Internal Revenue Bulletin 2012-2 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 201
2-2
January 9, 2012
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
T.D. 9559, page 252.
Final regulations amend the user fee regulations and establish
a new user fee for individuals to take the registered tax return
preparer competency examination.
INCOME TAX
Rev. Rul. 2012–1, page 255.
Recurring item exception to the all events test.This ruling
clarifies the treatment of certain liabilities under the recurring
item exception to the economic performance requirement un-
der section 461(h)(3) of the Code. It also addresses the appli-
cation of the “not material” and “better matching” requirement
of the recurring item exception in the context of a lease and
a service contract each having a term of one year. The ruling
distinguishes contracts for the provision of services from in-
surance and warranty contracts and applies the recurring item
exception differently. Rev. Proc. 2011–14 modified and am-
plified.
T.D. 9559, page 252.
Final regulations amend the user fee regulations and establish
a new user fee for individuals to take the registered tax return
preparer competency examination.
REG–149625–10, page 279.
Proposed regulations under section 382 of the Code provide
exceptions to the segregation rules, under which certain
transactions may create one or more additional public groups
treated as 5-percent shareholders, for certain sales of loss
corporation stock to small shareholders and for certain re-
demptions of small shareholders. The regulations also provide
that in certain circumstances certain entities owning the loss
corporation generally will be treated as having no more than
one public group.
EXEMPT ORGANIZATIONS
Rev. Proc. 2012–9, page 261.
This procedure sets forth issuing determination letters and rul-
ings on the exempt status of organizations under sections 501
and 521 of the Code. The procedures also apply to the revo-
cation and modification of determination letters or rulings, and
provide guidance on the exhaustion of administrative remedies
for purposes of declaratory judgment under section 7428 of
the Code. Rev. Proc. 2011–9 superseded.
Rev. Proc. 2012–10, page 273.
This procedure sets forth updated procedures with respect to
issuing rulings and determination letters on private foundation
status under § 509(a) of the Code, operating foundation sta-
tus under § 4942(j)(3), and exempt operating foundation status
under § 4940(d)(2), of organizations exempt from Federal in-
come tax under § 501(c)(3). This procedure also applies to
the issuance of determination letters on the foundation status
under § 509(a)(3) of nonexempt charitable trusts described in
§ 4947(a)(1). Rev. Proc. 2011–10 superseded.
(Continued on the next page)
Finding Lists begin on page ii.

ADMINISTRATIVE
T.D. 9559, page 252.
Final regulations amend the user fee regulations and establish
a new user fee for individuals to take the registered tax return
preparer competency examination.
Notice 2012–1, page 260.
Optional standard mileage rates for 2012.This notice an-
nounces 55.5 cents as the optional standard mileage rate for
substantiating the amount of the deduction for the business
use of an automobile, 14 cents as the optional rate for use of
an automobile as a charitable contribution, and 23 cents as
theoptionalrateforuseofanautomobileasamedicalormov-
ing expense for 2012. The notice also provides the amount
a taxpayer must use in calculating reductions to basis for de-
preciation taