by the
PATH Act by expanding the due diligence
requirements to the CTC/ACTC and
the AOTC. These temporary regulations
also conform the regulation to the 2014
Act, reflecting that the penalty is to be
adjusted for inflation.

##### Explanation of Provisions

The temporary regulations amend
§ 1.6695-2 to implement the changes
made by the PATH Act that extend the
preparer due diligence requirements to re-
turns or claims for refund including
claims of the CTC/ACTC and/or AOTC
in addition to the EIC. As a result of these
changes, one return or claim for refund
may contain claims for more than one
credit subject to the due diligence require-
ments. Pursuant to the statute, each failure
to comply with the due diligence require-
ments set forth in regulations prescribed
by the Secretary results in a penalty. The
section 6695(g) requirements apply to
each credit claimed, meaning more than
one penalty could apply to a single return
or claim for refund. The temporary regu-
lations provide examples to show how
multiple penalties could apply when one
return or claim for refund is filed.

The Form 8867 has been revised for
the 2016 tax year and is a single checklist
to be used for all applicable credits (EIC,
CTC/ACTC, and/or AOTC) on the return
or claim for refund subject to the section
6695(g) due diligence requirements. The
Form 8867 was streamlined to eliminate
unnecessary redundancy with other forms
and schedules. These changes were in-
tended to reduce burden while increas-
ing the utility of the Form 8867 as a
checklist for tax return preparers to
more accurately determine taxpayer eli-
gibility for credits, thereby reducing er-
rors and increasing compliance by pre-
parers and taxpayers. The temporary
regulations clarify § 1.6695-2(b)(1)(ii)
to illustrate that the completion of Form
8867 can be based on information pro-

vided by the taxpayer to the preparer or
otherwise reasonably obtained or previ-
ously known by the preparer.

The examples provided in § 1.6695-
2(b)(3)(ii) have been updated to provide
more insight into when a tax return pre-
parer has satisfied the due diligence
knowledge requirement, including for
purposes of the CTC and AOTC. The
updates to the examples in § 1.6695-
2T(b)(3)(ii) illustrate that the knowledge
requirement for purposes of due diligence
can be satisfied in conjunction with a tax
return preparer's information-gathering
activities done for the purpose of accu-
rately completing other aspects of a tax
return or claim for refund. New examples,
Example 2 and Example 4, have also been
added to illustrate that in certain circum-
stances a tax return preparer may satisfy
the knowledge requirement based on ex-
isting knowledge without having to make
additional reasonable inquiries. Another
new example, Example 7, provides an ex-
ample of due diligence for purposes of the
AOTC.

Section 1.6695-2(a) is amended by the
temporary regulations to reflect the
changes made by section 208(c) of
the 2014 Act, requiring the IRS to index
the penalty for inflation for returns or
claims for refund filed after December 31,
2014. In addition, § 1.6695-2T(c)(3) clar-
ifies the parenthetical therein by removing
the words "or ascertained."

##### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory assessment is not
required. For applicability of the Regula-
tory Flexibility Act, please refer to the
cross-reference notice of proposed rule-
making published elsewhere in this issue
of the Federal Register. Pursuant to sec-
tion 7805(f) of the Code, these regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on the impact
on small businesses.

##### Drafting Information

The principal author of this regulation
is Rachel L. Gregory, Office of the Asso-

ciate Chief Counsel (Procedure & Admin-
istration).

* * * * *

26 CFR Part 602

Reporting and recordkeeping require-
ments.

##### Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602
are amended as follows:

##### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding a new entry
in numerical order to read in part as fol-
lows:

Authority: 26 U.S.C. 7805 * * *

Section 1.6695-2T is also issued under
26 U.S.C. 6695(g).

* * * * *

Par. 2. Section 1.6695-2 is amended by
revising the section heading and para-
graphs (a), (b)(1)(i) introductory text,
(b)(1)(ii), (b)(2), (b)(3)(i) and (ii),
(b)(4)(i)(B) and (C), and (c)(3) to read as
follows:

§ 1.6695-2 Tax return preparer due
diligence requirements for certain
credits.

(a) [Reserved]. For further guidance
regarding the penalty for failure to meet
due diligence requirements with respect to
certain credits, see § 1.6695-2T(a).

(b) * * *

(1) * * *

(i) [Reserved]. For further guidance re-
garding the completion of Form 8867, see
§ 1.6695-2T(b)(1)(i).

* * * * *

(ii) [Reserved]. For further guidance
regarding the information used to com-
plete the Form 8867, see 1.6695-
2T(b)(1)(ii).

(2) [Reserved]. For further guidance
regarding computation, see § 1.6695-
2T(b)(2).

(3) * * *

(i) [Reserved]. For further guidance re-
garding the knowledge requirement, see
§ 1.6695-2T(b)(3)(i).

(ii) [Reserved]. For current examples,

see § 1.6695-2T(b)(3)(ii).

(4) * * *

(i) * * *
(B) [Reserved]. For further guidance
on the retention of records, see § 1.6695-
2T(b)(4)(i)(B).

* * * * *

(3) [Reserved]. For further guidance on
the special rule for firms, see § 1.6695-
2T(c)(3).

* * * * *

Par. 3. Section 1.6695-2T is added to
read as follows:

§ 1.6695-2T Tax return preparer due
diligence requirements for certain
credits (Temporary).

(a) Penalty for failure to meet due dil-
igence requirements-(1) In general. A
person who is a tax return preparer (as
defined in section 7701(a)(36)) of a tax
return or claim for refund under the Inter-
nal Revenue Code with respect to deter-
mining the eligibility for, or the amount
of, the child tax credit (CTC) and addi-
tional child tax credit (ACTC) under sec-
tion 24, the American opportunity tax
credit (AOTC) under section 25A(i), or
the earned income credit (EIC) under sec-
tion 32 and who fails to satisfy the due
diligence requirements of paragraph (b) of
this section will be subject to a penalty as
prescribed in section 6695(g) (indexed for
inflation under section 6695(h)) for each
failure. A separate penalty applies with
respect to each credit claimed on a return
or claim for refund for which the due
diligence requirements of this section are
not satisfied and for which the exception
to penalty provided by paragraph (d) of
this section does not apply.

(2) Examples. The provisions of para-
graph (a)(1) of this section are illustrated
by the following examples:

Example 1. Preparer A prepares a federal in-
come tax return for a taxpayer claiming the CTC
and the AOTC. Preparer A did not meet the due
diligence requirements under this section with re-
spect to the CTC or the AOTC claimed on the
taxpayer's return. Unless the exception to penalty
provided by paragraph (d) of this section applies,
Preparer A is subject to two penalties under sec-
tion 6695(g): one for failure to meet the due dil-
igence requirements for the CTC and a second
penalty for failure to meet the due diligence re-
quirements for the AOTC.

Example 2. Preparer B prepares a federal in-
come tax return for a taxpayer claiming the CTC
and the AOTC. Preparer B did not meet the due
diligence requirements under this section with re-
spect to the CTC claimed on the taxpayer's return,
but Preparer B did meet the due diligence require-
ments under this section with respect to the AOTC
claimed on the taxpayer's return. Unless the ex-
ception to penalty provided by paragraph (d) of
this section applies, Preparer B is subject to one
penalty under section 6695(g) for the failure to
meet the due diligence requirements for the CTC.
Preparer B is not subject to a penalty under section
6695(g) for failure to meet the due diligence re-
quirements for the AOTC.

(b) [Reserved]. For further guidance,
see § 1.6695-2(b).

(1) Completion and submission of
Form 8867. (i) The tax return preparer
must complete Form 8867, "Paid Prepar-
er's Due Diligence Checklist," or such
other form and such other information as
may be prescribed by the Internal Reve-
nue Service (IRS), and-

(A) through (C) [Reserved]. For further
guidance, see § 1.6695-2(b)(1)(i)(A)
through (C).

(ii) The tax return preparer's comple-
tion of Form 8867 must be based on in-
formation provided by the taxpayer to the
tax return preparer or otherwise reason-
ably obtained or known by the tax return
preparer.

(2) Computation of credit or credits. (i)
When computing the amount of a credit
described in paragraph (a) of this section
to be claimed on a return or claim for
refund, the tax return preparer must ei-
ther-

(A) Complete the worksheet in the
Form 1040, 1040A, 1040EZ, and/or Form
8863 instructions or such other form in-
cluding such other information as may be
prescribed by the IRS applicable to each
credit described in paragraph (a) of this
section claimed on the return or claim for
refund; or

(B) Otherwise record in one or more
documents in the tax return preparer's pa-
per or electronic files the tax return pre-
parer's computation of the credit or cred-
its claimed on the return or claim for
refund, including the method and informa-
tion used to make the computations.

(ii) The tax return preparer's comple-
tion of an applicable worksheet de-
scribed in paragraph (b)(2)(i)(A) of this
section (or other record of the tax return
preparer's computation of the credit or
credits permitted under paragraph

(b)(2)(i)(B) of this section) must be
based on information provided by the
taxpayer to the tax return preparer or
otherwise reasonably obtained or known
by the tax return preparer.

(3) Knowledge-(i) In general. The tax
return preparer must not know, or have
reason to know, that any information used
by the tax return preparer in determining
the taxpayer's eligibility for, or the
amount of, any credit described in para-
graph (a) of this section and claimed on
the return or claim for refund is incorrect.
The tax return preparer may not ignore the
implications of information furnished to,
or known by, the tax return preparer, and
must make reasonable inquiries if a rea-
sonable and well-informed tax return pre-
parer knowledgeable in the law would
conclude that the information furnished to
the tax return preparer appears to be in-
correct, inconsistent, or incomplete. The
tax return preparer must also contempora-
neously document in the files any inqui-
ries made and the responses to those in-
quiries.

(ii) Examples. The provisions of para-
graph (b)(3)(i) of this section are illus-
trated by the following examples:

Example 1. In 2018, Q, a 22 year-old taxpayer,
engages Preparer C to prepare Q's 2017 federal
income tax return. Q completes Preparer C's stan-
dard intake questionnaire and states that she has
never been married and has two sons, ages 10 and
11. Based on the intake sheet and other information
that Q provides, including information that shows
that the boys lived with Q throughout 2017, Preparer
C believes that Q may be eligible to claim each boy
as a qualifying child for purposes of the EIC and the
CTC. However, Q provides no information to Pre-
parer C, and Preparer C does not have any informa-
tion from other sources, to verify the relationship
between Q and the boys. To meet the knowledge
requirement in paragraph (b)(3) of this section, Pre-
parer C must make reasonable inquiries to determine
whether each boy is a qualifying child of Q for
purposes of the EIC and the CTC, including reason-
able inquiries to verify Q's relationship to the boys,
and Preparer C must contemporaneously document
these inquiries and the responses.

Example 2. Assume the same facts as in Exam-
ple 1 of this paragraph (b)(3)(ii). In addition, as
part of preparing Q's 2017 federal income tax
return, Preparer C made sufficient reasonable in-
quiries to verify that the boys were Q's legally
adopted children. In 2019, Q engages Preparer C
to prepare her 2018 federal income tax return.
When preparing Q's 2018 federal income tax re-
turn, Preparer C is not required to make additional
inquiries to determine the boys relationship to Q
for purposes of the knowledge requirement in
paragraph (b)(3) of this section.

Example 3. In 2018, R, an 18 year-old taxpayer,
engages Preparer D to prepare R's 2017 federal
income tax return. R completes Preparer D's stan-
dard intake questionnaire and states that she has
never been married, has one child, an infant, and
that she and her infant lived with R's parents
during part of the 2017 tax year. R also provides
Preparer D with a Form W-2 showing that she
earned $10,000 during 2017. R provides no other
documents or information showing that R earned
any other income during the tax year. Based on the
intake sheet and other information that R provides,
Preparer D believes that R may be eligible to
claim the infant as a qualifying child for the EIC
and the CTC. To meet the knowledge requirement
in paragraph (b)(3) of this section, Preparer D
must make reasonable inquiries to determine
whether R is eligible to claim these credits, in-
cluding reasonable inquiries to verify that R is not
a qualifying child of her parents (which would
make R ineligible to claim the EIC) or a dependent
of her parents (which would make R ineligible to
claim the CTC), and Preparer D must contempo-
raneously document these inquiries and the re-
sponses.

Example 4. The facts are the same as the facts in
Example 3 of this paragraph (b)(3)(ii). In addition,
Preparer D previously prepared the 2017 joint fed-
eral income tax return for R's parents. Based on
information provided by R's parents, Preparer D has
determined that R is not eligible to be claimed as a
dependent or as a qualifying child for purposes of the
EIC or CTC on R's parents' return. Therefore, for
purposes of the knowledge requirement in paragraph
(b)(3) of this section, Preparer D is not required to
make additional inquiries to determine that R is not
her parents' qualifying child or dependent.

Example 5. In 2018, S engages Preparer E to
prepare his 2017 federal income tax return. During
Preparer E's standard intake interview, S states that
he has never been married and his niece and nephew
lived with him for part of the 2017 tax year. Preparer
E believes S may be eligible to claim each of these
children as a qualifying child for purposes of the EIC
and the CTC. To meet the knowledge requirement in
paragraph (b)(3) of this section, Preparer E must
make reasonable inquiries to determine whether each
child is a qualifying child for purposes of the EIC
and the CTC, including reasonable inquiries about
the children's parents and the children's residency,
and Preparer E must contemporaneously document
these inquiries and the responses.

Example 6. W engages Preparer F to prepare her
federal income tax return. During Preparer F's stan-
dard intake interview, W states that she is 50 years
old, has never been married, and has no children. W
further states to Preparer F that during the tax year
she was self-employed, earned $10,000 from her
business, and had no business expenses or other
income. Preparer F believes W may be eligible for
the EIC. To meet the knowledge requirement in
paragraph (b)(3) of this section, Preparer F must
make reasonable inquiries to determine whether W is
eligible for the EIC, including reasonable inquiries to
determine whether W's business income and ex-
penses are correct, and Preparer F must contempo-
raneously document these inquiries and the re-
sponses.

Example 7. Y, who is 32 years old, engages
Preparer G to prepare his federal income tax return.
Y completes Preparer G's standard intake question-
naire and states that he has never been married. As
part of Preparer G's client intake process, Y provides
Preparer G with a copy of the Form 1098-T Y
received showing that University M billed $4,000 of
qualified tuition and related expenses for Y's enroll-
ment or attendance at the university and that Y was
at least a half-time undergraduate student. Preparer
G believes that Y may be eligible for the AOTC. To
meet the knowledge requirements in paragraph
(b)(3) of this section, Preparer G must make reason-
able inquiries to determine whether Y is eligible for
the AOTC, as Form 1098-T does not contain all the
information needed to determine eligibility for the
AOTC or to calculate the amount of the credit if Y is
eligible, and contemporaneously document these in-
quiries and the responses.

(4) Retention of records. (i) [Reserved].
For further guidance, see § 1.6695-
2(b)(4)(i).

(A) [Reserved]. For further guidance,
see § 1.6695-2(b)(4)(i)(A).

(B) A copy of each completed worksheet
required under paragraph (b)(2)(i)(A) of this
section (or other record of the tax return
preparer's computation permitted under
paragraph (b)(2)(i)(B) of this section); and

(C) A record of how and when the
information used to complete Form 8867
and the applicable worksheets required
under paragraph (b)(2)(i)(A) of this sec-
tion (or other record of the tax return
preparer's computation permitted under
paragraph (b)(2)(i)(B) of this section) was
obtained by the tax return preparer, in-
cluding the identity of any person furnish-

ing the information, as well as a copy of
any document that was provided by the
taxpayer and on which the tax return pre-
parer relied to complete Form 8867 and/or
an applicable worksheet required under
paragraph (b)(2)(i)(A) of this section (or
other record of the tax return preparer's
computation permitted under paragraph
(b)(2)(i)(B) of this section).

(ii) through (iii) [Reserved]. For further
guidance, see § 1.6695-2(b)(4)(ii)
through (iii).

(1) through (2) [Reserved]. For further
guidance, see § 1.6695-2(c)(1) through
(2).

(3) The firm disregarded its reasonable
and appropriate compliance procedures
through willfulness, recklessness, or gross
indifference (including ignoring facts that
would lead a person of reasonable pru-
dence and competence to investigate) in
the preparation of the tax return or claim
for refund with respect to which the pen-
alty is imposed.

(d) [Reserved]. For further guidance,
see § 1.6695-2(d).

(e) Applicability date. This section ap-
plies to tax returns and claims for refund
prepared on or after December 5, 2016
with respect to tax years beginning after
December 31, 2015. For returns and
claims for refund prepared before Decem-
ber 5, 2016 with respect to tax years be-

ginning before January 1, 2016, the rules
that apply are contained in § 1.6695-2 in
effect prior to December 5, 2016. (See 26
CFR part 1 revised as of April 2016).

(f) Expiration date. This section will
expire on December 5, 2019.

PART 602-OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

###### § 602.101 [Amended]

Par. 5. In § 602.101, paragraph (b) is
amended by removing the entry for
§ 1.6695-2 from the table.

John M Dalrymple,
Deputy Commissioner for Services and
Enforcement.

Approved: November 21, 2016.

Mark J Mazur,
Assistant Secretary of the Treasury (Tax
Policy).

(Filed by the Office of the Federal Register on December 2,
2016, 8:45 a.m., and published in the issue of the Federal
Register for December 5, 2016, 81 F.R. 87444)

# Part III. Administrative, Procedural, and Miscellaneous

Treatment of Amounts Paid
to Section 170(c)
Organizations under
Employer Leave-Based
Donation Programs to Aid
Victims of Hurricane
Matthew

Notice 2016-69

This notice provides guidance on the
treatment of leave-based donation pro-
grams to aid victims of Hurricane Mat-
thew.

## TREATMENT OF LEAVE-BASED DONATION PAYMENTS

In response to the extreme need for
charitable relief for victims of Hurricane
Matthew, employers may have adopted or
may be considering adopting leave-based
donation programs. Under leave-based
donation programs, employees can elect
to forgo vacation, sick, or personal leave
in exchange for cash payments that the
employer makes to charitable organiza-
tions described in § 170(c) of the Internal
Revenue Code (§ 170(c) organizations).
This notice provides guidance for income
and employment tax purposes on the treat-
ment of cash payments made by employ-
ers under leave-based donation programs
for the relief of victims of Hurricane Mat-
thew.

The Service will not assert that cash
payments an employer makes to § 170(c)
organizations in exchange for vacation,
sick, or personal leave that its employees
elect to forgo constitute gross income or
wages of the employees if the payments
are: (1) made to the § 170(c) organizations
for the relief of victims of Hurricane Mat-
thew; and (2) paid to the § 170(c) organi-
zations before January 1, 2018.

Similarly, the Service will not assert
that the opportunity to make such an elec-
tion results in constructive receipt of gross
income or wages for employees. Electing
employees may not claim a charitable
contribution deduction under § 170 with
respect to the value of forgone leave ex-
cluded from compensation and wages.

The Service will not assert that an em-
ployer is permitted to deduct these cash
payments exclusively under the rules of
§ 170 rather than the rules of § 162. Cash
payments to which this guidance applies
need not be included in Box 1, 3 (if ap-
plicable), or 5 of the Form W-2.

## DRAFTING INFORMATION

For further information, please contact
Sheldon Iskow of the Office of Associate
Chief Counsel (Income Tax and Account-
ing) at (202) 317-4718 (not a toll-free
number).

Section 45R - 2016
Guidance with Respect to
the Tax Credit for
Employee Health Insurance
Expenses of Certain Small
Employers

## Notice 2016-75

### I. PURPOSE

This notice provides guidance on sec-
tion 45R of the Internal Revenue Code-
(Code) for certain small employers that
cannot offer a qualified health plan (QHP)
through the Small Business Health Op-
tions Program (SHOP) Exchange because
the employer's principal business address
is in a county in Wisconsin in which a
QHP through a SHOP Exchange will not
be available for all or part of 2016 calen-
dar year. Section IV of this notice includes
a list of those counties. With respect to
those employers in Wisconsin, this notice
provides guidance on how to satisfy the
requirements for the section 45R credit for
coverage provided during the 2016 calen-
dar year and the portion of a health plan
year beginning in 2016, if any, that con-
tinues into 2017. (See Notice 2014-6,
2014 I.R.B. 279 and Notice 2015-08,
2015 I.R.B. 589 for guidance on counties
in other states in which a QHP through a
SHOP Exchange might not be available
during 2014 and 2015.)

## II. BACKGROUND

Section 45R was added to the Code by
section 1421 of the Patient Protection and
Affordable Care Act, enacted March 23,
2010, Pub. L. No. 111-148. Section 45R
offers a tax credit to certain small employ-
ers that provide health insurance coverage
to their employees (eligible small employ-
ers). The credit generally is available for
taxable years beginning after December
31, 2009. For taxable years beginning af-
ter December31, 2013, the credit is avail-
able only with respect to premiums paid
by a small employer for a QHP offered
by the employer to its employees
through a SHOP Exchange, and is avail-
able only for a period of two consecu-
tive taxable years. Additionally, for tax-
able years beginning after December 31,
2013, the maximum credit rate is in-
creased to 50 percent from 35 percent
for eligible small employers (and to 35
percent from 25 percent for tax-exempt
eligible small employers). An eligible
small employer may claim the credit by
filing an income tax return and attaching
Form 8941, "Credit for Small Employer
Health Insurance Premiums" (or in the
case of tax-exempt eligible small em-
ployers, filing Form 990-T, "Exempt
Organization Business Income Tax Re-
turn," and attaching Form 8941).

The Treasury Department and the IRS
issued final regulations under section 45R
on June 30, 2014 (79 FR 36640). The
regulations provide guidance on determin-
ing eligibility for the credit and calculat-
ing and claiming the credit.

The Treasury Department and the
IRS have been advised by the Depart-
ment ofHealth and Human Services
(HHS) that for calendar year 2016 the
SHOP Exchanges in Wisconsin will not
have QHPs available in certain counties
for employers to offer to their employ-
ees. Under HHS regulations governing
employer eligibility for SHOP Ex-
changes, an employer may either (1)
offer coverage to all of its eligible full-
time employees through the SHOP
whose service area includes the employ-
er's principal business address, or (2)
offer coverage to each eligible full-time
employee through the SHOP whose ser-

vice area includes that employee's pri-
mary worksite. 45 CFR 155.710(b)(3).
Under either approach, an employer
may offer SHOP coverage to employees
whose primary worksite is at its princi-
pal business address only if that address
is located within the service area of the
SHOP. As a result, absent the relief pro-
vided in this notice, an otherwise eligi-
ble small employer with its principal
business address in a county without any
QHPs available would be denied the op-
portunity to claim the section 45R credit
for 2016. To provide these otherwise
eligible small employers an opportunity
to claim the section 45R credit for 2016,
this notice provides relief for those em-
ployers for the plan year of the employ-
er's group health plan beginning in
2016, including any portion of that plan
year that continues into 2017, with re-
spect to employees whose primary
worksite is at the employer's principal
business address.

On December 17, 2013, the Treasury
Department and the IRS issued Notice
2014-6, 2014-2 I.R.B. 279, which pro-
vided transition relief for employers in
certain counties in Washington and Wis-
consin with no SHOP coverage available
in 2014. On January 16, 2015, Notice
2015-08, 2015-6 I.R.B. 589, was issued
which provided similar relief for employ-
ers in certain counties in Iowa with no
SHOP coverage available in 2015. The
Treasury Department and the IRS have de-
termined that similar relief, described in sec-
tion III of this notice, is appropriate for
employers in certain counties in Wisconsin
with no SHOP coverage available in 2016.
Nothing in this notice is intended to modify
or otherwise affect the relief provided in
Notice 2014-6 or Notice 2015-08.

## III. 2016 RELIEF

An eligible small employer with a prin-
cipal business address in one of the coun-
ties listed in section IV below may calcu-
late the credit under section 45R by
treating health insurance coverage pro-
vided for the 2016 health plan year as
qualifying for the section 45R credit, pro-
vided that that the coverage would have
qualified for a credit under section 45R
under the rules applicable before January
1, 2014. This treatment applies with re-
spect to the coverage provided during the

2016 calendar year and during any portion
of a health plan year beginning in 2016
that continues into 2017. If the eligible
small employer claims the section 45R
credit for the 2016 taxable year, then the
credit will be calculated at the 50 percent
rate (35 percent for tax-exempt eligible
small employers) for the entire 2016 tax-
able year. If the eligible small employer
first claims the section 45R credit for the
2016 taxable year, the 2016 taxable year
will be the first year of the two-
consecutive-taxable year credit period. If
the eligible small employer first claims the
section 45R credit for the 2015 taxable
year, then the 2016 taxable year will be
the second year of the two-consecutive-
taxable year credit period, regardless of
whether the eligible small employer takes
advantage of the relief in this notice re-
garding the credit for coverage provided
under the rules applicable before January
1, 2014.

The relief in this notice is illustrated
by the following examples. The exam-
ples assume that the employer is an el-
igible small employer that is not a tax-
exempt employer, and that its principal
business address is in a county listed in
this notice.

Example 1. (i) Facts. Employer does not claim
the credit for coverage provided for its 2015 taxable
year. Employer has a 2016 health plan year and a
2016 taxable year that both begin January 1, 2016,
and end December 31, 2016. Employer provides
health insurance coverage from January 1, 2016,
through December 31, 2016, that would have qual-
ified Employer for a credit under section 45R under
the rules applicable to taxable years beginning be-
fore January 1, 2014.

(ii) Conclusion. Employer may claim the credit
at the 50 percent rate under section 45R for coverage
provided for the entire 2016 taxable year. If Em-
ployer claims the credit for coverage provided for
the 2016 taxable year, the 2016 taxable year is the
first year of its two-consecutive-taxable year credit
period.

Example 2. (i) Facts. Employer does not claim
the credit for coverage provided for its 2015 tax-
able year. Employer has a 2016 taxable year that
begins January 1, 2016, and ends December 31,
2016, and a 2016 health plan year that begins
April 1, 2016, and ends March 31, 2017. From
April 1, 2016 through December 31, 2016 (the
initial months of its plan year that begins April 1,
2016) and from January 1, 2017 through March
31, 2017, Employer provides coverage that would
have qualified Employer for a credit under section
45R under the rules applicable to taxable years
beginning before January 1, 2014.

(ii) Conclusion. Employer may claim the credit
at the 50 percent rate under section 45R for coverage

provided from April 1, 2016 through December 31,
2016. Employer may also claim the credit under
section 45R for coverage provided for its 2017 tax-
able year from January 1, 2017 through March 31,
2017 (in addition to any credit under section 45R for
which Employer is eligible based on coverage pro-
vided from April 1 through December 31 of the 2017
taxable year).

Example 3. (i) Facts. Employer has a 2016 tax-
able year that begins January 1, 2016 and ends
December 31, 2016, and a 2016 health plan year that
begins May 1, 2016 and ends April 30, 2017. Em-
ployer provided coverage through a SHOP plan for
2015 and qualifies for, and claims, the credit for
2015. In 2016, Employer provides coverage through
a SHOP plan for January 2016. Beginning February
1 and through April 30, 2016, Employer provides
coverage with a policy for the remainder of the plan
year that would have qualified Employer for a credit
under section 45R under the rules applicable to tax-
able years beginning before January 1, 2014. From
May 1, 2016, through December 31, 2016 (the initial
months of its plan year that begins May 1, 2016), and
from January 1, 2017, through April 30, 2017, Em-
ployer provides coverage that would have qualified
Employer for a credit under section 45R under the
rules applicable to taxable years beginning before
January 1, 2014.

(ii) Conclusion. Employer may claim the
credit at the 50 percent rate under section
45R for coverage provided from January 1,
2016, through December 31, 2016. Em-
ployer may not claim the credit under sec-
tion 45R for coverage provided for its 2017
taxable year because its two-consecutive-
taxable year period ends with 2016.

# IV. LIST OF WISCONSIN COUNTIES

Pierce, Polk, St. Croix.

## V. EFFECTIVE DATE

This notice is effective as of December
2, 2016 and applies to periods after De-
cember 31, 2015.

## DRAFTING INFORMATION

The principal author of this notice is
Stephanie Caden of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information regarding this notice
contact Stephanie Caden at (202) 317-
5500 (not a toll-free number).

# IRS Enforcement and Administration of Section 871(m) and Related Withholding Provisions During the Phase-In Period

## Notice 2016-76

### I. PURPOSE

This notice provides taxpayers with
guidance for complying with final and
temporary regulations under sections
871(m), 1441, 1461, and 1473 of the In-
ternal Revenue Code (the Code) (collec-
tively, referred to as the section 871(m)
regulations) in 2017 and 2018, and ex-
plains how the Internal Revenue Service
(IRS) intends to administer those regula-
tions in 2017 and 2018. Because amend-
ments to the section 871(m) regulations
are expected, the Treasury Department
and the IRS have determined that it is
appropriate to phase in the application of
certain rules in the section 871(m) regu-
lations to facilitate the implementation of
those regulations. Comments have noted
that taxpayers and withholding agents will
face challenges complying with certain
aspects of the section 871(m) regulations
by their applicability date of January 1,
2017. Those challenges include designing,
building, and testing new withholding and
reporting infrastructure for dealers, issu-
ers, and other withholding agents; imple-
menting new system requirements for
paying agents and clearing organizations;
and enhancing and developing data
sources for determining whether transac-
tions are section 871(m) transactions.1 In
addition, certain taxpayers may face addi-
tional challenges applying for status as a
qualified derivatives dealer (QDD) under
the Qualified Intermediary (QI) withhold-
ing agreement (QI agreement) and imple-
menting the QDD regime in a timely man-
ner. The Treasury Department and the IRS
have determined that the phased-in appli-
cation of certain rules as provided by this
notice-in combination with the expected
changes to the final and temporary regu-
lations-will allow for the orderly imple-

mentation of the section 871(m) regula-
tions.

As described in detail in section III of
this notice, this notice provides as follows:

· For 2017,2 the IRS will take into ac-
count the extent to which the taxpayer
or withholding agent made a good
faith effort to comply with the section
871(m) regulations in enforcing the
section 871(m) regulations for any
delta-one transaction;

· For 2018, the IRS will take into ac-
count the extent to which the taxpayer
or withholding agent made a good
faith effort to comply with the section
871(m) regulations in enforcing the
section 871(m) regulations for any
non-delta-one transaction;

· For 2017, withholding agents may rely
on a simplified standard for determin-
ing whether transactions are combined
transactions pursuant to § 1.871-
15(n);

· For 2017, withholding agents may re-
mit amounts withheld for dividend
equivalent payments quarterly;

· For 2017 and following years, a
QDD's section 871(m) amount is to be
determined by calculating the net delta
exposure of the QDD;

· For 2017, the IRS will take into ac-
count the extent to which the QDD
made a good faith effort to comply
with the QDD provisions in the QI
agreement when enforcing those pro-
visions;

· Prospective QDDs may apply for
QDD status on or before March 31,
2017, and, if accepted by the IRS, be
treated as having QDD status as of
January 1, 2017;

· Before receiving a QI-EIN, QDDs
may provide a statement on a Form
W-8IMY that the QDD is "awaiting
QI-EIN," and withholding agents may
rely on this statement, to the extent
permitted in this notice; and

· The section 871(m) regulations will
not apply to certain existing exchange-
traded notes specifically identified in
section III.D of this notice until Janu-
ary 1, 2020.

The anti-abuse rule provided in
§ 1.871-15(o) will apply during the
phase-in years described in this notice. As
a result, a transaction that would not oth-
erwise be treated as a section 871(m)
transaction (including as a result of this
notice), may be a section 871(m) transac-
tion under § 1.871-15(o).

## II. BACKGROUND

Section 871(m) treats dividend equiv-
alent payments as U.S. source dividends
for purposes of chapters 3 and 4 and sec-
tions 871(a), 881, and 4948(a). As a re-
sult, dividend equivalent payments are
amounts subject to withholding (as de-
fined in § 1.1441-2(a)) for purposes of
sections 1441 through 1443 and withhold-
able payments (as defined in § 1.1473-
1(a)) for purposes of sections 1471 and
1472. Accordingly, a withholding agent
generally is required to deduct and with-
hold a tax equal to 30 percent on any
dividend equivalent payment made to a
foreign person unless an exception from,
or lower rate of, withholding applies pur-
suant to the Code or regulations thereun-
der, or an applicable income tax treaty.

The Treasury Department and the IRS
issued the section 871(m) regulations in
several parts. On December 5, 2013, final
regulations (TD 9648) were published at
78 FR 73079. On September 18, 2015,
final regulations and temporary regula-
tions (TD 9734) were published at 80 FR
56866 (2015 final regulations). Also on
September 18, 2015, the Federal Register
published a notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations and a notice of public hearing at 80
FR 56415 (2015 proposed regulations).
Correcting amendments to the 2015 final
regulations were published on December
7, 2015, in the Federal Register at 80 FR
75946, and on December 7, 2015, in the
Federal Register at 80 FR 75956.

On July 1, 2016, the Treasury Depart-
ment and the IRS released Notice 2016-
42, 2016-29 IRB 67, containing a pro-
posed QI agreement (the proposed QI
agreement) that describes requirements
and obligations that will be applicable to

1Unless otherwise provided, for purposes of this notice, terms that are defined in the section 871(m) regulations and in the proposed QI agreement in Notice 2016-42 (for example, "section
871(m) transaction," "qualified derivatives dealer," "delta," "dividend equivalent," "underlying security," "payment," and "QDD tax liability") have the meanings described in those
documents.

2Unless otherwise provided, all references to years refer to calendar years.

QDDs. The Treasury Department and the
IRS have received written comments on
Notice 2016-42. The Treasury Depart-
ment and the IRS intend to publish a final
QI agreement before the end of 2016,
taking into account these comments. The
final QI agreement will be effective on or
after January 1, 2017.

## III. ENFORCEMENT AND ADMINISTRATION OF COMPLIANCE WITH SECTION 871(M) DURING THE PHASED-IN YEARS

This section describes the phased-in
application of the section 871(m) regula-
tions. This notice does not apply to any
transaction that is a section 871(m) trans-
action pursuant to § 1.871-15(d)(1).

### A. Phased-In Application for Delta-One and Non-Delta-One Transactions

This notice announces that the Trea-
sury Department and the IRS intend to
amend the applicability dates of the sec-
tion 871(m) regulations with respect to
certain transactions.

#### 1. 2017 Phase-in Year for Delta-One Transactions

Section 1.871-15(d)(2) and (e) will
continue to apply with respect to any pay-
ment made with respect to any potential
section 871(m) transaction issued on or
after January 1, 2017, that has a delta of
one-including a transaction that is a
combined transaction under § 1.871-
15(n) (subject to the simplified standard
provided in section III.B of this notice).
However, as described in section III.A.3
of this notice, for taxpayers and withhold-
ing agents 2017 will be a phase-in year for
any delta-one transaction that is a section
871(m) transaction pursuant to § 1.871-
15(d)(2) or (e).

### 2. 2018 Phase-in Year for Non-Delta- One Transactions

The Treasury Department and the IRS
have determined that taxpayers and with-
holding agents need additional time to im-
plement the section 871(m) regulations
with respect to section 871(m) transac-
tions other than delta-one transactions
(non-delta-one transactions)-including

transactions that are combined transac-
tions under § 1.871-15(n). Therefore, the
Treasury Department and the IRS intend
to revise § 1.871-15(d)(2) and (e) to not
apply to any payment made with respect
to any non-delta-one transaction issued
before January 1, 2018. In addition, 2018
will be a phase-in year for any non-delta-
one transaction that is a section 871(m)
transaction pursuant to § 1.871-15(d)(2)
or (e).

### 3. IRS Enforcement and Administration During the Phase-In Years

When enforcing the section 871(m)
regulations for the applicable phase-in
year, the IRS will take into account the
extent to which the taxpayer or withhold-
ing agent made a good faith effort to com-
ply with the section 871(m) regulations.
For example, the IRS will take into ac-
count whether a withholding agent made a
good faith effort to (1) build or update its
documentation and withholding systems
to comply with the section 871(m) regu-
lations; (2) determine whether transac-
tions are combined transactions under
§ 1.871-15(n) (taking into account the
simplified standard in section III.B of this
notice for 2017); (3) report information to
other parties to a transaction (as required
under § 1.871-15(p)); and (4) implement
the substantial equivalence test provided
in § 1.871-15(h) for 2018. Any person
that did not make a good faith effort to
comply with the section 871(m) regula-
tions will not be given relief from IRS
administration or enforcement, including
penalties.

During 2017, a withholding agent will
be considered to have timely satisfied its
deposit requirements for section 871(m)
dividend equivalent payments if it makes
deposits of amounts withheld for dividend
equivalents during any calendar quarter
on or before the last day of that calendar
quarter. The withholding agent should
write "Notice 2016-76" on the center, top
portion of the tax year 2017 Form 1042
tax return.

In addition, during 2017, taxpayers
may continue to rely on Notice 2010-46.
Notice 2010-46 will be obsoleted as of
January 1, 2018.

B. Simplified Standard for Determining
Whether Transactions Are Combined
Transactions

For purposes of determining whether
transactions are section 871(m) transac-
tions, two or more transactions are treated
as a single transaction when (1) a long
party (or a related person) enters into mul-
tiple transactions that reference the same
underlying security, (2) the combined po-
tential section 871(m) transactions repli-
cate the economics of a transaction that
would be a section 871(m) transaction,
and (3) the transactions were entered into
in connection with each other. § 1.871-
15(n). In applying this combination rule, a
broker acting as a short party may pre-
sume (absent actual knowledge to the con-
trary) that transactions are not entered into
in connection with each other if (1) the
long party holds the transactions in sepa-
rate accounts, unless the broker has actual
knowledge that the separate accounts
were created or used to avoid section
871(m), or (2) the transactions are entered
into two or more business days apart.

Comments to the final section 871(m)
regulations noted that for withholding
agents to comply with this combination
rule would require the development of
novel and complicated systems to identify
transactions entered into in connection
with each other. These comments recom-
mended replacing the existing rule with a
requirement to combine contracts if the
withholding agent has actual knowledge
that the contracts were priced, marketed,
or sold in connection with each other. The
Treasury Department and the IRS have
determined that the "priced, marketed, or
sold" standard would provide an inade-
quate long-term substitute for the combi-
nation rule and would undermine enforce-
ment of the section 871(m) regulations.

However, this notice provides a simpli-
fied standard for withholding agents to
determine whether transactions entered
into in 2017 are combined transactions. A
withholding agent will only be required to
combine transactions entered into in 2017
for purposes of determining whether the
transactions are section 871(m) transac-
tions when the transactions are over-the-
counter transactions that are priced, mar-
keted, or sold in connection with each
other. Withholding agents will not be re-

quired to combine any transactions that
are listed securities that are entered into in
2017.

Transactions that are entered into in
2017 that are combined under this simpli-
fied standard will continue to be treated as
combined transactions for future years
and will not cease to be combined trans-
actions as a result of applying § 1.871-
15(n) or disposing of less than all of the
potential section 871(m) transactions that
are combined under this rule. Transactions
that are entered into in 2017 that are not
combined under this simplified standard
will not become combined transactions as
a result of applying § 1.871-15(n) to these
transactions in future years, unless a reis-
suance or other event causes the transac-
tions to be retested to determine whether
they are section 871(m) transactions. This
simplified standard only applies to with-
holding agents, and does not apply to tax-
payers that are long parties to potential
section 871(m) transactions.

### C. Phase-in Year for Qualified Derivatives Dealers

A QI that is an eligible entity is per-
mitted to be a QDD, provided that the
entity enters into a QI agreement under
§ 1.1441-1(e)(5) and (6). Generally, a
QDD described in § 1.1441-1(e)(6) will
be liable for tax under section 881 on the
dividend equivalents it receives in its ca-
pacity as an equity derivatives dealer only
to the extent described in paragraph
III.C.1 of this notice, provided that the
QDD complies with its QDD obligations
under the QI agreement.

Comments requested that eligible enti-
ties be given sufficient time to enter into
QI agreements, determine their QDD tax
liability, and comply with their reporting
and withholding obligations. To facilitate
implementation of the QDD system, para-
graph III.C.2 of this notice describes how
the IRS will administer the QDD rules for
2017.

#### 1. Net Delta Computation for QDD's Section 871(m) Amount

A QDD is liable for tax under section
881(a)(1) on dividends on physical shares
or deemed dividends (together "actual
dividends") received by the QDD. Section

1.871-15T(q)(1), however, provides that
a QDD is exempt from withholding under
chapters 3 and 4 on actual dividends and
dividend equivalents that the QDD re-
ceives in its capacity as an equity deriva-
tives dealer, although the QDD remains
liable for tax under section 881 to the
extent that dividends and dividend equiv-
alent payments the QDD receives on an
underlying security exceed the dividend
equivalent payments the QDD is obligated
to make with respect to the same dividend
on the same underlying security. This no-
tice announces that the Treasury Depart-
ment and the IRS intend to revise § 1.871-
15(q)(1) to provide that a QDD will
remain liable for tax under section
881(a)(1) and subject to withholding un-
der chapters 3 and 4 on actual dividends it
receives, and that the QI agreement will
provide that a QDD's "section 871(m)
amount" will be determined by calculat-
ing the net delta exposure (measured in
number of shares) of the QDD on the date
provided in § 1.871-15(j)(2), multiplied
by the relevant dividend amount per share.
A QDD's net delta exposure will be de-
termined by aggregating the delta of all
physical positions and potential section
871(m) transactions (as defined in
§ 1.871-15(a)(12)) with respect to an un-
derlying security entered into by the QDD
in its equity derivatives dealer capacity. If
a QDD calculates net delta for non-tax
business purposes, that net delta ordinarily
will be the delta used for this purpose. A
QDD's tax liability on the section 871(m)
amount associated with an underlying se-
curity will be reduced (but not below
zero) by the amount of tax paid by the
QDD in its capacity as an equity deriva-
tives dealer under section 881(a)(1) on the
receipt of the same dividend payment on
that same underlying security.

#### 2. General Phase-in Year for QDDs

For purposes of the IRS's enforcement
and administration of the QDD rules in
the section 871(m) regulations and the
relevant provisions of the QI agreement
for 2017, the IRS will take into account
the extent to which the QDD made a good
faith effort to comply with the section
871(m) regulations and the relevant pro-
visions of the QI agreement. The QI
agreement will accordingly provide that a

QDD will be considered to satisfy the
obligations that apply specifically to a
QDD under the QI agreement for 2017
provided that the QDD made a good faith
effort to comply with the relevant terms of
the QI agreement. Any QDD that has not
made a good faith effort to comply with
its QDD obligations will not be given any
relief from IRS administration or enforce-
ment during 2017, including penalties.

#### 3. Effective Date of QI Agreement

The proposed QI agreement described
in Notice 2016-42 provides a three-
month window in which to apply for a QI
agreement within a calendar year. In par-
ticular, section 2.23 of the proposed QI
agreement allows a prospective QI to have
its QI agreement effective as of January 1
in any given year in which the QI applies
on or before March 31 of that year. For a
prospective QI that applies after March 31
of a given year and that has not received
any reportable payments before the date
the application is submitted, the effective
date of the QI agreement will be January 1
of that year. For a prospective QI that
applies after March 31 of a given year and
that has received a reportable payment in
the year before the date the application is
submitted, the effective date of the QI
agreement will be the first day of the first
month in which both the QI application is
complete and the QI has received its QI-
EIN. For a QI that is renewing its QI
agreement, the effective date of the QI
agreement when renewed by March 31,
2017, will be January 1, 2017.

#### 4. Certifying QDD Status with QI Application Pending or Prior to Filing

A QDD must provide a valid Form
W-8IMY to a withholding agent certify-
ing that it is a QDD, and the withholding
agent is not required to withhold on any
payment with respect to a potential sec-
tion 871(m) transaction (including an ac-
tual section 871(m) transaction) that it
makes to the QDD in its QDD capacity.
Before approval of its QI agreement and
QDD status, an applicant that has submit-
ted a QI application applying for QDD
status on or before March 31, 2017, may
represent on a Form W-8IMY that it is a
QDD until the end of the sixth full month

after the month in which it submits its QI
application requesting QDD status. An ap-
plicant that has not yet submitted a QI
application applying for QDD status but
that intends to submit that application on
or before March 31, 2017, may represent
on a Form W-8IMY that it is a QDD until
the end of the sixth full month after the
month in which it actually submits its QI
application requesting QDD status, pro-
vided that it submits that application by
March 31, 2017. However, a QDD appli-
cant may not represent that it is a QDD if
it no longer intends to submit a QI appli-
cation applying for QDD status by March
31, 2017, or its application has been de-
nied. In addition, an applicant may not
represent that it is a QDD if it receives a
notice from the IRS stating that the QDD
applicant may not make the representation
until the applicant's QI and QDD status
has been approved. (The IRS will gener-
ally only issue such notices in cases where
an application is not substantially com-
plete or when the IRS has determined on a
preliminary basis that it will not enter into
a QI agreement with the applicant or that
the applicant is not an eligible entity.)

In cases where an applicant certifies to
QDD status before its QDD application is
approved, the applicant must immediately
notify any withholding agent to whom it
has certified that it no longer qualifies as a
QDD if (1) it determines that it no longer
intends to submit a QI application apply-
ing for QDD status by March 31, 2017,
(2) it does not submit the application by
March 31, 2017, or (3) its application is
denied. The withholding agent will be re-
quired to inform the IRS of any notifica-
tions it receives when it files its Form
1042, listing the name and EIN (if avail-
able) of each person whose QDD certifi-
cation was withdrawn for any of these
reasons. When an applicant provides a
valid W-8IMY with a QDD certification
to a withholding agent, the withholding
agent is not required to withhold on pay-
ments with respect to potential section
871(m) transactions made to the QDD
when the QDD is acting as a principal
(that is, not as an intermediary), unless it
has been notified that the W-8IMY is no
longer valid, including for the reasons
mentioned above.

A withholding agent is required to
withhold on any actual dividend paid to a

QDD, whether the dividend is paid to the
QDD in its capacity as a dealer in equity
derivatives or otherwise.

5\. Certifying QDD Status and
Depositing Withheld Amounts Pending
Receipt of QI-EIN

The IRS will issue a QI employer iden-
tification number (QI-EIN) upon approval
of a QI application. After an applicant
receives a QI-EIN from the IRS, the ap-
plicant must include its QI-EIN on any
Form W-8IMY that the applicant pro-
vides as a QDD. If an applicant must
provide a Form W-8IMY certifying its
QDD status to a withholding agent before
it has received a QI-EIN, the applicant
should indicate that it is awaiting a QI-
EIN by writing "awaiting QI-EIN" on line
8 of Part I of the form. If an applicant
provides an "awaiting QI-EIN" statement
on a Form W-8IMY, the applicant must
provide its QI-EIN to its withholding
agent as soon as practicable after the QDD
receives its QI-EIN. It is not necessary,
however, for the applicant to provide a
newly executed Form W-8IMY with its
QI-EIN after it receives its QI-EIN or
after it receives the fully executed QI
agreement, provided all of the information
on the original form remains valid. The
applicant may furnish its QI-EIN to its
withholding agent in any manner agreed
to by the applicant and its withholding
agent. If an applicant is denied QDD sta-
tus, it must notify the withholding agent
immediately.

A withholding agent that receives a
Form W-8IMY with an "awaiting QI-
EIN" statement may treat the person that
provides the form as a QDD unless it
knows, or has reason to know, that the
provider of the form cannot validly repre-
sent that it is a QDD. A withholding agent
is not required to determine when a QDD
applied for an agreement or if it is actually
in possession of a fully executed agree-
ment. A withholding agent is also not
required to verify whether a QDD's EIN
is a QI-EIN. A withholding agent may
only rely on a Form W-8IMY that says
"awaiting QI-EIN" for up to six months
after receipt, unless a QI-EIN is provided
to the withholding agent within that time.

The IRS will not assess any penalties
for a QDD's failure to deposit withheld

amounts before the date the QDD receives
its QI-EIN, provided that within 3 days of
receiving its QI-EIN the QDD deposits
any amounts that the QDD was previously
required to deposit. In addition, if a QDD
applies to enroll in the Electronic Federal
Tax Payment Systems (EFTPS) within 30
days of receiving a QI-EIN, no penalty
will be assessed for the QDD's failure to
deposit withheld amounts, provided that
within 3 days of being enrolled in EFTPS
the QDD deposits any amounts that the
QDD was previously required to deposit.

##### D. List of Exchange Traded Notes (ETNs) with Delayed Effective Date

ETNs that reference underlying securi-
ties and are delta-one transactions will
generally become subject to section
871(m) beginning on January 1, 2017.
The Treasury Department and the IRS are
aware that a certain number of these ETNs
existed before the issuance of the 2015
final regulations and have been in contin-
uous distribution (meaning that issuers
continuously "create"-that is, issue and
sell-new ETNs based on the same offer-
ing documents as the original ETN secu-
rities). The newly created ETNs have the
same ticker symbol and CUSIP code as
the previously issued ETNs and are there-
fore fungible with ETNs previously issued
under the same offering documents. An
ETN that is a delta-one transaction under
the section 871(m) regulations but that is
issued before January 1, 2017, however,
would not be subject to section 871(m)
withholding, while an identical newly cre-
ated ETN issued on or after January 1,
2017, would be subject to section 871(m)
withholding. This difference would result
in otherwise identical ETNs not being
fungible for tax purposes, even though
they are indistinguishable for commercial
and other legal purposes.

To permit issuers time to unwind the
identified ETNs, maintain fungibility, and
preserve market liquidity, the Treasury
Department and the IRS intend to amend
§ 1.871-15(r)(3) to provide that § 1.871-
15(d)(2) and (e) (regarding specified
NPCs and specified ELIs, respectively)
will not apply to the following ETNs
(identified by name, ticker symbol, and
CUSIP number) until January 1, 2020:

Ticker Symbol

ETN Name

CUSIP

CAPE

BARCLAYS ETN+ SHILLER CAPE

06742A669

CEFL

ETRACS MONTH PAY 2X LEV C/E

90270L842

CSLS

X-LINKS LONG/SHORT EQUITY

22542D878

CSMA

X-LINKS MERGER ARBITRAGE ETN

22542D845

DIVC

C-TRACKS ETN MILLER/HOWARD

17322H149

DOD

ELEMENTS-DOGS OF DOW

25153Q658

DVYL

ETRACS 2X DJ SEL DVD ETN

90268G607

EEH

ELEMENTS SPECTRUM ETN

870297504

FBG

FI ENHANCED BIG CAP GR ETN

90267L508

FBGX

FI ENHANCED LARGE CAP GROWTH

902677780

FIBG

CS FI ENHANCED BIG CAP GROW

22539T563

FIEG

FI ENHANCED GLOBAL HI YLD

25155L293

FIGY

FI ENHANCED GLOBAL HIGH YLD

06742C152

FLGE

FI LARGE CAP GROWTH ENHANCED

22542D423

GCE

CLAYMORE CEF GS CONNECT ETN

362273104

HDLV

ETRACS 2X HI DIV LOW VOL ETN

90270L727

HOML

ETRACS MON RST 2XLEV ISE EX

90274P302

HOMX

ETRACS ISE EXCLUSIV HOMEBUIL

90274P310

LRET

ETRACS MONTHLY PAY 2XLEVERAG

90274R100

MORL

ETRACS MONTHLY PAY 2XLEVERAG

90269A302

RODI

BARCLAYS RETURN ON DISABILIT

06740D830

SDYL

ETRACS 2X S&amp;P DVD ETN

90267L409

SMHD

ETRACS MON PAY 2X LEV US SM

90274D838

WIL

BARCLAYS WOMEN IN LEADERSHIP

06742W430

WMW

ELEMENTS LKD TO MORNINGSTAR

25153Q708

Comments are requested on whether there are other delta-one ETNs that are not included in this list but that existed before
September 18, 2015, and that will become subject to section 871(m) withholding on January 1, 2017. The Treasury Department and
the IRS will consider allowing other ETNs that meet these criteria to be subject to the delayed effective date, if appropriate-either
through published guidance or in a private letter ruling.

## IV. ADJUSTING UNDERWITHHOLDING BEFORE THE DUE DATE (WITHOUT EXTENSIONS) FOR FILING FORM 1042

Under § 1.1461-2(b), a withholding
agent that fails to withhold on a payment
made to a beneficial owner may withhold on
a future payment made to the beneficial
owner or may satisfy the tax from property
that it holds in custody for the beneficial
owner or from property over which it has
control. That additional withholding or sat-
isfaction of tax must be made no later than
the due date (not including extensions) for
filing Form 1042 for the year in which the
underwithholding occurred. Under the
IRS's interpretation of § 1.1461-2(b), a

withholding agent that adjusts its underwith-
holding pursuant to these procedures will
not be subject to any penalties for failure to
deposit or failure to pay under sections
6656, 6672, and 7202 when it timely depos-
its the additional amounts withheld or oth-
erwise obtained. Therefore, a withholding
agent that fails to withhold on a dividend
equivalent payment made to a foreign per-
son may rely on the procedures in § 1.1461-
2(b) to adjust its underwithholding without
penalty before March 15 of the year follow-
ing the year in which the underwithholding
occurred.

## V. DRAFTING INFORMATION

The principal authors of this notice are
D. Peter Merkel and Karen Walny of the

Office of Associate Chief Counsel (Inter-
national). For further information regard-
ing this notice contact Mr. Merkel or Ms.
Walny at (202) 317-6938 (not a toll-free
number).

26 CFR 601.201: Rulings and determination letter-
s.(Also: Part I, Sections 846; 1.846-1.)

## Rev. Proc. 2016-58

### SECTION 1. PURPOSE

This revenue procedure prescribes the
loss payment patterns and discount factors
for the 2016 accident year. These factors
will be used to compute discounted un-
paid losses under § 846 of the Internal
Revenue Code. See Rev. Proc. 2012-44,
2012-49 I.R.B. 645, for background con-
cerning the loss payment patterns and ap-
plication of the discount factors.

### SECTION 2. SCOPE

This revenue procedure applies to any
taxpayer that is required to discount un-
paid losses under § 846 for a line of busi-
ness using the discount factors published
by the Secretary.

## SECTION 3. TABLES OF DISCOUNT FACTORS

.01 The following tables present sepa-
rately for each line of business the dis-
count factors under § 846 for accident
year 2016. All the discount factors pre-
sented in this section were determined us-
ing the applicable interest rate under
§ 846(c) for 2016, which is 1.56 percent,
and by assuming all loss payments occur
in the middle of the calendar year.

.02 If the groupings of individual lines
of business on the annual statement
change, taxpayers must discount unpaid
losses on the resulting line of business in
accordance with the discounting patterns
that would have applied to those unpaid
losses based on their classification on the
2010 annual statement. See Rev. Proc.
2012-44, 2012-49 I.R.B. 645, section 2,
for additional background on discounting
under § 846 and the use of the Secretary's
tables.

.03 Section V of Notice 88-100,
1988-2 C.B. 439, sets forth a composite
method for computing discounted unpaid

losses for accident years that are not sep-
arately reported on the annual statement.
The tables separately provide discount
factors for taxpayers who elect to use the
composite method of section V of Notice
88-100. See Rev. Proc. 2002-74, 2002-2
C.B. 980.

.04 Tables

### Accident and Health (Other Than Disability Income or Credit Disability Insurance)

Taxpayers that do not use the compos-
ite method of Notice 88-100 should use
99.2290 percent to discount unpaid losses
incurred in this line of business in the
2016 accident year and that are outstand-
ing at the end of the 2016 and later taxable
years.

Taxpayers that use the composite
method of Notice 88-100 should use
99.2290 percent to discount all unpaid
losses in this line of business that are
outstanding at the end of the 2016 taxable
year.

#### Auto Physical Damage

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

90.2657

9.7343

9.6535

99.1701

2017

99.7478

9.4822

0.2522

0.2483

98.4669

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid
losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.
2018 and later years
0.1261
0.1261
0.1251
99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2018 taxable year.

## Commercial Auto/Truck Liability/Medical

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

25.7034

74.2966

71.8363

96.6886

2017

48.2664

22.5629

51.7336

50.2188

97.0718

2018

67.8834

19.6171

32.1166

31.2327

97.2479

2019

82.0630

14.1795

17.9370

17.4302

97.1744

2020

90.4161

8.3532

9.5839

9.2840

96.8715

2021

94.6293

4.2132

5.3707

5.1830

96.5045

2022

97.0203

2.3910

2.9797

2.8543

95.7897

2023

98.2283

1.2081

1.7717

1.6814

94.9023

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2024

98.6653

0.4370

1.3347

1.2672

94.9441

2025

98.8635

0.1982

1.1365

1.0872

95.6662

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid
losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

0.1982

0.9382

0.9044

96.3940

2027

0.1982

0.7400

0.7187

97.1264

2028

0.1982

0.5417

0.5302

97.8602

2029

0.1982

0.3435

0.3386

98.5845

2030 and later years

0.1982

0.1453

0.1441

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 97.0950 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Composite

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

39.5281

60.4719

57.8180

95.6113

2017

62.0267

22.4986

37.9733

36.0465

94.9259

2018

73.7017

11.6750

26.2983

24.8432

94.4666

2019

80.0846

6.3830

19.9154

18.7981

94.3901

2020

85.7818

5.6971

14.2182

13.3500

93.8935

2021

90.2809

4.4992

9.7191

9.0241

92.8498

2022

91.9588

1.6778

8.0412

7.4740

92.9464

2023

92.9722

1.0134

7.0278

6.5693

93.4763

2024

94.0835

1.1113

5.9165

5.5519

93.8371

2025

94.7469

0.6634

5.2531

4.9700

94.6094

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

0.6634

4.5898

4.3790

95.4073

2027

0.6634

3.9264

3.7788

96.2399

2028

0.6634

3.2631

3.1692

97.1241

2029

0.6634

2.5997

2.5502

98.0937

2030 and later years

0.6634

1.9364

1.9214

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.4927 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Fidelity/Surety

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

22.8449

77.1551

75.5562

97.9277

2017

55.8585

33.0137

44.1415

43.4648

98.4669

Tax Year

Estimated Cumulative Losses

Estimated Losses Paid Each

Unpaid Losses

Discounted Unpaid Losses at

Discount

Paid (%)

Year (%)

at Year End (%)

Year End (%)

Factors (%)

2018 and later years

22.0707

21.9006

99.2290

## Financial Guaranty/Mortgage Guaranty

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

6.2515

93.7485

91.7295

97.8464

2017

43.0154

36.7639

56.9846

56.1110

98.4669

2018 and later years

28.4923

28.2726

99.2290

## International (Composite)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

39.5281

60.4719

57.8180

95.6113

2017

62.0267

22.4986

37.9733

36.0465

94.9259

2018

73.7017

11.6750

26.2983

24.8432

94.4666

2019

80.0846

6.3830

19.9154

18.7981

94.3901

2020

85.7818

5.6971

14.2182

13.3500

93.8935

2021

90.2809

4.4992

9.7191

9.0241

92.8498

2022

91.9588

1.6778

8.0412

7.4740

92.9464

2023

92.9722

1.0134

7.0278

6.5693

93.4763

2024

94.0835

1.1113

5.9165

5.5519

93.8371

2025

94.7469

0.6634

5.2531

4.9700

94.6094

2026

0.6634

4.5898

4.3790

95.4073

2027

0.6634

3.9264

3.7788

96.2399

2028

0.6634

3.2631

3.1692

97.1241

2029

0.6634

2.5997

2.5502

98.0937

2030 and later years

0.6634

1.9364

1.9214

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.4927 percent to discount unpaid losses
incurred in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Medical Professional Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

6.3462

93.6538

89.1520

95.1953

2017

23.0958

16.7496

76.9042

73.6651

95.7881

2018

41.6827

18.5868

58.3173

56.0830

96.1686

2019

56.5267

14.8440

43.4733

41.9985

96.6076

2020

71.2882

14.7615

28.7118

27.7775

96.7458

2021

82.3023

11.0141

17.6977

17.1111

96.6856

2022

86.5143

4.2120

13.4857

13.1334

97.3871

2023

91.1422

4.6279

8.8578

8.6744

97.9290

2024

94.8664

3.7242

5.1336

5.0566

98.4989

2025

97.5408

2.6745

2.4592

2.4402

99.2290

2026 and later years

2.4592

–

99.2290

## Medical Professional Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

1.2044

98.7956

91.6674

92.7849

2017

4.3376

3.1332

95.6624

89.9398

94.0180

2018

11.8161

7.4785

88.1839

83.8063

95.0358

2019

24.7088

12.8928

75.2912

72.1207

95.7891

2020

42.3863

17.6774

57.6137

55.4311

96.2115

2021

57.1600

14.7738

42.8400

41.4072

96.6556

2022

68.9797

11.8196

31.0203

30.1417

97.1676

2023

82.4247

13.4450

17.5753

17.0624

97.0618

2024

86.7084

4.2837

13.2916

13.0116

97.8935

2025

91.6701

4.9617

8.3299

8.2144

98.6127

2026 and later years

4.9617

3.3683

3.3423

99.2290

## Miscellaneous Casualty

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

69.0731

30.9269

30.3590

98.1638

2017

85.5169

16.4438

14.4831

14.2610

98.4669

2018 and later years

7.2415

7.1857

99.2290

## Multiple Peril Lines (Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

60.9719

39.0281

37.9001

97.1096

2017

82.9059

21.9341

17.0941

16.3869

95.8627

2018

89.2783

6.3724

10.7217

10.2205

95.3261

2019

91.5605

2.2822

8.4395

8.0800

95.7413

2020

94.4255

2.8649

5.5745

5.3189

95.4145

2021

96.5899

2.1644

3.4101

3.2206

94.4441

2022

97.6023

1.0124

2.3977

2.2506

93.8655

2023

98.0034

0.4011

1.9966

1.8815

94.2357

2024

98.3410

0.3376

1.6590

1.5706

94.6737

2025

98.5727

0.2317

1.4273

1.3617

95.3998

2026

0.2317

1.1957

1.1495

96.1346

2027

0.2317

0.9640

0.9340

96.8791

2028

0.2317

0.7324

0.7151

97.6355

2029

0.2317

0.5007

0.4928

98.4099

2030 and later years

0.2317

0.2691

0.2670

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.9112 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Other (Including Credit)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

54.6589

45.3411

44.6328

98.4380

2017

84.2314

29.5725

15.7686

15.5268

98.4669

Tax Year

Estimated Cumulative Losses

Estimated Losses Paid Each

Unpaid Losses

Discounted Unpaid Losses at Year

Discount

Paid (%)

Year (%)

at Year End (%)

End (%)

Factors (%)

2018 and later years

7.8843

7.8235

99.2290

## Other Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

7.4270

92.5730

87.8256

94.8717

2017

25.2808

17.8538

74.7192

71.2032

95.2943

2018

44.2108

18.9301

55.7892

53.2368

95.4250

2019

56.4956

12.2848

43.5044

41.6871

95.8227

2020

69.2838

12.7883

30.7162

29.4498

95.8772

2021

77.6662

8.3823

22.3338

21.4618

96.0953

2022

83.1572

5.4910

16.8428

16.2629

96.5568

2023

88.1777

5.0205

11.8223

11.4571

96.9106

2024

93.1315

4.9539

6.8685

6.6435

96.7242

2025

92.9490

-0.1826

7.0510

6.9311

98.2990

2026

3.2639

3.7871

3.7499

99.0184

2027 and later years

3.2639

0.5232

0.5192

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.0369 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Other Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

10.0721

89.9279

84.0612

93.4762

2017

24.3995

14.3274

75.6005

70.9339

93.8272

2018

37.3366

12.9372

62.6634

59.0027

94.1583

2019

52.4142

15.0776

47.5858

44.7284

93.9954

2020

64.3437

11.9295

35.6563

33.4040

93.6834

2021

73.7950

9.4512

26.2050

24.4004

93.1136

2022

79.7756

5.9807

20.2244

18.7539

92.7295

2023

84.0963

4.3206

15.9037

14.6923

92.3828

2024

85.6878

1.5915

14.3122

13.3176

93.0508

2025

86.9224

1.2346

13.0776

12.2812

93.9100

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

1.2346

11.8431

11.2286

94.8119

2027

1.2346

10.6085

10.1597

95.7689

2028

1.2346

9.3740

9.0740

96.8001

2029

1.2346

8.1394

7.9714

97.9360

2030 and later years

1.2346

6.9048

6.8516

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.2276 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Private Passenger Auto Liability/Medical

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

42.9881

57.0119

55.6793

97.6626

2017

71.9931

29.0051

28.0069

27.3175

97.5386

2018

84.8250

12.8318

15.1750

14.8121

97.6085

2019

92.3500

7.5251

7.6500

7.4597

97.5123

2020

96.2665

3.9165

3.7335

3.6291

97.2044

2021

97.9880

1.7214

2.0120

1.9509

96.9616

2022

98.7958

0.8078

1.2042

1.1672

96.9294

2023

99.2445

0.4487

0.7555

0.7332

97.0542

2024

99.4543

0.2097

0.5457

0.5333

97.7195

2025

99.6370

0.1827

0.3630

0.3575

98.4721

2026 and later years

0.1827

0.1803

0.1789

99.2290

## Products Liability - Claims-Made

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

4.5270

95.4730

88.8146

93.0259

2017

16.0134

11.4865

83.9866

78.6245

93.6155

2018

45.1313

29.1179

54.8687

50.5069

92.0504

2019

39.2459

-5.8854

60.7541

57.2259

94.1927

2020

44.8357

5.5898

55.1643

52.4854

95.1438

2021

72.1615

27.3258

27.8385

25.7661

92.5555

2022

80.4448

8.2834

19.5552

17.8203

91.1284

2023

73.2957

-7.1491

26.7043

25.3029

94.7525

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2024

87.4824

14.1866

12.5176

11.4008

91.0781

2025

87.7500

0.2677

12.2500

11.3089

92.3180

2026

0.2677

11.9823

11.2156

93.6014

2027

0.2677

11.7147

11.1208

94.9310

2028

0.2677

11.4470

11.0246

96.3099

2029

0.2677

11.1793

10.9268

97.7413

2030 and later years

0.2677

10.9117

10.8275

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 95.8264 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Products Liability - Occurrence

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

7.1936

92.8064

86.0592

92.7297

2017

16.9555

9.7619

83.0445

77.5639

93.4004

2018

28.3624

11.4069

71.6376

67.2784

93.9149

2019

39.7945

11.4321

60.2055

56.8070

94.3552

2020

54.3906

14.5961

45.6094

42.9837

94.2430

2021

60.9060

6.5154

39.0940

37.0882

94.8693

2022

67.7760

6.8700

32.2240

30.7434

95.4053

2023

75.7119

7.9359

24.2881

23.2254

95.6247

2024

79.5966

3.8847

20.4034

19.6728

96.4195

2025

83.9430

4.3464

16.0570

15.5996

97.1513

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

4.3464

11.7107

11.4628

97.8837

2027

4.3464

7.3643

7.2615

98.6044

2028 and later years

4.3464

3.0179

2.9947

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.2573 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Reinsurance - Nonproportional Assumed Property

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

20.1003

79.8997

77.4053

96.8780

2017

59.2833

39.1830

40.7167

39.1254

96.0916

2018

73.0867

13.8034

26.9133

25.8251

95.9565

2019

80.3675

7.2808

19.6325

18.8905

96.2208

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2020

87.7278

7.3603

12.2722

11.7677

95.8895

2021

94.4454

6.7175

5.5546

5.1816

93.2838

2022

96.5143

2.0689

3.4857

3.1774

91.1552

2023

97.9468

1.4326

2.0532

1.7833

86.8559

2024

97.4560

-0.4909

2.5440

2.3058

90.6356

2025

97.0652

-0.3908

2.9348

2.7356

93.2116

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount unpaid

losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

0.1836

2.7512

2.5932

94.2578

2027

0.1836

2.5675

2.4486

95.3671

2028

0.1836

2.3839

2.3017

96.5527

2029

0.1836

2.2003

2.1526

97.8320

2030 and later years

0.1836

2.0166

2.0011

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.0251 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Reinsurance - Nonproportional Assumed Liability

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

3.4987

96.5013

89.5392

92.7855

2017

23.2170

19.7183

76.7830

71.0645

92.5524

2018

43.7483

20.5313

56.2517

51.4823

91.5213

2019

38.9131

-4.8352

61.0869

57.1582

93.5686

2020

47.9298

9.0167

52.0702

48.9631

94.0328

2021

80.0315

32.1017

19.9685

17.3758

87.0160

2022

76.5053

-3.5292

23.4947

21.2005

90.2350

2023

78.1701

1.6649

21.8299

19.8534

90.9460

2024

80.0717

1.9015

19.9283

18.2468

91.5621

2025

79.8791

-0.1926

20.1209

18.7255

93.0650

2026

1.1246

18.9963

17.8843

94.1462

2027

1.1246

17.8717

17.0300

95.2901

2028

1.1246

16.7471

16.1623

96.5079

2029

1.1246

15.6225

15.2811

97.8145

2030 and later years

1.1246

14.4979

14.3861

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 95.9885 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Reinsurance - Nonproportional Assumed Financial Lines

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

1.5423

98.4577

93.0298

94.4871

2017

20.9273

19.3850

79.0727

74.9455

94.7805

2018

30.4705

9.5433

69.5295

66.4972

95.6390

2019

46.3043

15.8337

53.6957

51.5778

96.0558

2020

51.8464

5.5421

48.1536

46.7973

97.1834

2021

72.7869

20.9405

27.2131

26.4241

97.1007

2022

82.0967

9.3097

17.9033

17.4542

97.4915

2023

89.2630

7.1664

10.7370

10.5045

97.8346

2024

95.3692

6.1062

4.6308

4.5147

97.4934

2025

96.7995

1.4303

3.2005

3.1437

98.2266

2026

1.4303

1.7702

1.7513

98.9364

2027 and later years

1.4303

0.3399

0.3372

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.9741 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary and Theft)

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

55.6145

44.3855

43.8006

98.6824

2017

89.3328

33.7182

10.6672

10.5037

98.4669

2018 and later years
5.3336

5.3336

5.2925

99.2290

## Warranty

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

85.4101

14.5899

14.4669

99.1571

2017

99.5388

14.1287

0.4612

0.4541

98.4669

2018 and later years

0.2306

0.2288

99.2290

## Workers' Compensation

Tax Year

Estimated Cumulative Losses Paid (%)

Estimated Losses Paid Each Year (%)

Unpaid Losses at Year End (%)

Discounted Unpaid Losses at Year End (%)

Discount Factors (%)

2016

21.8973

78.1027

72.4793

92.8001

2017

43.4962

21.5989

56.5038

51.8433

91.7519

2018

56.0061

12.5099

43.9939

40.0450

91.0240

2019

63.5544

7.5482

36.4456

33.0628

90.7181

2020

68.9880

5.4337

31.0120

28.1027

90.6188

2021

73.9567

4.9687

26.0433

23.5338

90.3641

2022

76.0580

2.1013

23.9420

21.7833

90.9836

2023

77.6365

1.5785

22.3635

20.5323

91.8119

2024

80.1194

2.4828

19.8806

18.3505

92.3034

2025

81.3456

1.2262

18.6544

17.4010

93.2810

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount unpaid

losses incurred in this line of business in the 2016 accident year and that are outstanding at the end of the tax year shown.

2026

1.2262

17.4281

16.4367

94.3111

2027

1.2262

16.2019

15.4573

95.4044

2028

1.2262

14.9757

14.4627

96.5746

2029

1.2262

13.7494

13.4525

97.8408

2030 and later years

1.2262

12.5232

12.4266

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 96.0431 percent to discount unpaid losses incurred
in this line of business in 2016 and prior years and that are outstanding at the end of the 2026 taxable year.

## SECTION 4. DRAFTING INFORMATION

The principal author of this revenue
procedure is Sharon Y. Horn of the Office
of Associate Chief Counsel (Financial In-
stitutions & Products). For further infor-
mation regarding this revenue procedure
contact Ms. Horn at (202) 317-4426 (not a
toll free number).

26 CFR 601.201: Rulings and determination letters.
(Also: Part I, Section 832, 846; 1.832-4, 1.846-1.)

## Rev. Proc. 2016-59

### SECTION 1. PURPOSE

This revenue procedure prescribes the
salvage discount factors for the 2016 ac-
cident year. These factors must be used to
compute discounted estimated salvage re-

coverable under § 832 of the Internal Rev-
enue Code.

## SECTION 2. BACKGROUND

Section 832(b)(5)(A) requires that all
estimated salvage recoverable (including
that which cannot be treated as an asset
for state accounting purposes) be taken
into account in computing the deduction
for losses incurred. Under § 832(b)(5)(A),
paid losses are reduced by salvage and
reinsurance recovered during the taxable
year. This amount is adjusted to reflect
changes in discounted unpaid losses on
nonlife insurance contracts and in unpaid
losses on life insurance contracts. An ad-
justment is then made to reflect any
changes in discounted estimated salvage
recoverable and reinsurance recoverable.

Pursuant to § 832(b), the amount of
estimated salvage is determined on a dis-
counted basis in accordance with proce-
dures established by the Secretary.

## SECTION 3. SCOPE

This revenue procedure applies to any
taxpayer that is required to discount esti-
mated salvage recoverable under § 832.

## SECTION 4. TABLES OF DISCOUNT FACTORS

.01 The following tables present sepa-
rately for each line of business the dis-
count factors under § 832 for the 2016
accident year. All the discount factors pre-
sented in this section were determined us-
ing the applicable interest rate under
§ 846(c) for 2016, which is 1.56 percent,
and by assuming all estimated salvage is
recovered in the middle of the calendar
year.

.02 These tables must be used by tax-
payers irrespective of whether they
elected to discount unpaid losses using
their own experience under § 846(e).

.03 Section V of Notice 88-100,
1988-2 C.B. 439, provides a composite
discount factor to be used in determining
the discounted unpaid losses for accident
years that are not separately reported on
the annual statement approved by the Na-
tional Association of Insurance Commis-
sioners. The tables separately provide dis-
count factors for taxpayers who elect to
use the composite method. Rev. Proc.
2002-74, 2002-2 C.B. 980, clarifies that
for certain insurance companies subject to
tax under § 831 the composite method for
discounting unpaid losses set forth in No-
tice 88-100, section V, is permitted but
not required. Rev. Proc. 2002-74 further
provides alternative methods for comput-

ing discounted unpaid losses that are per-
mitted for insurance companies not using
the composite method, and sets forth a
procedure for insurance companies to ob-
tain automatic consent of the Commis-
sioner to change to one of the methods
described therein.

.04 Tables.

### Accident and Health (Other Than Disability Income or Credit Disability Insurance)

Taxpayers that do not use the compos-
ite method of Notice 88-100 should use
99.2290 percent to discount salvage re-
coverable with respect to losses incurred
in this line of business in the 2016 acci-

dent year as of the end of the 2016 and
later taxable years.

Taxpayers that use the composite
method of Notice 88-100 should use
99.2290 percent to discount all salvage
recoverable in this line of business as of
the end of the 2016 taxable year.

#### Auto Physical Damage

Tax Year 2016

Discount Factors (%) 98.9012

2017

98.4669

Taxpayers that do not use the composite method of Notice 88-100 should use the following factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2016 accident year.

2018 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2018 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Commercial Auto/Truck Liability/Medical

Tax Year

Discount Factors (%)

2016

97.1365

2017

96.8308

2018

97.0777

2019

96.7064

2020

96.9932

2021

96.8099

2022

94.3972

2023

93.3971

2024

94.9982

2025

95.7201

2026

96.4475

2027

97.1788

2028

97.9099

Tax Year
2029

Discount Factors (%)
98.6269

99.2290

2030 and later years

Taxpayers that use the composite method of Notice 88-100 should use 97.1357
percent to discount salvage recoverable as of the end of the 2026 taxable year with
respect to losses incurred in this line of business in 2016 and prior years.

## Composite

Tax Year

Discount Factors (%)

2016

96.9439

2017

96.8171

2018

96.9416

2019

96.0697

2020

96.3473

2021

96.0938

2022

96.0154

2023

96.3954

2024

96.4109

2025

97.1429

2026

97.8757

2027

98.5976

2028 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.2524 percent to discount
salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of
business in 2016 and prior years.

## Fidelity/Surety

Tax Year 2016

Discount Factors (%)

97.5442

2017

98.4669

2018 and later years

99.2290

## Financial Guaranty/Mortgage Guaranty

Tax Year

Discount Factors (%)

2016

97.2630

2017

98.4669

### Tax Year

Discount Factors (%)

Taxpayers that do not use the composite method of Notice 88-100 should use the following
factor to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred
in this line of business in the 2016 accident year.

2018 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to
discount salvage recoverable as of the end of the 2018 taxable year with respect to losses incurred
in this line of business in 2016 and prior years.

## International (Composite)

Tax Year

Discount Factors (%)

2016

96.9439

2017

96.8171

2018

96.9416

2019

96.0697

2020

96.3473

2021

96.0938

2022

96.0154

2023

96.3954

2024

96.4109

2025

97.1429

2026

97.8757

2027

98.5976

2028 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.2524 percent to
discount salvage recoverable as of the end of the 2026 taxable year with respect to losses
incurred in this line of business in 2016 and prior years.

## Medical Professional Liability - Claims-Made

Tax Year

Discount Factors (%)

2016

96.5406

2017

97.0385

2018

95.6716

2019

97.2703

2020

97.4023

2021

97.6753

2022

98.1949

2023

98.5464

2024

98.5353

2025

99.2290

Taxpayers that do not use the composite method of Notice 88-100 should use the
following factor to discount salvage recoverable as of the end of the tax year shown with respect
to losses incurred in this line of business in the 2016 accident year.

### Tax Year

Discount Factors (%)

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to
discount salvage recoverable as of the end of the 2026 taxable year with respect to losses
incurred in this line of business in 2016 and prior years.

## Medical Professional Liability - Occurrence

Tax Year

Discount Factors (%)

2016

96.9122

2017

98.0946

2018

97.7852

2019

98.4996

2020

97.9271

2021

98.7202

2022

98.3540

2023

98.3987

2024

97.3615

2025

98.0900

2026

98.7938

2027 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.8774 percent to
discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in
this line of business in 2016 and prior years.

## Miscellaneous Casualty

Tax Year 2016

Discount Factors (%) 97.9036

2017

98.4669

2018 and later years

99.2290

## Multiple Peril Lines (Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))

Tax Year

Discount Factors (%)

2016

97.3546

2017

97.3274

2018

97.6245

2019

96.5274

Tax Year

Discount Factors (%)

2020

97.4327

2021

97.7088

2022

97.7950

2023

97.7390

2024

97.5499

2025

99.2290

2026 and later years

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Other (Including Credit)

Tax Year

Discount Factors (%)

2016

98.3183

2017

98.4669

2018 and later years

99.2290

## Other Liability - Claims-Made

Tax Year

Discount Factors (%)

2016

96.4147

2017

96.6325

2018

96.6603

2019

97.3254

2020

97.3517

2021

97.4480

2022

98.0897

2023

98.0735

2024

98.2338

2025

98.9443

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Other Liability - Occurrence

Tax Year

Discount Factors (%)

2016

94.5756

2017

95.2376

2018

95.9306

2019

96.3122

2020

96.7612

2021

97.3807

2022

97.4860

2023

97.4330

2024

98.5057

2025

99.2290

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Private Passenger Auto Liability/Medical

Tax Year

Discount Factors (%)

2016

97.8611

2017

97.7880

2018

97.7715

2019

97.4240

2020

97.4156

2021

97.4991

2022

97.3643

2023

97.5496

2024

98.2703

2025

98.9853

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Products Liability - Claims-Made

Tax Year

Discount Factors (%)

2016

94.2878

2017

95.1999

2018

94.1633

2019

97.2406

2020

96.0735

2021

99.0044

2022

97.9881

2023

91.9449

2024

99.0448

2025

99.2290

Taxpayers that do not use the composite method of Notice 88-100 should use the following factors to discount salvage recoverable as of the end of the tax year shown with respect to losses incurred in this line of business in the 2016 accident year. 2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Products Liability - Occurrence

Tax Year

Discount Factors (%)

2016

94.7954

2017

94.8540

2018

95.3519

2019

96.1073

2020

96.4444

2021

96.9520

2022

96.9120

2023

98.1796

2024

97.8452

2025

98.5720

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Reinsurance - Nonproportional Assumed Property

Tax Year

Discount Factors (%)

2016

96.0218

2017

97.3451

2018

96.1342

2019

95.4143

2020

96.6974

2021

96.1040

2022

98.3107

2023

94.5059

2024

97.7680

2025

98.5096

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Reinsurance - Nonproportional Assumed Liability

Tax Year

Discount Factors (%)

2016

92.8739

2017

94.2242

2018

91.1182

2019

91.9045

2020

95.3016

2021

97.0444

2022

96.5643

2023

96.8858

2024

95.8989

2025

98.1496

2026

98.8541

2027 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.9166 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Reinsurance - Nonproportional Assumed Financial Lines

Tax Year

Discount Factors (%)

2016

93.3899

2017

94.3763

2018

96.4484

2019

96.5268

2020

97.3112

2021

96.2333

2022

97.3277

2023

97.2956

2024

99.1055

2025

99.2290

2026 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 99.2290 percent to discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred in this line of business in 2016 and prior years.

## Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary and Theft)

Tax Year 2016 2017

Discount Factors (%) 97.9965

98.4669

2018 and later years

99.2290

## Warranty

Tax Year 2016 2017

Discount Factors (%) 97.7297

98.4669

2018 and later years

99.2290

## Workers' Compensation

Tax Year

Discount Factors (%)

2016

95.1952

2017

96.0854

2018

96.5588

2019

95.7091

2020

95.3661

2021

94.9814

2022

95.3348

2023

96.1542

2024

96.3142

2025

97.0492

2026

97.7882

2027

98.5257

2028 and later years

99.2290

Taxpayers that use the composite method of Notice 88-100 should use 98.2013 percent to
discount salvage recoverable as of the end of the 2026 taxable year with respect to losses incurred
in this line of business in 2016 and prior years.

## SECTION 5. DRAFTING INFORMATION

The principal author of this revenue
procedure is Sharon Y. Horn of the Office

of Associate Chief Counsel (Financial In-
stitutions & Products). For further infor-
mation regarding this revenue procedure
contact Ms. Horn at (202) 317-4426 (not a
toll free number).

## Part IV. Items of General Interest

### Tax Return Preparer Due Diligence Penalty under Section 6695(g)

#### REG-102952-16

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regula-
tions section of this issue of the Internal
Revenue Bulletin, the IRS is issuing tem-
porary regulations that will modify the
existing regulations related to the penalty
under section 6695(g) of the Internal Rev-
enue Code (Code) relating to tax return
preparer due diligence. The temporary
regulations implement recent law changes
that expand the tax return preparer due
diligence penalty under section 6695(g) so
that it applies to the child tax credit
(CTC), additional child tax credit
(ACTC), and the American Opportunity
Tax Credit (AOTC), in addition to the
earned income credit (EIC). The text of
those regulations also serves as the text of
these proposed regulations.

DATES: Written or electronic comments
and requests for a public hearing must be
received by March 5, 2017.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-102952-16), room
5205, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-102952-16),
Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224, or sent elec-
tronically via the Federal eRulemaking
Portal at http://www.regulations.gov
(IRS REG-102952-16).

#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Rachel L. Gregory, 202-317-
6845; concerning submissions of com-
ments and the hearing, Regina Johnson,
202-317-6901 (not toll-free numbers).

### SUPPLEMENTARY INFORMATION: Paperwork Reduction Act

The collection of information in cur-
rent §1.6695-2 was previously reviewed
and approved under control number 1545-
1570. Control number 1545-1570 was dis-
continued in 2014, as the burden for the
collection of information contained in
§1.6695-2 is reflected in the burden on
Form 8867, "Paid Preparer's Due Dili-
gence Checklist," under control number
1545-1629.

#### Background and explanation of provisions

Temporary regulations in the Rules
and Regulations section of this issue of
the Internal Revenue Bulletin amend 26
CFR 1.6695-2 by imposing due diligence
requirements on tax return preparers with
respect to determining the eligibility for,
or the amount of, the CTC/ACTC or
AOTC, in addition to the EIC, on any
return or claim for refund. The temporary
regulations also amend section 1.6695-2
to reflect the changes made by section
208(c), Div. B of the Tax Increase Pre-
vention Act of 2014, Pub. L. 113-295
(128 Stat. 4010, 4073 (2014)), requiring
the IRS to index the penalty for inflation
for returns and claims for refund filed
after December 31, 2014.

The text of those regulations also
serves as the text of these proposed regu-
lations. The preamble to the temporary
regulations explains the amendments.

### Special Analyses

Pursuant to the Regulatory Flexibility
Act (RFA) (5 U.S.C. chapter 6), it is
hereby certified that these proposed rules,
if adopted, would not have a significant
economic impact on a substantial number
of small entities. When an agency issues a
notice of proposed rulemaking, the RFA
requires the agency to "prepare and make
available for public comment an initial

regulatory flexibility analysis" that will
"describe the impact of the proposed rule
on small entities." (5 U.S.C. 603(a)). Sec-
tion 605 of the RFA provides an exception
to this requirement if the agency certifies
that the proposed rulemaking will not
have a significant economic impact on a
substantial number of small entities.

The proposed rules affect tax return
preparers who determine the eligibility
for, or the amount of, the EIC, the CTC/
ACTC and/or the AOTC. The North
American Industry Classification System
(NAICS) code that relates to tax return
preparation services (NAICS code
541213) is the appropriate code for tax
return preparers subject to this notice of
proposed rulemaking. Entities identified
as tax return preparation services are con-
sidered small under the Small Business
Administration size standards (13 CFR
121.201) if their annual revenue is less
than $20.5 million. The IRS estimates that
approximately 75 to 85 percent of the
505,000 persons who work at firms or are
self-employed tax return preparers are op-
erating as or employed by small entities.
The IRS has therefore determined that
these proposed rules will have an impact
on a substantial number of small entities.

The IRS has further determined, how-
ever, that the economic impact on entities
affected by the proposed rules will not be
significant. The current regulations under
section 6695(g) already require tax return
preparers to complete the Form 8867
when a return or claim for refund includes
a claim of the EIC. Tax return preparers
also must currently maintain records of
the checklists and EIC computations, as
well as a record of how and when the
information used to compute the EIC was
obtained by the tax return preparer. The
information needed to document eligibil-
ity for the CTC/ACTC and the AOTC
largely duplicates the information needed
to compute the EIC and complete other
parts of the return or claim for refund.
Even if certain preparers are required to
maintain the checklists and complete
Form 8867 for the first time, the IRS es-
timates that the total time required should
be minimal for these tax return preparers.
Further, the IRS does not expect that the
requirements in these proposed regula-

tions would necessitate the purchase of
additional software or equipment in order
to meet the additional information reten-
tion requirements.

Based on these facts, the IRS hereby
certifies that the collection of information
contained in this notice of proposed rule-
making will not have a significant eco-
nomic impact on a substantial number of
small entities. Accordingly, a Regulatory
Flexibility Analysis is not required.

Pursuant to section 7805(f) of the In-
ternal Revenue Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on the impact on small business.

### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are timely sub-
mitted to the IRS as prescribed in this
preamble under the "Addresses" heading.
The IRS and Treasury Department request
comments on all aspects of the proposed
rules. All comments will be available at
www.regulations.gov or upon request. A
public hearing will be scheduled if re-
quested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in the Federal Reg-
ister.

### Drafting Information

The principal author of this regulation
is Rachel L. Gregory, Office of the Asso-
ciate Chief Counsel (Procedure & Admin-
istration).

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

§ 1.6695-2 Tax return preparer due
diligence requirements for certain
credits.

(a) [The text of the proposed amend-
ment to §1.6695-2(a) is the same as the
text of §1.6695-2T(a) published else-
where in this issue of the Federal Regis-
ter].

(b) * * *

(1) * * *

(i) [The text of the proposed amend-
ment to §1.6695-2(b)(1)(i) is the same as
the text of §1.6695-2T(b)(1)(i) published
elsewhere in this issue of the Internal
Revenue Bulletin].

* * * * *

(ii) [The text of the proposed amend-
ment to §1.6695-2(b)(1)(ii) is the same as
the text of §1.6695-2T(b)(1)(ii) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(2) [The text of the proposed amend-
ment to §1.6695-2(b)(2) is the same as the
text of §1.6695-2T(b)(2) published else-
where in this issue of the Internal Reve-
nue Bulletin].

(3) * * *

(i) [The text of the proposed amend-
ment to §1.6695-2(b)(3)(i) is the same as
the text of §1.6695-2T(b)(3)(i) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(ii) [The text of the proposed amend-
ment to §1.6695-2(b)(3)(ii) is the same as
the text of §1.6695-2T(b)(3)(ii) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(4) * * *

(i) * * *

(B) [The text of the proposed amend-
ment to §1.6695-2(b)(4)(i)(B) is the same
as the text of §1.6695-2T(b)(4)(i)(B) pub-
lished elsewhere in this issue of the Inter-
nal Revenue Bulletin].

(C) [The text of the proposed amend-
ment to §1.6695-2T(b)(4)(i)(C) is the
same as the text of §1.6695-
2T(b)(4)(i)(C) published elsewhere in this
issue of the Internal Revenue Bulletin].

* * * * *

(3) [The text of the proposed amend-
ment to §1.6695-2T(c)(3) is the same as
the text of §1.6695-2T(c)(3) published
elsewhere in this issue of the Internal
Revenue Bulletin].

* * * * *

(e) Applicability date. The rules of this
section apply to tax returns and claims for
refunds prepared on or after the date of
publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register with respect to tax
years beginning after December 31, 2015.

John M Dalrymple,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on December 2,
2016, 8:45 a.m., and published in the issue of the Federal
Register for December 5, 2016, 81 F.R. 87502)

Update to Minimum
Present Value
Requirements for Defined
Benefit Plan Distributions

REG-107424-12

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing and notice of public hearing.

SUMMARY: This document contains
proposed regulations providing guidance
relating to the minimum present value re-
quirements applicable to certain defined
benefit pension plans. These proposed
regulations would provide guidance on
changes made by the Pension Protection
Act of 2006 and would provide other
modifications to these rules as well. These
regulations would affect participants, ben-
eficiaries, sponsors, and administrators of
defined benefit pension plans. This docu-
ment also provides a notice of a public
hearing on these proposed regulations.

DATES: Written or electronic comments
must be received by February 27, 2017.
Outlines of topics to be discussed at the
public hearing scheduled for March 7,

2017, must be received by February 27,
2017.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-107424-12), Room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG-107424-12),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via
the Federal eRulemaking Portal at
http://www.regulations.gov (IRS REG-
107424-12). The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.

## FOR FURTHER INFORMATION

CONTACT: Concerning the regulations,
Neil S. Sandhu or Linda S. F. Marshall at
(202) 317-6700; concerning submissions
of comments, the hearing, and/or being
placed on the building access list to attend
the hearing, Oluwafunmilayo (Funmi)
Taylor at (202) 317-6901 (not toll-free
numbers).

## SUPPLEMENTARY INFORMATION:

### Background

Section 401(a)(11) of the Internal Rev-
enue Code (Code) provides that, in order
for a defined benefit plan to qualify under
section 401(a), except as provided under
section 417, in the case of a vested par-
ticipant who does not die before the an-
nuity starting date, the accrued benefit
payable to such participant must be pro-
vided in the form of a qualified joint and
survivor annuity. In the case of a vested
participant who dies before the annuity
starting date and who has a surviving
spouse, a defined benefit plan must pro-
vide a qualified preretirement survivor an-
nuity to the surviving spouse of such par-
ticipant, except as provided under section
417.

Section 411(d)(6)(B) provides that a
plan amendment that has the effect of
eliminating or reducing an early retire-

ment benefit or a retirement-type subsidy,
or eliminating an optional form of benefit,
with respect to benefits attributable to ser-
vice before the amendment is treated as
impermissibly reducing accrued benefits.
However, the last sentence of section
411(d)(6)(B) provides that the Secretary
may by regulations provide that section
411(d)(6)(B) does not apply to a plan
amendment that eliminates an optional
form of benefit (other than a plan amend-
ment that has the effect of eliminating or
reducing an early retirement benefit or a
retirement-type subsidy).

Section 417(e)(1) provides that a plan
may provide that the present value of a
qualified joint and survivor annuity or a
qualified preretirement survivor annuity
will be immediately distributed if that
present value does not exceed the amount
that can be distributed without the partic-
ipant's consent under section 411(a)(11).
Section 417(e)(2) provides that, if the
present value of the qualified joint and
survivor annuity or the qualified preretire-
ment survivor annuity exceeds the amount
that can be distributed without the partic-
ipant's consent under section 411(a)(11),
then a plan may immediately distribute
the present value of a qualified joint and
survivor annuity or the qualified preretire-
ment survivor annuity only if the partici-
pant and the spouse of the participant (or
where the participant has died, the surviv-
ing spouse) consent in writing to the dis-
tribution.

Section 417(e)(3)(A) provides that the
present value shall not be less than the
present value calculated by using the ap-
plicable mortality table and the applicable
interest rate.3

Section 417(e)(3)(B) of the Code, as
amended by section 302 of the Pension
Protection Act of 2006 (PPA '06), Public
Law 109-280, 120 Stat. 780 (2006), pro-
vides that the term "applicable mortality
table" means a mortality table, modified
as appropriate by the Secretary, based on
the mortality table specified for the plan
year under section 430(h)(3)(A) (without
regard to section 430(h)(3)(C) or (3)(D)).

Section 417(e)(3)(C) of the Code, as
amended by section 302 of PPA '06, pro-
vides that the term "applicable interest

rate" means the adjusted first, second, and
third segment rates applied under rules
similar to the rules of section 430(h)(2)(C)
of the Code for the month before the date
of the distribution or such other time as
the Secretary may prescribe by regula-
tions. However, for purposes of section
417(e)(3), these rates are to be determined
without regard to the segment rate stabi-
lization rules of section 430(h)(2)(C)(iv).
In addition, under section 417(e)(3)(D),
these rates are to be determined using the
average yields for a month, rather than the
24-month average used under section
430(h)(2)(D).

Section 411(a)(13) of the Code, as
added by section 701(b) of PPA '06,
provides that an "applicable defined ben-
efit plan," as defined by section
411(a)(13)(C), is not treated as failing to
meet the requirements of section 417(e)
with respect to accrued benefits derived
from employer contributions solely be-
cause the present value of a participant's
accrued benefit (or any portion thereof)
may be, under the terms of the plan, equal
to the amount expressed as the hypothet-
ical account balance or as an accumulated
percentage of such participant's final av-
erage compensation.

Section 1107(a)(2) of PPA '06 pro-
vides that a pension plan does not fail to
meet the requirements of section
411(d)(6) by reason of a plan amendment
to which section 1107 applies, except as
provided by the Secretary of the Treasury.
Section 1107 of PPA '06 applies to plan
amendments made pursuant to the provi-
sions of PPA '06 or regulations issued
thereunder that are adopted no later than a
specified date, generally the last day of the
first plan year beginning on or after Jan-
uary 1, 2009.

Final regulations under section 417 re-
lating to the qualified joint and survivor
and qualified preretirement survivor annu-
ity requirements have not been amended
to reflect PPA '06. The regulations, which
were issued on August 22, 1988, were
amended on April 3, 1998, to reflect
changes enacted by the Uruguay Round
Agreements Act, Public Law 103-465
(GATT).

3Under section 411(a)(11)(B), the same applicable mortality table and applicable interest rate are used for purposes of determining whether the present value of a participant's nonforfeitable
accrued benefit exceeds the maximum amount that can be immediately distributed without the participant's consent.

Section 1.417(e)-1(d)(1) provides that
a defined benefit plan generally must pro-
vide that the present value of any accrued
benefit and the amount of any distribution,
including a single sum, must not be less
than the amount calculated using the spec-
ified applicable interest rate and the spec-
ified applicable mortality table. The pres-
ent value of any optional form of benefit
cannot be less than the present value of
the accrued benefit determined in accor-
dance with the preceding sentence.

Section 1.417(e)-1(d)(6) provides an
exception from the minimum present
value requirements of section 417(e) and
§ 1.417(e)-1(d). This exception applies to
the amount of a distribution paid in the
form of an annual benefit that either does
not decrease during the life of the partic-
ipant (or, in the case of a qualified prere-
tirement survivor annuity, the life of the
participant's spouse), or that decreases
during the life of the participant merely
because of the death of the survivor annu-
itant (but only if the reduction is to a level
not below 50 percent of the annual benefit
payable before the death of such survivor
annuitant) or the cessation or reduction of
Social Security supplements or qualified
disability benefits.

Notice 2007-81, 2007-2 CB 899 (see
26 CFR 601.601(d)(2)(ii)(b)), provides
guidance on the applicable interest rate.
Rev. Rul. 2007-67, 2007-2 CB 1047 (see
26 CFR 601.601(d)(2)(ii)(b)), provides
guidance on the applicable mortality table4
and the timing rules that apply to the deter-
mination of the applicable interest rate
and the applicable mortality table.

The Worker, Retiree, and Employer
Recovery Act of 2008, Public Law 109-
280 (120 Stat. 780), amended section
415(b)(2)(E)(v) to provide that the appli-
cable mortality table under section
417(e)(3)(B) applies for purposes of ad-
justing a benefit or limitation pursuant to
section 415(b)(2)(B), (C), or (D).

Sections 205(g), 203(e), and 204(g) of
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA) contain rules
that are parallel to Code sections 417(e),
411(a)(11), and 411(d)(6), respectively.
Under section 101 of Reorganization Plan
No. 4 of 1978 (43 FR 47713), the Secre-

tary of the Treasury has interpretive juris-
diction over the subject matter addressed
in these regulations for purposes of
ERISA, as well as the Code. Thus, these
regulations apply for purposes of the Code
and the corresponding provisions of
ERISA.

In West v. AK Steel Corporation Re-
tirement Accumulation Pension Plan, 484
F.3d 395 (6th Cir. 2007), the court held
that a preretirement mortality discount
could not be used in the computation of
the present value of a participant's single-
sum distribution under a cash balance plan
if the death benefit under the plan was
equal in value to the participant's accrued
benefit under the plan. The court found
that, if a participant's beneficiary is enti-
tled to the participant's entire accrued
benefit upon the participant's death before
attainment of normal retirement age, the
use of a mortality discount for the period
before normal retirement age would result
in a partial forfeiture of benefits in viola-
tion of the ERISA vesting rules that cor-
respond to the rules of section 411(a). See
also Berger v. Xerox Corporation Retire-
ment Income Guarantee Plan, 338 F.3d
755 (7th Cir. 2003); Crosby v. Bowater,
Inc. Ret. Plan, 212 F.R.D. 350 (W.D.
Mich. 2002), rev'd on other grounds, 382
F.3d 587 (6th Cir. 2004) (accrued benefits
include not only retirement benefits them-
selves, but also death benefits which are
directly related to the value of the retire-
ment benefits). In Stewart v. AT&T Inc.,
354 Fed. Appx. 111 (5th Cir. 2009), how-
ever, the court held that a preretirement
mortality discount was appropriately ap-
plied to determine a single-sum distribu-
tion under a traditional defined benefit
plan. The court distinguished AK Steel and
Berger on the basis that the plans at issue
in those cases did not provide for a for-
feiture of the accrued benefit on the death
of the participant before retirement,
whereas the plan at issue in Stewart pro-
vided for such a forfeiture.

Final regulations (TD 9783) under sec-
tion 417(e) that permit defined benefit
plans to simplify the treatment of certain
optional forms of benefit that are paid
partly in the form of an annuity and partly
in a more accelerated form were published

by the Treasury Department and the IRS
in the Federal Register on September 9,
2016 (81 FR 62359).

### Explanation of Provisions

#### Overview

These proposed regulations would
amend the current final regulations under
section 417(e) regarding the minimum
present value requirements of section
417(e)(3) in several areas. Specifically,
the proposed regulations would update the
regulations for changes made by PPA '06
and to eliminate certain obsolete provi-
sions. The proposed regulations also con-
tain a few other clarifying changes.

#### Updates to reflect statutory and regulatory changes

The proposed regulations would up-
date the existing regulatory provisions to
reflect the statutory changes made by PPA
'06, including the new interest rates and
mortality tables set forth in section
417(e)(3) and the exception from the val-
uation rules for certain applicable defined
benefit plans set forth in section
411(a)(13). The proposed regulations clar-
ify that the interest rates that are published
by the Commissioner pursuant to the pro-
visions as modified by PPA '06 are to be
used without further adjustment. In addi-
tion, the proposed regulations would elim-
inate obsolete provisions of the regula-
tions relating to the transition from
pre-1995 law to the interest rates and mor-
tality assumptions provided by GATT.
Furthermore, the proposed regulations
make conforming changes to reflect the
final regulations under section 417(e) that
permit defined benefit plans to simplify
the treatment of certain optional forms of
benefit that are paid partly in the form of
an annuity and partly in a more acceler-
ated form.

#### Other clarifying changes

#### A. Treatment of preretirement mortality

The proposed regulations would in-
clude rules relating to the treatment of

4Notice 2008-85, 2008-2 CB 905, Notice 2013-49, 2013-32 IRB 127, Notice 2015-53, 2015-33 IRB 190, and Notice 2016-50, 2016-38 IRB 371, set forth the section 417(e)(3) applicable
mortality tables for 2009 through 2017.

preretirement mortality discounts in deter-
mining the minimum present value of ac-
crued benefits under the regulations to ad-
dress the issue raised by AK Steel and
Berger of whether a plan that provides a
death benefit equal in value to the accrued
benefit may apply a preretirement mortal-
ity discount for the probability of death
when determining the amount of a single-
sum distribution.

Section 411(a) generally prohibits for-
feitures of accrued benefits. Under section
411(a)(1), an employee's rights in his ac-
crued benefit derived from employee con-
tributions must be nonforfeitable, and un-
der section 411(a)(2), an employee's
rights in his accrued benefit derived from
employer contributions must become non-
forfeitable in accordance with a vesting
schedule that is specified in the statute.
Section 411(a)(3)(A) provides that a right
to an accrued benefit derived from em-
ployer contributions is not treated as for-
feitable solely because the plan provides
that it is not payable if the participant dies
(except in the case of a survivor annuity
which is payable as provided in section
401(a)(11)).

Section 411(a)(7)(A)(i) defines a par-
ticipant's accrued benefit under a defined
benefit plan as the employee's accrued
benefit determined under the plan and,
except as provided in section 411(c)(3),
expressed in the form of an annual benefit
commencing at normal retirement age.
Section 1.411(a)-7(a)(1) defines a partic-
ipant's accrued benefit under a defined
benefit plan as the annual benefit com-
mencing at normal retirement age if the
plan provides an accrued benefit in that
form. If a defined benefit plan does not
provide an accrued benefit in the form of
an annual benefit commencing at normal
retirement age, § 1.411(a)-7(a)(1)(ii) de-
fines the accrued benefit as an annual ben-
efit commencing at normal retirement age
which is the actuarial equivalent of the
accrued benefit determined under the plan.
The regulation further clarifies that the
term "accrued benefits" refers only to pen-
sion or retirement benefits. Consequently,
accrued benefits do not include ancillary
benefits not directly related to retirement
benefits, such as incidental death benefits.

Section 411(d)(6)(A) prohibits a plan
amendment that decreases a participant's
accrued benefit. Section 411(d)(6)(B) pro-

vides that a plan amendment that has the
effect of eliminating or reducing an early
retirement benefit or retirement-type sub-
sidy or eliminating an optional form of
benefit with respect to benefits attributable
to service before the amendment is treated
as reducing accrued benefits for this pur-
pose. Section 1.411(d)-3(g)(2)(v) pro-
vides that a death benefit under a defined
benefit plan other than a death benefit that
is part of an optional form of benefit is an
ancillary benefit. Section 1.411(d)-
3(g)(6)(ii)(B) describes death benefits
payable after the annuity starting date that
are considered part of an optional form of
benefit. Pursuant to § 1.411(d)-3(g)(14)
and (15), section 411(d)(6) protected ben-
efits do not include a death benefit under a
defined benefit plan that is an ancillary
benefit and not part of an optional form of
benefit.

A death benefit under a defined benefit
plan that is payable when the participant
dies before attaining normal retirement
age and before benefits commence is not
part of the participant's accrued benefit
within the meaning of section 411(a)(7).
Accordingly, the anti-forfeiture rules of
section 411(a) do not apply to such a
death benefit. This is the case even if the
amount of the death benefit is the same as
the amount the participant would have
received had the participant separated
from service and elected to receive a dis-
tribution immediately before death. More-
over, such a death benefit is an ancillary
benefit within the meaning of § 1.411(d)-
3(g)(2)(v)-rather than a section 411(d)(6)
protected benefit - and therefore can be
eliminated by plan amendment (provided
that a qualified preretirement survivor annu-
ity for a surviving spouse is preserved, pur-
suant to section 401(a)(11)).

The minimum present value require-
ments of section 417(e)(3) do not take into
account the value of ancillary benefits that
are not part of the participant's accrued
benefit under the plan. Consistent with
this, § 1.417(e)-1(d)(1)(i) does not require
ancillary death benefits to be taken into
account in the required minimum present
value calculation. Because questions have
arisen regarding this rule, the proposed
regulations would clarify that the proba-
bility of death under the applicable mor-
tality table is generally taken into account
for purposes of determining the present

value under section 417(e)(3), without re-
gard to the death benefits provided under
the plan other than a death benefit that is
part of the normal form of benefit or part
of another optional form of benefit (as
described in § 1.411(d)-3(g)(6)(ii)(B)) for
which present value is determined.

However, a different rule applies with
respect to whether the probability of death
under the applicable mortality table is
taken into account for purposes of deter-
mining the present value with respect to
the accrued benefit derived from contribu-
tions made by an employee. This is be-
cause an employee's rights in the accrued
benefit derived from the employee's own
contributions are nonforfeitable under
section 411(a)(1), and the exception for
death under section 411(a)(3)(A) to the
nonforfeitability of accrued benefits does
not apply to the accrued benefit derived
from employee contributions. As a result,
for purposes of determining the present
value under section 417(e)(3) with respect
to the accrued benefit derived from con-
tributions made by an employee (that is
computed in accordance with the require-
ments of section 411(c)(3)), the probabil-
ity of death during the assumed deferral
period, if any, is not taken into account.
For purposes of the preceding sentence,
the assumed deferral period is the period
between the date of the present value de-
termination and the assumed commence-
ment date for the annuity attributable to
contributions made by an employee.

The proposed regulations include an
example to illustrate the application of the
minimum present value requirements of
section 417(e)(3) in the case of a single-
sum distribution of a participant's entire
accrued benefit that consists both of an
accrued benefit derived from employee
contributions and an employer-provided
accrued benefit. Consistent with the rules
in these proposed regulations, the example
illustrates that a single-sum distribution of
the participant's entire accrued benefit in
such a case must equal the sum of the
minimum present value of the accrued
benefit derived from employee contribu-
tions, determined under section 417(e)(3)
(applying the special rules set forth in the
preceding paragraph), and the minimum
present value of the employer-provided
accrued benefit, determined under section
417(e)(3). Note that Rev. Rul. 89-60,

1989-1 CB 113 (1989) suggests that it is
sufficient for a single-sum distribution in
such a case to merely equal the greater of
the minimum present value of the accrued
benefit derived from employee contribu-
tions and the minimum present value of
the participant's entire accrued benefit. To
the extent the guidance under Rev. Rul.
89-60 is inconsistent with the final regu-
lations that adopt these proposed regula-
tions, the regulations would supersede the
guidance in Rev. Rul. 89-60.

#### B. Social security level income options

Questions have arisen regarding
whether the minimum present value re-
quirements of section 417(e)(3) apply to a
social security level income option. As
noted above, § 1.417(e)-1(d)(6) provides
that the minimum present value require-
ments of section 417(e)(3) do not apply to
the amount of a distribution paid in the
form of an annual benefit that does not
decrease during the life of the participant,
or that decreases during the life of the
participant merely because of the death of
the survivor annuitant or the cessation or
reduction of social security supplements
or qualified disability benefits.

A social security supplement is defined
in § 1.411(a)-7(c)(4) as a benefit for plan
participants that commences before and
terminates before the age when partici-
pants are entitled to old-age insurance
benefits, unreduced on account of age,
under title II of the Social Security Act,
and does not exceed such old-age insur-
ance benefit. A social security supplement
(other than a QSUPP as defined in
§ 1.401(a)(4)-12) is an ancillary benefit
that is not a section 411(d)(6) protected
benefit.

A social security level income option is
an optional form of benefit (protected un-
der section 411(d)(6)) under which a par-
ticipant's accrued benefit is paid in the
form of an annuity with larger payments
in earlier years, before an assumed social
security commencement age, to provide
the participant with approximately level
retirement income when the assumed so-
cial security payments are taken into ac-
count. It is appropriate to subject a social
security level income option to the rules
of section 417(e)(3) because, when a par-
ticipant's accrued benefit is paid as a so-

cial security level income option, a por-
tion of the participant's accrued benefit
(which may be substantial) is accelerated
and paid over a short period of time until
social security retirement age. Because the
periodic payments under a social security
level income option decrease during the
lifetime of the participant and the decrease
is not the result of the cessation of an
ancillary social security supplement,
§ 1.417(e)-1(d)(6) does not provide an
exception from the minimum present
value requirements of section 417(e)(3)
for such a distribution. These proposed
regulations contain an example that illus-
trates this point.

#### C. Application of required assumptions to the accrued benefit

The proposed regulations would clarify
the scope of the rule of § 1.417(e)-1(d)(1)
under which the present value of any op-
tional form of benefit cannot be less than
the present value of the normal retirement
benefit (with both values determined us-
ing the applicable interest rate and the
applicable mortality table). The proposed
regulations would require that the present
value of any optional form of benefit can-
not be less than the present value of the
accrued benefit payable at normal retire-
ment age, and would provide an exception
for an optional form of benefit payable
after normal retirement age to the extent
that a suspension of benefits applies pur-
suant to section 411(a)(3)(B). Effective/
Applicability Dates

The changes under the proposed regu-
lations are proposed to apply to distribu-
tions with annuity starting dates in plan
years beginning on or after the date regu-
lations that finalize these proposed regu-
lations are published in the Federal Reg-
ister. Prior to this applicability date,
taxpayers must continue to apply existing
regulations relating to section 417(e),
modified to reflect the relevant statutory
provisions during the applicable period
(and guidance of general applicability re-
lating to those statutory provisions, such
as Rev. Rul. 2007-67).

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented

and reaffirmed by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
proposed regulation does not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

### Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS request comments on all aspects of
these proposed regulations. In addition,
the Treasury Department and the IRS spe-
cifically request comments on whether, in
the case of a plan that provides a subsi-
dized annuity payable upon early retire-
ment and determines a single-sum distri-
bution as the present value of the early
retirement annuity, the present-value de-
termination should be required to be cal-
culated using the applicable interest rate
and the applicable mortality table applied
to the early retirement annuity (or whether
the requirement to have a minimum pres-
ent value that is equal to the present value
of the annuity payable at normal retire-
ment age determined in accordance with
section 417(e)(3) provides the level of
protection for the participant that is re-
quired by section 417(e)(3)). See Rybarc-
zyk v. TRW, 235 F.3d 975 (6th Cir. 2000).

All comments will be available at
www.regulations.gov or upon request. A
public hearing has been scheduled for
March 7, 2017, beginning at 10 a.m. in the
Auditorium, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the Consti-
tution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more

than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT section of
this preamble.

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
February 27, 2017, and an outline of top-
ics to be discussed and the amount of time
to be devoted to each topic (a signed orig-
inal and eight (8) copies) by February 27,
2017. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.

### Drafting Information

The principal authors of these regula-
tions are Neil S. Sandhu and Linda S. F.
Marshall, Office of Division Counsel/As-
sociate Chief Counsel (Tax Exempt and
Government Entities). However, other
personnel from the IRS and the Treasury
Department participated in the develop-
ment of these regulations.

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

#### PART 1-INCOME TAXES

Par. 1. The authority citation for part 1
continues to read in part as follows:

Authority: 26 U.S.C. 7805 * *

Par. 2. Section 1.417(e)-1 is amended
by:

1\. Revising paragraphs (d)(1)(i), (d)(2),
(d)(3), (d)(4), and (d)(6).

2\. Adding paragraph (d)(8)(vi).

3\. Revising paragraph (d)(9).

4\. Removing paragraph (d)(10).

The addition and revisions read as fol-
lows:

## § 1.417(e)-1 Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417.

* * * * *

(d) Present value requirement-(1)
General rule-(i) Defined benefit plans-
(A) In general. A defined benefit plan
must provide that the present value of any
accrued benefit and the amount (subject to
sections 411(c)(3) and 415) of any distri-
bution, including a single sum, must not
be less than the amount calculated using
the applicable mortality table described in
paragraph (d)(2) of this section and the
applicable interest rate described in para-
graph (d)(3) of this section, as determined
for the month described in paragraph
(d)(4) of this section. The present value of
any optional form of benefit, determined
in accordance with the preceding sen-
tence, cannot be less than the present
value of the accrued benefit payable at
normal retirement age, except to the ex-
tent that, for an optional form of benefit
payable after normal retirement age, the
requirements for suspension of benefits
under section 411(a)(3)(B) are satisfied.
The same rules used for the plan under
this paragraph (d) must also be used to
compute the present value of the benefit
for purposes of determining whether con-
sent for a distribution is required under
paragraph (b) of this section.

(B) Payment of a portion of a partici-
pant's benefit. The rules of this paragraph
(d)(1) apply with respect to a payment of
only a portion of the accrued benefit in the
same manner as these rules would apply
to a distribution of the entire accrued ben-
efit. See paragraph (d)(7) of this section.

(C) Special rules for applicable defined
benefit plans. See section 411(a)(13) and
the regulations thereunder for an excep-
tion from the rules of section 417(e)(3)
and this paragraph (d) that applies to cer-
tain distributions from certain applicable
defined benefit plans.

* * * * *

(2) Applicable mortality table-(i) In
general. The applicable mortality table for
a calendar year is the mortality table that
is prescribed by the Commissioner in
guidance published in the Internal Reve-
nue Bulletin. See § 601.601(d)(2) of this
chapter. This mortality table is to be based
on the table specified under section

430(h)(3)(A), but without regard to sec-
tion 430(h)(3)(C) or (D).

(ii) Mortality discounts-(A) In gen-
eral. Except as provided under paragraph
(d)(2)(ii)(B) of this section, the probabil-
ity of death under the applicable mortality
table is taken into account for purposes of
determining the present value under this
paragraph (d) without regard to the death
benefits provided under the plan (other
than a death benefit that is part of the
normal form of benefit or part of another
optional form of benefit, as described in
§ 1.411(d)-3(g)(6)(ii)(B), for which pres-
ent value is determined).

(B) Special rule for employee-provided
benefit. For purposes of determining the
present value under this paragraph (d)
with respect to the accrued benefit derived
from employee contributions (that is de-
termined in accordance with the require-
ments of section 411(c)(3)), the probabil-
ity of death during the assumed deferral
period, if any, is not taken into account.
For purposes of the preceding sentence,
the assumed deferral period is the period
between the date of the present value de-
termination and the assumed commence-
ment date for the annuity attributable to
contributions made by an employee.

(3) Applicable interest rate-(i) In
general. The applicable interest rate for a
month is determined using the first, sec-
ond, and third segment rates for that
month under section 430(h)(2)(C), as
modified pursuant to section 417(e)(3)(D)
(and without regard to the segment
rate stabilization rules of section
430(h)(2)(C)(iv)). The applicable interest
rate is specified by the Commissioner in
revenue rulings, notices, or other guidance
published in the Internal Revenue Bulle-
tin, and is applied under rules similar to
the rules under § 1.430(h)(2)-1(b). Thus,
for example, in determining the present
value of a straight life annuity, the first
segment is applied with respect to pay-
ments expected to be made during the
5-year period beginning on the annuity
starting date, the second segment rate is
applied with respect to payments expected
to be made during the 15-year period fol-
lowing the end of that 5-year period, and
the third segment rate is applied with re-
spect to payments expected to be made
after the end of that 15-year period. The
interest rates that are published by the

Commissioner are to be used for this pur-
pose without further adjustment.

(ii) Examples. The following examples
illustrate the rules of paragraphs (d)(2)
and (3) of this section.

Example 1. (i) Plan A is a non-contributory
single-employer defined benefit plan with a
calendar-year plan year, a one-year stability period
coinciding with the calendar year, and a two-month
lookback used for determining the applicable interest
rate. The normal retirement age is 65, and all partic-
ipant elections are made with proper spousal con-
sent. Plan A provides for optional single sum pay-
ments equal to the present value of the participant's
accrued benefit. Plan A provides that the applicable
interest rates are the segment rates as specified by the
Commissioner for the second full calendar month
preceding the calendar year that contains the annuity
starting date. The applicable mortality table is the
table specified by the Commissioner for the calendar
year that contains the annuity starting date.

(ii) Participant P retires in May 2017 at age 60
and elects (with spousal consent) to receive a single-
sum payment. P has an accrued benefit of $2,000 per
month payable as a life annuity beginning at the
plan's normal retirement age of 65. The applicable
mortality rates for 2017 apply. The applicable inter-
est rates published by the Commissioner for Novem-
ber 2016 are 1.57%, 3.45%, and 4.39% for the first,
second, and third segment rates, respectively. The
deferred annuity factor calculated based on these
interest rates and the applicable mortality table for
2017 is 10.931 for a participant age 60. To satisfy the
requirements of section 417(e)(3) and this paragraph
(d), the single-sum payment received by P cannot be
less than $262,344 (that is, $2,000 x 12 x 10.931).

Example 2. (i) The facts are the same as for
Example 1 of this paragraph (d)(3)(ii), except that
Plan A provides for mandatory employee contribu-
tions. Participant Q retires in May 2017 at age 60 and
elects (with spousal consent) to receive a single-sum
payment of Q's entire accrued benefit. Q has an
accrued benefit of $2,000 per month payable as a life
annuity beginning at Plan A's normal retirement age
of 65, consisting of an accrued benefit derived from
employee contributions determined in accordance
with section 411(c)(2) (Q's employee-provided ac-
crued benefit) of $500 per month and an accrued
benefit derived from employer contributions (Q's
employer-provided accrued benefit) of $1,500 per
month.

(ii) Pursuant to paragraph (d)(2)(ii)(B) of this
section, the single-sum payment used to settle Q's
employee-provided accrued benefit cannot be less
than the present value of that portion of Q's accrued
benefit determined using the applicable interest and
mortality rates described in paragraphs (d)(3)(i) and
(d)(2)(ii) of this section, determined without taking
the probability of death during the assumed deferral
period into account. The deferred annuity factor cal-
culated based on the interest and mortality rates
specified in Example 1 of this paragraph (d)(3)(ii)
(taking the probability of death only after age 65 into
account) is 11.266 for a participant age 60. To satisfy
the requirement of section 417(e)(3) and this para-
graph (d), the single-sum payment received by Q
with respect to the employee-provided portion of the

accrued benefit cannot be less than the minimum
present value of $67,596 (that is, $500 x 12 x
11.266).

(iii) The single-sum payment used to settle Q's
employer-provided accrued benefit cannot be less
than the present value of that portion of Q's accrued
benefit determined using the applicable interest and
mortality rates. However, for this purpose, Plan A is
permitted to take the probability of death during the
assumed deferral period into account. The single-
sum payment received by Q with respect to the
employer-provided portion of the accrued benefit
cannot be less than $196,758 (that is, $1,500 x 12 x
10.931).

(iv) The total single-sum payment received by Q
cannot be less than the sum of the minimum present
value of Q's employee- and employer-provided ac-
crued benefits, or $264,354 ($67,596 + $196,758).

(4) Time for determining interest rate
and mortality table-(i) Interest rate gen-
eral rule. Except as provided in paragraph
(d)(4)(v) or (vi) of this section, the appli-
cable interest rate to be used for a distri-
bution is the applicable interest rate deter-
mined under paragraph (d)(3) of this
section for the applicable lookback month.
The applicable lookback month for a dis-
tribution is the lookback month (as de-
scribed in paragraph (d)(4)(iv) of this sec-
tion) for the stability period (as described
in paragraph (d)(4)(iii) of this section) that
contains the annuity starting date for the
distribution. The time and method for de-
termining the applicable interest rate for
each participant's distribution must be de-
termined in a consistent manner that is
applied uniformly to all participants in the
plan.

(ii) Mortality table general rule. The
applicable mortality table to be used for a
distribution is the mortality table that is
published for the calendar year during
which the stability period containing the
annuity starting date begins.

(iii) Stability period. A plan must spec-
ify the period for which the applicable
interest rate remains constant (the stability
period). This stability period may be one
calendar month, one plan quarter, one cal-
endar quarter, one plan year, or one cal-
endar year. This same stability period also
applies to the applicable mortality table.

(iv) Lookback month. A plan must
specify the lookback month that is used to
determine the applicable interest rate with
respect to a stability period. The lookback
month may be the first, second, third,
fourth, or fifth full calendar month preced-
ing the first day of the stability period.

(v) Permitted average interest rate. A
plan may apply the rules of paragraph
(d)(4)(i) of this section by substituting a
permitted average applicable interest rate
with respect to the plan's stability period
for the applicable interest rate determined
under paragraph (d)(3) of this section for
the applicable lookback month for the sta-
bility period. For this purpose, a permitted
average applicable interest rate with re-
spect to a stability period is the applicable
interest rate that is computed by averaging
the applicable interest rates determined
under paragraph (d)(3) of this section for
two or more consecutive months from
among the first, second, third, fourth, and
fifth calendar months preceding the first
day of the stability period. For this para-
graph (d)(4)(v) to apply, a plan must spec-
ify the manner in which the permitted
average interest rate is computed.

(vi) Additional determination dates.
The Commissioner may prescribe, in
guidance published in the Internal Reve-
nue Bulletin, other times that a plan may
provide for determining the applicable in-
terest rate.

(vii) Example. The following example
illustrates the rules of this paragraph
(d)(4):

Example. (i) The facts are the same as Example 1
of paragraph (d)(3)(ii) of this section, except that
Plan A provides that the applicable interest rates are
the rates for the third full calendar month preceding
the beginning of the plan quarter that contains the
annuity starting date. Plan A also provides that the
applicable mortality table is the table specified by
the Commissioner for the calendar year that contains
the beginning of the stability period.

(ii) The segment interest rates that apply for
annuity starting dates during the period beginning
April 1, 2017 and ending June 30, 2017 are the
segment rates for January 2017. This plan design
permits the applicable interest rate to be fixed for
each plan quarter and for the applicable interest rate
for all distributions made during each plan quarter to
be determined before the beginning of the plan quar-
ter.

* * * * *

(6) Exceptions-(i) In general. This
paragraph (d) (other than the provisions
relating to section 411(d)(6) requirements
in paragraph (d)(9) of this section) does
not apply to the amount of a distribution
paid in the form of an annual benefit
that-

(A) Does not decrease during the life of
the participant, or, in the case of a QPSA,
the life of the participant's spouse; or

(B) Decreases during the life of the
participant merely because of-

(1) The death of the survivor annuitant
(but only if the reduction is to a level not
below 50 percent of the annual benefit
payable before the death of the survivor
annuitant): or

(2) The cessation or reduction of a so-
cial security supplement or qualified dis-
ability benefit (as defined in section
411(a)(9)).

(ii) Example. The following example
illustrates the rules of this paragraph
(d)(6).

Example. (i) The facts are the same as Example 1
of paragraph (d)(3)(ii) of this section. Plan A also
provides an optional distribution in the form of a
Social Security level income option. Under this pro-
vision, the participant's benefit is adjusted so that a
larger amount is payable until age 65, at which time
it is reduced to provide a level income in combina-
tion with the participant's estimated social security
benefit beginning at age 65. Participant R's reduced
early retirement benefit payable as a straight life
annuity benefit commencing at age 60 is $1,300 per
month (which is less than the actuarially equivalent
benefit that would have been determined using the
applicable interest and mortality rates under section
417(e)(3)) and R's estimated social security benefit
is $1,000 per month beginning at age 65.

(ii) Because the benefit payable under the social
security level income option decreases at age 65 and
the decrease is not on account of the death of the
participant or a beneficiary or the cessation or reduc-
tion of social security supplements or qualified dis-
ability benefits, the benefits payable under the social
security level income option are subject to the min-
imum present value requirements of section
417(e)(3). As illustrated in Example 1 of paragraph
(d)(3)(ii) of this section, the minimum present value
of Participant R's benefits under section 417(e)(3) is
$262,344, which is based on the present value of R's
accrued benefit, not R's benefit that would be pay-
able as a straight life annuity at the annuity starting
date.

(iii) The deferred annuity factor for a participant
age 60 with lifetime benefits commencing at age 65,
based on the November 2016 segment rates and the
applicable mortality table for 2017, is 10.931. The
corresponding temporary annuity factor to age 65 is
4.752. The minimum benefits payable to Participant
R in the form of a social security level income option
(with a decrease of $1,000 - equal to the partici-
pant's estimated social security benefit - occurring at
age 65) are $2,090.99 per month until age 65 and
$1,090.99 per month thereafter. Any amounts less
than this would have a present value smaller than the
required amount of $262,344, and thus would fail to
satisfy the minimum present value requirement of
section 417(e)(3).

* * * * *

(8) * * *

(vi) Applicability date for provisions
reflecting PPA '06 updates and other
rules. Paragraphs (d)(1) through (4) of this

section apply to distributions with annuity
starting dates in plan years beginning on
or after the date regulations that finalize
these proposed regulations are published
in the Federal Register. Prior to this ap-
plicability date, taxpayers must continue
to apply the provisions of § 1.417(e)-1(d)
as contained in 26 CFR part 1 as in effect
immediately before publication of those
final regulations, except to the extent su-
perseded by statutory changes and guid-
ance of general applicability relating to
those statutory changes.

(9) Relationship with section
411(d)(6)-(i) In general. A plan amend-
ment that changes the interest rate or the
mortality assumptions used for the pur-
poses described in paragraph (d)(1) of this
section (including a plan amendment that
changes the time for determining those
assumptions) is generally subject to sec-
tion 411(d)(6). However, for certain ex-
ceptions to the rule in the preceding sen-
tence, see paragraph (d)(7)(iv) of this
section, § 1.411(d)-4, Q&A-2(b)(2)(v)
(with respect to plan amendments relating
to involuntary distributions), and section
1107(a)(2) of the Pension Protection Act
of 2006, Public Law 109-280, 120 Stat.
780 (2006) (PPA '06) (with respect to
certain plan amendments that were made
pursuant to a change to the Internal Rev-
enue Code by PPA '06 or regulations is-
sued thereunder).

(ii) Section 411(d)(6) relief for change
in time for determining interest rate and
mortality table. Notwithstanding the gen-
eral rule of paragraph (d)(9)(i) of this sec-
tion, if a plan amendment changes the
time for determining the applicable inter-
est rate (and, if the amendment changes
the stability period described in paragraph
(d)(4)(iii) of this section, the time for de-
termining the applicable mortality table),
including an indirect change as a result of
a change in plan year, the amendment will
not be treated as reducing accrued benefits
in violation of section 411(d)(6) merely
on account of this change if the conditions
of this paragraph (d)(9)(ii) are satisfied. If
the plan amendment is effective on or
after the date the amendment is adopted,
any distribution for which the annuity
starting date occurs in the one-year period
commencing at the time the amendment is
effective must be determined using the
interest rate and mortality table provided

under the plan determined at either the
date for determining the interest rate and
mortality table before the amendment or
the date for determining the interest rate
and mortality table after the amendment,
whichever results in the larger distribu-
tion. If the plan amendment is adopted
retroactively (that is, the amendment is
effective prior to the adoption date), the
plan must use the interest rate and mortal-
ity table determination dates resulting in
the larger distribution for distributions
with annuity starting dates occurring dur-
ing the period beginning with the effective
date and ending one year after the adop-
tion date.

* * * * *

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on November
23, 2016, 8:45 a.m., and published in the issue of the Federal
Register for November 25, 2016, 81 F.R. 85190)

Dollar-Value LIFO
Regulations: Inventory
Price Index Computation
(IPIC) Method Pools

REG-125946-10

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed
rulemaking.

SUMMARY: This document contains
proposed regulations that relate to the es-
tablishment of dollar-value last-in, first-
out (LIFO) inventory pools by certain tax-
payers that use the inventory price index
computation (IPIC) pooling method. The
proposed regulations provide rules regard-
ing the proper pooling of manufactured or
processed goods and wholesale or retail
(resale) goods. The proposed regulations
would affect taxpayers who use the IPIC
pooling method and whose inventory for a
trade or business consists of manufactured
or processed goods and resale goods.

DATES: Comments and requests for a
public hearing must be received by Feb-
ruary 27, 2017.

ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-125946-10), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand deliv-
ered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to: CC:PA:
LPD:PR (REG-125946-10), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, N.W., Washington, DC,
or sent electronically via the Federal eRule-
making Portal at http://www.regulations.
gov/ (IRS REG-125946-10).

FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Natasha M. Mulleneaux,
(202) 317-7007; concerning submission
of comments and requests for a public
hearing, Regina Johnson, (202) 317-6901
(not toll-free numbers).

## SUPPLEMENTARY INFORMATION:

### Background

Section 472 of the Internal Revenue
Code permits a taxpayer to account for
inventories using the LIFO method of ac-
counting. The LIFO method of accounting
for goods treats inventories on hand at the
end of the year as consisting first of in-
ventory on hand at the beginning of the
year and then of inventories acquired dur-
ing the year.

Section 1.472-8(a) of the Income Tax
Regulations (26 CFR part 1) provides that
any taxpayer may elect to determine the
cost of its LIFO inventories using the
dollar-value method, provided such
method is used consistently and clearly
reflects income. The dollar-value method
of valuing LIFO inventories is a method
of determining cost by using "base-year"
cost expressed in terms of total dollars
rather than the quantity and price of spe-
cific goods as the unit of measurement.
The "base-year" cost is the aggregate of
the cost (determined as of the beginning
of the tax year for which the LIFO method
is first adopted) of all items in a pool.

Pooling is central to the operation of
the dollar-value LIFO method. Pooling re-
quires costs related to different inventory
products to be grouped into one or more
inventory pools. To determine whether
there is an increment or liquidation in a
pool for a particular taxable year, the end

of the year inventory of the pool ex-
pressed in terms of base-year cost is com-
pared with the beginning of the year in-
ventory of the pool expressed in terms of
base-year cost. The regulations prescribe
rules for determining whether the number
and composition of the pools used by the
taxpayer are appropriate. The rules vary
depending upon whether the taxpayer is
engaged in the activity of manufacturing
or processing or the activity of wholesal-
ing or retailing.

The general pooling rules applicable to
dollar-value LIFO taxpayers are in
§1.472-8(b) and (c). These paragraphs
provide separate pooling principles for
taxpayers engaged in the manufacturing
or processing of goods (§1.472-8(b)), and
for taxpayers engaged in the wholesaling
or retailing of goods purchased from oth-
ers (§1.472-8(c)).

Section 1.472-8(b)(1) requires a man-
ufacturer or processor to establish one
pool for each natural business unit (natu-
ral business unit pooling method) unless
the manufacturer or processor elects under
§1.472-8(b)(3) to establish multiple
pools. Further, §1.472-8(b)(2) provides
that where a manufacturer or processor is
also engaged in the wholesaling or retail-
ing of goods purchased from others, the
wholesaling or retailing operations with
respect to such purchased goods shall not
be considered a part of any manufacturing
or processing unit. Additionally, §1.472-
8(b)(1) requires that where the manufac-
turer or processor is also engaged in the
wholesaling or retailing of goods pur-
chased from others, any pooling of the
LIFO inventory of such purchased goods
for wholesaling and retailing operations
shall be determined in accordance with
§1.472-8(c).

In Amity Leather Products Co. v. Com-
missioner, 82 T.C. 726 (1984), the Tax
Court considered whether a taxpayer that
used the natural business unit pooling
method was subject to the separate pool-
ing requirements by virtue of being both a
manufacturer and a wholesaler or retailer
of merchandise. The court concluded that
requiring separate inventory accounting
for the two functions was reasonable and
held that, where the taxpayer manufac-
tured goods and regularly purchased iden-
tical goods from a subsidiary for resale, it
was required to maintain separate pools

for manufactured and purchased inven-
tory.

A manufacturer or processor using the
natural business unit pooling method may
elect to use the multiple pooling method
described in §1.472-8(b)(3) for inventory
items that are not within a natural business
unit. Alternatively, a manufacturer or pro-
cessor that does not use the natural busi-
ness unit pooling method may elect to use
the multiple pooling method. Under the
multiple pooling method, generally each
pool should consist of a group of inven-
tory items that are substantially similar.
Thus, raw materials that are substantially
similar should be pooled together. Simi-
larly, finished goods and goods-in-process
should be placed in pools classified by
major classes or types of goods.

Section 1.472-8(c)(1) requires whole-
salers, retailers, jobbers, and distributors
to establish inventory pools by major
lines, types, or classes of goods. Mirroring
§1.472-8(b)(1), §1.472-8(c)(1) requires
that where a wholesaler or retailer is also
engaged in the manufacturing or process-
ing of goods, the pooling of the LIFO
inventory for the manufacturing or pro-
cessing operations must be determined in
accordance with §1.472-8(b).

In general, any taxpayer that elects to
use the dollar-value LIFO method to value
LIFO inventories may elect to use the
IPIC method to compute the base-year
cost and determine the LIFO value of a
dollar-value pool for a trade or business.
A taxpayer that elects to use the IPIC
method of determining the value of a
dollar-value LIFO pool for a trade or busi-
ness may also elect to establish dollar-
value pools, for those items accounted for
using the IPIC method, using the IPIC
pooling method provided in §1.472-
8(b)(4) and (c)(2). Section 1.472-8(b)(4)
governs the application of the IPIC pool-
ing method to manufacturers and proces-
sors that elect to use the IPIC method for
a trade or business. Section 1.472-8(c)(2)
governs the application of the IPIC pool-
ing method to wholesalers, retailers, job-
bers, and distributors that elect to use the
IPIC method for a trade or business.

For manufacturers and processors us-
ing the IPIC pooling method under
§1.472-8(b)(4), pools may be established
for those items accounted for using the
IPIC method based on the 2-digit com-

modity codes (that is, major commodity
groups) in Table 9 (formerly Table 6) of
the Producer Price Index Detailed Report
(PPI Detailed Report), which is published
monthly by the United States Bureau of
Labor Statistics (BLS). A taxpayer estab-
lishing IPIC pools under §1.472-
8(b)(4) may combine IPIC pools that
comprise less than 5 percent of the total
inventory value of all dollar-value pools
to form a single miscellaneous IPIC pool.
If the resulting miscellaneous IPIC pool is
less than 5 percent of the total inventory
value of all dollar-value pools, the tax-
payer may combine the miscellaneous
IPIC pool with its largest IPIC pool.

For retailers using the IPIC pooling
method under §1.472-8(c)(2), pools may
be established for those purchased items
accounted for using the IPIC method
based on either the general expenditure
categories (that is, major groups) in Table
3 of the Consumer Price Index Detailed
Report (CPI Detailed Report), published
monthly by BLS, or the 2-digit commod-
ity codes (that is, major commodity
groups) in Table 9 of the PPI Detailed
Report. For wholesalers, jobbers, or dis-
tributors using the IPIC pooling method
under §1.472-8(c)(2), pools may be es-
tablished for those items accounted for
using the IPIC method based on the
2-digit commodity codes in Table 9 of the
PPI Detailed Report. A taxpayer establish-
ing IPIC pools under §1.472-8(c)(2) may
combine pools that comprise less than 5
percent of the total inventory value of all
dollar-value pools to form a single mis-
cellaneous IPIC pool. If the resulting mis-
cellaneous IPIC pool is less than 5 percent
of the total inventory value of all dollar-
value pools, the taxpayer may combine
the miscellaneous IPIC pool with its larg-
est IPIC pool.

Each of the 5-percent rules provided in
§1.472-8(b)(4) or (c)(2) is a method of
accounting. Thus, a taxpayer may not
change to, or cease using either 5-percent
rule without obtaining the prior consent of
the Commissioner. Whether a specific
IPIC pool or the miscellaneous IPIC pool
satisfies the applicable 5-percent rule must
be determined in the year of adoption or
year of change (whichever is applicable)
and redetermined every third taxable year.
Any change in pooling required or permit-
ted under a 5-percent rule is also a change

in method of accounting. A taxpayer must
secure the consent of the Commissioner
before combining or separating pools. The
general procedures under section 446(e)
and §1.446-1(e) that a taxpayer must fol-
low to obtain the consent of the Commis-
sioner to change a method of accounting
for federal income tax purposes are con-
tained in Rev. Proc. 2015-13, 2015-5
I.R.B. 419 (or its successors), as modified
by Rev. Proc. 2015-33, 2015-24 I.R.B.
1067. See §601.601(d)(2)(ii)(b).

The general pooling rules of §1.472-
8(b) and (c) provide that where a taxpayer
is engaged in both a manufacturing or
processing activity and a wholesaling or
retailing activity, separate pooling rules
apply to the separate activities, and goods
purchased for resale may not be included
in the same pool as manufactured or pur-
chased goods. On the other hand, the IPIC
pooling rules address circumstances
where a trade or business consists entirely
of a manufacturing, processing, retailing,
or wholesaling activity. The Treasury De-
partment and the IRS have become aware
of confusion concerning how the IPIC
pooling rules apply where a taxpayer is
engaged in both a manufacturing or pro-
cessing activity and a wholesaling or re-
tailing activity. Accordingly, these pro-
posed regulations address this issue.

### Explanation of Provisions

#### Changes to IPIC Pooling Rules

The proposed regulations amend the
IPIC pooling rules to clarify that those
rules are applied consistently with the
general LIFO pooling rule that manufac-
tured or processed goods and resale goods
may not be included in the same dollar-
value LIFO pool. This general rule is in-
tended to limit cost transference, an inher-
ent problem with pooling. Cost
transference may occur, among other cir-
cumstances, when inventory items from
separate economic activities (for example,
manufacturing and resale activities) are
placed in the same pool and may cause
misallocation of cost or distortion of in-
come.

Accordingly, the proposed regulations
clarify that an IPIC-method taxpayer who
elects the IPIC pooling method described
in §1.472-8(b)(4) or (c)(2) and whose
trade or business consists of both manu-

facturing or processing activity and resale
activity may not commingle the manufac-
tured or processed goods and the resale
goods within the same IPIC pool.

Specifically, the proposed regulations
provide that a manufacturer or processor
using the IPIC pooling method under
§1.472-8(b)(4) that is also engaged,
within the same trade or business, in
wholesaling or retailing goods purchased
from others may elect to establish dollar-
value pools for the manufactured or pro-
cessed items accounted for using the IPIC
method based on the 2-digit commodity
codes in Table 9 of the PPI Detailed Re-
port. If the manufacturer or processor
makes this election, the manufacturer or
processor must also establish pools for its
resale goods in accordance with §1.472-
8(c)(2) (that is, based on the general ex-
penditure categories in Table 3 of the CPI
Detailed Report in the case of a retailer or
the 2-digit commodity codes in Table 9 of
the PPI Detailed Report in the case of a
retailer, wholesaler, jobber, or distribu-
tor).

If the manufacturer or processor
chooses to use the 5-percent method of
pooling, manufactured or processed IPIC
pools (IPIC pools consisting of manufac-
tured or processed goods) of less than 5
percent of the total current year cost of all
dollar-value pools may be combined to
form a single miscellaneous IPIC pool of
manufactured or processed goods. The
manufacturer or processor may also com-
bine resale IPIC pools (IPIC pools con-
sisting of resale goods) of less than 5
percent of the total value of inventory to
form a single miscellaneous IPIC pool of
resale goods. If the miscellaneous IPIC
pool of manufactured or processed goods
is less than 5 percent of the total value of
inventory, the manufacturer or processor
may combine the miscellaneous IPIC pool
of manufactured or processed goods with
its largest manufactured or processed IPIC
pool. The miscellaneous IPIC pool of re-
sale goods may not be combined with any
other IPIC pool.

The proposed regulations also provide
that a wholesaler, retailer, jobber, or dis-
tributor using the IPIC pooling method
under §1.472-8(c)(2) that is also engaged,
within the same trade or business, in man-
ufacturing or processing activities may
elect to establish dollar-value pools for the

resale goods accounted for using the IPIC
method in accordance with §1.472-
8(c)(2) (that is, based on the general ex-
penditure categories in Table 3 of the CPI
Detailed Report in the case of a retailer or
the 2-digit commodity codes in Table 9 of
the PPI Detailed Report in the case of a
wholesaler, retailer, jobber, or distribu-
tor). If the wholesaler, retailer, jobber, or
distributor makes this election, it must
also establish pools for its manufactured
or processed goods based on the 2-digit
commodity codes in Table 9 of the PPI
Detailed Report.

If the wholesaler, retailer, jobber, or
distributor chooses to use the 5-percent
method of pooling, resale IPIC pools of
less than 5 percent of the total value of
inventory may be combined to form a
single miscellaneous IPIC pool of resale
goods. The wholesaler, retailer, jobber, or
distributor may also combine the IPIC
pools of manufactured or processed goods
of less than 5 percent of the total value of
inventory to form a single miscellaneous
IPIC pool of manufactured or processed
goods. If the resale miscellaneous IPIC
pool is less than 5 percent of the total
value of inventory, the wholesaler, re-
tailer, jobber, or distributor may combine
the resale miscellaneous IPIC pool with
the largest resale IPIC pool. The miscel-
laneous IPIC pool of manufactured or pro-
cessed goods may not be combined with
any other IPIC pool.

The Treasury Department and the IRS
specifically request comments on the re-
quirement that a taxpayer engaged in both
manufacturing and resale activities within
the same trade or business is required to
use IPIC pooling for both activities.

Changes to Conform with Current BLS
Publications

These proposed regulations modify
§1.472-8(b), (c), and (e)(3) to update ref-
erences from Table 6 (Producer price in-
dexes and percent changes for commodity
groupings and individual items, not sea-
sonally adjusted) to Table 9 (Producer
price indexes and percent changes for
commodity and service groupings and in-
dividual items, not seasonally adjusted)
because of BLS changes in the PPI De-
tailed Report.

These proposed regulations also mod-
ify §1.472-8(e)(3)(ii) to remove the ex-
ception to the trade or business require-
ment for taxpayers using the Department
Store Inventory Price Indexes because
BLS discontinued publishing these in-
dexes after December 2013.

### Effective/Applicability Date

These regulations are proposed to ap-
ply for taxable years ending on or after the
date the regulations are published as final
regulations in the Federal Register.

### Special Analyses

Certain IRS regulations, including
these, are exempt from the requirements
of Executive Order 12866, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory impact
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these proposed regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.

### Comments and Request for a Public Hearing

A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in the Federal Reg-
ister.

### Drafting Information

The principal author of these regula-
tions is Natasha M. Mulleneaux of the
Office of the Associate Chief Counsel (In-
come Tax & Accounting). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.472-8 also issued under 26
U.S.C 472. * * *

Par. 2. Section 1.472-8 is amended as
follows:

1\. Paragraph (b)(4) is revised.

2\. Paragraph (c)(2) is revised.

3\. Paragraph (e)(3)(ii) is revised.

4\. Paragraph (e)(3)(iii)(B)(2) is
amended by removing "Table 6 (Producer
price indexes and percent changes for
commodity groupings and individual
items, not seasonally adjusted)" and add-
ing in its place "Table 9 (formerly Table
6\) (Producer price indexes and percent
changes for commodity and service
groupings and individual items, not sea-
sonally adjusted)" in the first sentence;
and removing "Table 6" and adding in its
place "Table 9" in the second sentence.

5\. Paragraphs (e)(3)(iii)(C)(1) and (2)
are amended by removing "Table 6" and
adding in its place "Table 9".

6\. Paragraph (e)(3)(v) is revised.
The revisions read as follows:

#### §1.472-8 Dollar-value method of pricing LIFO inventories.

* * * * *

(b) * * *

(4) IPIC method pools-(i) In general.
A manufacturer or processor that elects to
use the inventory price index computation
method described in paragraph (e)(3) of
this section (IPIC method) for a trade or
business may elect to establish dollar-

value pools for those manufactured or
processed items accounted for using the
IPIC method as provided in this paragraph
(b)(4)(i) based on the 2-digit commodity
codes (that is, major commodity groups)
in Table 9 (formerly Table 6) (Producer
price indexes and percent changes for
commodity and service groupings and in-
dividual items, not seasonally adjusted) of
the "PPI Detailed Report" published
monthly by the United States Bureau of
Labor Statistics (available at http://www.
bls.gov). A taxpayer electing to establish
dollar-value pools under this paragraph
(b)(4)(i) may combine IPIC pools of man-
ufactured or processed goods that com-
prise less than 5 percent of the total
current-year cost of all dollar-value pools
for that trade or business to form a single
miscellaneous manufactured or processed
IPIC pool. A taxpayer electing to establish
dollar-value pools under this paragraph
(b)(4)(i) may combine a miscellaneous
manufactured or processed IPIC pool that
comprises less than 5 percent of the total
current-year cost of all dollar-value pools
with the largest manufactured or pro-
cessed IPIC pool. Each of these 5-percent
rules is a method of accounting. A tax-
payer may not change to, or cease using,
either 5-percent rule without obtaining the
Commissioner's prior consent. Whether a
specific manufactured or processed IPIC
pool or the miscellaneous manufactured
or processed IPIC pool satisfies the appli-
cable 5-percent rule must be determined
in the year of adoption or year of change,
whichever is applicable, and redetermined
every third taxable year. Any change in
pooling required or permitted as a result
of a 5-percent rule is a change in method
of accounting. A taxpayer must secure the
consent of the Commissioner pursuant to
§1.446-1(e) before combining or separat-
ing manufactured or processed IPIC pools
and must combine or separate its manu-
factured or processed IPIC pools in accor-

dance with paragraph (g)(2) of this sec-
tion.

(ii) Pooling of goods a manufacturer
or processor purchased for resale. A
manufacturer or processor electing to es-
tablish dollar-value pools under paragraph
(b)(4)(i) of this section and that is also
engaged, within the same trade or busi-
ness, in wholesaling or retailing goods
purchased from others (resale), must es-
tablish pools for its resale goods in accor-
dance with paragraph (c)(2)(i) of this sec-
tion. A manufacturer or processor that
must establish dollar-value pools for re-
sale goods under this paragraph (b)(4)(ii)
may combine IPIC pools of resale goods
that comprise less than 5 percent of the
total current-year cost of all dollar-value
pools for that trade or business to form a
single miscellaneous resale IPIC pool.
The single miscellaneous resale IPIC pool
established pursuant to this paragraph
(b)(4)(ii) may not be combined with any
other IPIC pool. This 5-percent rule is a
method of accounting. A taxpayer may
not change to, or cease using, this
5-percent rule without obtaining the Com-
missioner's prior consent. Whether a spe-
cific resale IPIC pool satisfies the
5-percent rule must be determined in the
year of adoption or year of change, which-
ever is applicable, and redetermined every
third taxable year. Any change in pooling
required or permitted as a result of this
5-percent rule is a change in method of
accounting. A taxpayer must secure the
consent of the Commissioner pursuant to
§1.446-1(e) before combining or separat-
ing resale IPIC pools and must combine or
separate its resale IPIC pools in accor-
dance with paragraph (g)(2) of this sec-
tion.

(iii) No commingling of manufactured
goods and resale goods within a pool.
Notwithstanding any other rule provided
in paragraph (b) or (c) of this section, a
manufacturer or processor electing to es-
tablish dollar-value pools under paragraph

(b)(4)(i) of this section and that is also
engaged in retailing or wholesaling may
not include manufactured or processed
goods in the same IPIC pool as goods
purchased for resale. Further, in applying
the 5-percent rules described in para-
graphs (b)(4)(i) and (ii) of this section, a
taxpayer may not combine an IPIC pool of
manufactured or processed goods that
comprises less than 5 percent of the total
current-year cost of all dollar-value pools
for that trade or business with a resale
IPIC pool that comprises less than 5 per-
cent of the total current-year cost of all
dollar-value pools for the purpose of
forming a single miscellaneous IPIC pool.

(iv) Examples. The rules of paragraph
(b)(4) of this section may be illustrated by
the following examples:

Example 1. (i) Taxpayer is engaged in the trade
or business of manufacturing products A, B, and C.
In order to cover temporary shortages, Taxpayer also
purchases a small quantity of identical products for
resale to customers. Taxpayer treats its manufactur-
ing and resale activities as a single trade or business.
Taxpayer uses the IPIC method described in para-
graph (e)(3) of this section. Pursuant to its election,
Taxpayer establishes dollar-value pools for the man-
ufactured items under paragraph (b)(4)(i) of this
section, based on the 2-digit commodity codes in
Table 9 of the PPI Detailed Report. Taxpayer also
establishes dollar-value pools for the items pur-
chased for resale under paragraph (b)(4)(ii) of this
section, based on the 2-digit commodity codes in
Table 9 of the PPI Detailed Report. Taxpayer does
not choose to use the 5-percent rules under para-
graphs (b)(4)(i) and (ii) of this section.

(ii) Even though Taxpayer has manufactured
items and resale items that share the same 2-digit
commodity codes, under paragraph (b)(4)(iii) of this
section, Taxpayer's manufactured goods may not be
included in the same IPIC pool as its goods pur-
chased for resale.

Example 2. (i) The facts are the same as in
Example 1, except Taxpayer establishes three IPIC
pools for its manufacturing activities and three IPIC
pools for its resale activities. Further, Taxpayer
chooses to use the 5-percent rules of paragraphs
(b)(4)(i) and (ii) of this section. The percentage of
total current-year cost of each IPIC pool to the
current-year cost of all dollar-value pools for the
trade or business is as follows:

Percentage of total current-year cost of IPIC pool to current-year cost of all dollar-value pools

Manufacturing Pools:

Pool A

90%

Pool B

Pool C

Resale Pools:

Pool D

Pool E

Pool F

100%

(ii) For purposes of applying the 5-percent rules
to Taxpayer's manufacturing operations under para-
graph (b)(4)(i) of this section, because Pools B and C
each comprise less than 5 percent of the total
current-year cost of all dollar-value pools, Pools B
and C may be combined to form a single miscella-
neous pool of manufactured or processed goods
(new Pool G).

(iii) For purposes of applying the 5-percent rules
to Taxpayer's resale operations under paragraph
(b)(4)(ii) of this section, because Pools E and F each
comprise less than 5 percent of the total current-year
cost of all dollar-value pools, Pools E and F may be
combined to form a single miscellaneous pool of
resale goods (new Pool H).

(iv) Because Pool G comprises less than 5 per-
cent of the total current-year cost of all dollar-value
pools, under paragraph (b)(4)(i) of this section, Pool
G may be combined with Pool A, the largest IPIC
pool of manufactured goods.

(v) Although Pool H also comprises less than 5
percent of the total current-year cost of all dollar-
value pools, under paragraph (b)(4)(ii) of this sec-
tion, Pool H may not be combined with Pool A, the
largest pool of manufactured goods, or Pool D, the
largest pool of resale goods.

* * * * *

(2) IPIC method pools-(i) In general.
A retailer that elects to use the inventory
price index computation method de-
scribed in paragraph (e)(3) of this section
(IPIC method) for a trade or business may
elect to establish dollar-value pools for
those purchased items accounted for using
the IPIC method as provided in this para-
graph (c)(2)(i) based on either the general
expenditure categories (that is, major
groups) in Table 3 (Consumer Price Index
for all Urban Consumers (CPI-U): U.S.
city average, detailed expenditure catego-
ries) of the "CPI Detailed Report" or the
2-digit commodity codes (that is, major
commodity groups) in Table 9 (formerly
Table 6) (Producer price indexes and per-

cent changes for commodity and service
groupings and individual items, not sea-
sonally adjusted) of the "PPI Detailed Re-
port." A wholesaler, jobber, or distributor
that elects to use the IPIC method for a
trade or business may elect to establish
dollar-value pools for any group of resale
goods accounted for using the IPIC
method based on the 2-digit commodity
codes (that is, major commodity groups)
in Table 9 (Producer price indexes and
percent changes for commodity and ser-
vice groupings and individual items, not
seasonally adjusted) of the "PPI Detailed
Report." The "CPI Detailed Report" and
the "PPI Detailed Report" are published
monthly by the United States Bureau of
Labor Statistics (BLS) (available at http://
www.bls.gov). A taxpayer electing to es-
tablish dollar-value pools under this para-
graph (c)(2)(i) may combine IPIC pools of
resale goods that comprise less than 5
percent of the total current-year cost of all
dollar-value pools for that trade or busi-
ness to form a single miscellaneous resale
IPIC pool. A taxpayer electing to establish
pools under this paragraph (c)(2)(i) may
combine a miscellaneous resale IPIC pool
that comprises less than 5 percent of the
total current-year cost of all dollar-value
pools with the largest resale IPIC pool.
Each of these 5-percent rules is a method
of accounting. A taxpayer may not change
to, or cease using, either 5-percent rule
without obtaining the Commissioner's
prior consent. Whether a specific resale
IPIC pool or the miscellaneous resale
IPIC pool satisfies the applicable
5-percent rule must be determined in the
year of adoption or year of change, which-
ever is applicable, and redetermined every

third taxable year. Any change in pooling
required or permitted under a 5-percent
rule is a change in method of accounting.
A taxpayer must secure the consent of the
Commissioner pursuant to §1.446-
1(e) before combining or separating resale
IPIC pools and must combine or separate
its resale IPIC pools in accordance with
paragraph (g)(2) of this section.

(ii) Pooling of manufactured or pro-
cessed goods of a wholesaler, retailer,
jobber, or distributor. A wholesaler, re-
tailer, jobber, or distributor electing to es-
tablish dollar-value pools under paragraph
(c)(2)(i) of this section and that is also
engaged, within the same trade or busi-
ness, in manufacturing or processing,
must establish pools for its manufactured
or processed goods in accordance with
paragraph (b)(4)(i) of this section. A
wholesaler, retailer, jobber, or distributor
that must establish dollar-value pools for
manufactured or processed goods under
this paragraph (c)(2)(ii) may combine
IPIC pools of manufactured or processed
goods that comprise less than 5 percent of
the total current-year cost of all dollar-
value pools for that trade or business to
form a single miscellaneous manufactured
or processed IPIC pool. The single mis-
cellaneous manufactured or processed
IPIC pool established pursuant to this
paragraph (c)(2)(ii) may not be combined
with any other IPIC pool. This 5-percent
rule is a method of accounting. A taxpayer
may not change to, or cease using, this
5-percent rule without obtaining the Com-
missioner's prior consent. Whether a spe-
cific manufactured or processed IPIC pool
satisfies the 5-percent rule must be deter-
mined in the year of adoption or year of

change, whichever is applicable, and re-
determined every third taxable year. Any
change in pooling required or permitted as
a result of a 5-percent rule is a change in
method of accounting. A taxpayer must
secure the consent of the Commissioner
pursuant to §1.446-1(e) before combin-
ing or separating manufactured or pro-
cessed IPIC pools and must combine or
separate its manufactured or processed
IPIC pools in accordance with paragraph
(g)(2) of this section.

(iii) No commingling of manufactured
goods and purchased goods within a pool.
Notwithstanding any other rule provided
in paragraph (b) or (c) of this section, a
wholesaler, retailer, jobber, or distributor
electing to establish dollar-value pools un-
der paragraph (c)(2)(i) of this section and
that is also engaged in manufacturing or
processing may not include manufactured

or processed goods in the same IPIC pool
as goods purchased for resale. Further, in
applying the 5-percent rules described in
paragraphs (c)(2)(i) and (ii) of this sec-
tion, a taxpayer may not combine an IPIC
pool of manufactured or processed goods
that comprises less than 5 percent of the
total current-year cost of all dollar-value
pools with a resale IPIC pool that com-
prises less than 5 percent of the total
current-year cost of all dollar-value pools
for purposes of forming a single miscel-
laneous IPIC pool.

(iv) Examples. The rules of paragraph
(c)(2) of this section may be illustrated by
the following examples:

Example 1. (i) Taxpayer is engaged in the trade
or business of wholesaling products A, B, and C.
Taxpayer also manufactures a small quantity of iden-
tical products for sale to customers. Taxpayer treats
its wholesaling and manufacturing activities as a
single trade or business. Taxpayer uses the IPIC
method described in paragraph (e)(3) of this section.

Pursuant to its election, Taxpayer establishes dollar-
value pools for the wholesale items purchased for
resale under paragraph (c)(2)(i) of this section, based
on the 2-digit commodity codes in Table 9 of the PPI
Detailed Report. Taxpayer also establishes dollar-
value pools for the manufactured items under para-
graph (c)(2)(ii) of this section, based on the 2-digit
commodity codes in Table 9 of the PPI Detailed
Report. Taxpayer does not choose to use the
5-percent rules under paragraphs (c)(2)(i) and (ii) of
this section.

(ii) Even though Taxpayer has resale and manu-
factured items that share the same 2-digit commodity
codes, under paragraph (c)(2)(iii) of this section,
Taxpayer's resale goods may not be included in the
same IPIC pool as its manufactured goods.

Example 2. (i) The facts are the same as in
Example 1, except Taxpayer establishes three IPIC
pools for its wholesale activities and three IPIC
pools for its manufacturing activities. Further, Tax-
payer chooses to use the 5-percent rules of para-
graphs (c)(2)(i) and (ii) of this section. The percent-
age of total current-year cost of each IPIC pool to the
current-year cost of all dollar-value pools for the
trade or business is as follows:

Percentage of total current-year cost of IPIC pool to current-year cost of all dollar-value pools

Wholesaling Pools:

Pool J

90%

Pool K

Pool L

Manufacturing Pools:

Pool M

Pool N

Pool O

100%

(ii) For purposes of applying the 5-percent rules
to Taxpayer's wholesaling operations under para-
graph (c)(2)(i) of this section, because Pools K and L
each comprise less than 5 percent of the total
current-year cost of all dollar-value pools, Pools K
and L may be combined to form a single miscella-
neous pool of wholesale goods (new Pool P).

(iii) For purposes of applying the 5-percent rules
to Taxpayer's manufacturing operations under para-
graph (c)(2)(ii) of this section, because Pools N and
O each comprise less than 5 percent of the total
current-year cost of all dollar-value pools, Pools N
and O may be combined to form a single miscella-
neous pool of manufactured goods (new Pool Q).

(iv) Because Pool P comprises less than 5 per-
cent of the total current-year cost of all dollar-value
pools, under paragraph (c)(2)(i) of this section, Pool
P may be combined with Pool J, the largest IPIC
pool of resale goods.

(v) Although Pool Q also comprises less than 5
percent of the total current-year cost of all dollar-
value pools, under paragraph (c)(2)(ii) of this sec-
tion, Pool Q may not be combined with Pool J, the
largest pool of resale goods, or Pool M, the largest
pool of manufactured goods.

* * * * *

(e) * * *

(3) * * *

(ii) Eligibility. Any taxpayer electing to
use the dollar-value LIFO method may
elect to use the IPIC method. Except as
provided in other published guidance, a
taxpayer that elects to use the IPIC
method for a specific trade or business
must use that method to account for all
items of dollar-value LIFO inventory.

* * * * *

(v) Effective/applicability date. The
rules of this paragraph (e)(3) and para-
graphs (b)(4) and (c)(2) of this section are
applicable for taxable years ending on or
after the date the Treasury decision adopt-
ing these rules as final regulations is pub-
lished in the Federal Register.

* * * * *

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on November
25, 2016, 8:45 a.m., and published in the issue of the Federal
Register for November 28, 2016, 81 F.R. 85450)

## 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
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the 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 with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is 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
with amplified and clarified, above).

Obsoleted describes 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.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes 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
published ruling is first modified and then,
as modified, is superseded.

Supplemented is 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
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

## Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

U.S.C .- United States Code.

DC-Dummy Corporation.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

Numerical Finding List1

Notices :- Continued

Revenue Rulings:

Bulletin 2016-27 through 2016-51

2016-66, 2016-47 I.R.B. 747

2016-17, 2016-27 I.R.B. 1

2016-67, 2016-47 I.R.B. 751

2016-18, 2016-31 I.R.B. 194

Action on Decision:

2016-68, 2016-48 I.R.B. 774

2016-19, 2016-35 I.R.B. 273

2016-69, 2016-51 I.R.B. 832

2016-20, 2016-36 I.R.B. 279

2016-01, 2016-16 I.R.B. 580

2016-70, 2016-49 I.R.B. 784

2016-23, 2016-39 I.R.B. 382

2016-02, 2016-31 I.R.B. 193

2016-72, 2016-50 I.R.B. 794

2016-24, 2016-39 I.R.B. 395

2016-03, 2016-40 I.R.B. 424

2016-75, 2016-51 I.R.B. 832

2016-25, 2016-41 I.R.B. 435

Announcements:

2016-76, 2016-51 I.R.B. 834

2016-26, 2016-45 I.R.B. 538 2016-27, 2016-49 I.R.B. 781

2016-21, 2016-27 I.R.B. 8

Proposed Regulations:

2016-28, 2016-51 I.R.B. 805

2016-23, 2016-27 I.R.B. 10

2016-24, 2016-30 I.R.B. 170

REG-163113-02, 2016-36 I.R.B. 329

Treasury Decisions:

2016-25, 2016-31 I.R.B. 205

REG-147196-07, 2016-29 I.R.B. 32

9772, 2016-28 I.R.B. 11

2016-26, 2016-38 I.R.B. 389

REG-125946-10, 2016-51 I.R.B. 868

9773, 2016-29 I.R.B. 56

2016-27, 2016-33 I.R.B. 238

REG-107424-12, 2016-51 I.R.B. 861

9774, I.R.B. 151

2016-28, 2016-34 I.R.B. 272

REG-123854-12, 2016-28 I.R.B. 15

2016-30 9775, 2016-30 I.R.B. 159

2016-29, 2016-34 I.R.B. 272

REG-136978-12, 2016-50 I.R.B. 796

9776, 2016-32 I.R.B. 222

2016-30, 2016-37 I.R.B. 355

REG-150992-13, 2016-44 I.R.B. 537

9777, 2016-36 I.R.B. 282

2016-31, 2016-38 I.R.B. 392

REG-131418-14, 2016-33 I.R.B. 248

9778, 2016-31 I.R.B. 196

2016-32, 2016-40 I.R.B. 434

REG-102516-15, 2016-32 I.R.B. 231

9779, 2016-33 I.R.B. 233

2016-33, 2016-39 I.R.B. 422

REG-109086-15, 2016-30 I.R.B. 171

9780, 2016-38 I.R.B. 357

2016-34, 2016-39 I.R.B. 422

REG-134016-15, 2016-31 I.R.B. 205

9781, 2016-35 I.R.B. 274

2016-35, 2016-39 I.R.B. 423

REG-134122-15, 2016-46 I.R.B. 728

9782, 2016-36 I.R.B. 301

2016-36, 2016-39 I.R.B. 423

REG-101689-16, 2016-30 I.R.B. 170

9783, 2016-39 I.R.B. 396

2016-37, 2016-39 I.R.B. 423

REG-102952-16, 2016-51 I.R.B. 860

9784, 2016-39 I.R.B. 402

2016-38, 2016-43 I.R.B. 523

REG-103058-16, 2016-33 I.R.B. 238

9785, 2016-38 I.R.B. 375

2016-39, 2016-45 I.R.B. 720

REG-105005-16, 2016-38 I.R.B. 380

9786, 2016-42 I.R.B. 442

2016-40, 2016-49 I.R.B. 791

REG-108792-16, 2016-36 I.R.B. 320

9789, 2016-44 I.R.B. 527

2016-41, 2016-48 I.R.B. 780

REG-108934-16, 2016-44 I.R.B. 532

9790, 2016-45 I.R.B. 540

2016-42, 2016-49 I.R.B. 793

REG-114734-16, 2016-48 I.R.B. 777

9791, 2016-47 I.R.B. 734

REG-122387-16, 2016-48 I.R.B. 779

9792, 2016-48 I.R.B. 751

Notices:

REG-123600-16, 2016-43 I.R.B. 523

9793, 2016-48 I.R.B. 768

2016-40, 2016-27 I.R.B. 4

REG-130314-16, 2016-45 I.R.B. 718

9797, 2016-51 I.R.B. 819

2016-41, 2016-27 I.R.B. 5

9798, 2016-51 I.R.B. 821

2016-42, 2016-29 I.R.B. 67

Revenue Procedures:

9799, 2016-51 I.R.B. 827

2016-43, 2016-29 I.R.B. 132

2016-37, 2016-29 I.R.B. 136

2016-44, 2016-29 I.R.B. 132

2016-39, 2016-30 I.R.B. 164

2016-45, 2016-29 I.R.B. 135

2016-40, 2016-32 I.R.B. 228

2016-46, 2016-31 I.R.B. 202

2016-47, 2016-35 I.R.B. 276

2016-41, 2016-30 I.R.B. 165

2016-48, 2016-33 I.R.B. 235

2016-42, 2016-34 I.R.B. 269

2016-49, 2016-34 I.R.B. 265

2016-43, 2016-36 I.R.B. 316

2016-50, 2016-38 I.R.B. 384

2016-44, 2016-36 I.R.B. 316

2016-51, 2016-37 I.R.B. 344

2016-45, 2016-37 I.R.B. 344

2016-52, 2016-40 I.R.B. 425

2016-46, 2016-37 I.R.B. 345

2016-53, 2016-39 I.R.B. 421

2016-47, 2016-37 I.R.B. 346

2016-54, 2016-40 I.R.B. 429

2016-48, 2016-37 I.R.B. 348

2016-55, 2016-40 I.R.B. 432

2016-49, 2016-42 I.R.B. 462

2016-57, 2016-40 I.R.B. 432

2016-50, 2016-43 I.R.B. 522

2016-58, 2016-41 I.R.B. 438

2016-51, 2016-42 I.R.B. 465

2016-59, 2016-42 I.R.B. 457

2016-52, 2016-42 I.R.B. 520

2016-60, 2016-42 I.R.B. 458

2016-53, 2016-44 I.R.B. 530

2016-61, 2016-46 I.R.B. 722

2016-54, 2016-45 I.R.B. 685

2016-62, 2016-46 I.R.B. 725

2016-55, 2016-45 I.R.B. 707

2016-63, 2016-45 I.R.B. 683

2016-57, 2016-49 I.R.B. 786

2016-64, 2016-46 I.R.B. 726

2016-58, 2016-51 I.R.B. 839

2016-65, 2016-48 I.R.B. 772

2016-59, 2016-51 I.R.B. 849

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016-01 through 2016-26 is in Internal Revenue Bulletin
2016-26, dated June 27, 2016.

### Finding List of Current Actions on Previously Published Items1

Bulletin 2016-27 through 2016-51

Notices:

2009-89
Modified by
Notice 2016-51, 2016-37 I.R.B. 344

2012-54
Obsoleted by
Notice 2016-51, 2016-37 I.R.B. 344

2013-1
Modified by
Notice 2016-41, 2016-27 I.R.B. 5

2013-1
Superseded by
Notice 2016-41, 2016-27 I.R.B. 5

2013-1
Modified by
Notice 2016-65, 2016-47 I.R.B. 745

2013-1
Superseded by
Notice 2016-65, 2016-47 I.R.B. 745

2013-67
Modified by
Notice 2016-51, 2016-37 I.R.B. 344
2015-63
Superseded by
Notice 2016-58, 2016-41 I.R.B. 438

#### Revenue Procedures:

2003-16
Modified by
Rev. Proc. 2016-47, 2016-37 I.R.B. 346

2007-44
Clarified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Superseded by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2009-33
Modified by
Rev. Proc. 2016-48, 2016-37 I.R.B. 348

### Revenue Procedures :- Continued

2015-36
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2016-3
Modified by
Rev. Proc. 2016-40, 2016-32 I.R.B. 228

2016-3
Modified by
Rev. Proc. 2016-45, 2016-37 I.R.B. 228

2016-3
Supplemented by
Rev. Proc. 2016-50, 2016-43 I.R.B. 522

2016-29
Modified by
Rev. Proc. 2016-39, 2016-30 I.R.B. 164

#### Treasury Decisions:

2013-17
Obsoleted by
T.D. 9785 2016-38 I.R.B. 375

2014-12
Modified by
T.D. 9776 2016-32 I.R.B. 222

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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Internal Revenue Bulletin 2016-51 (PDF rendition): IRS Notices

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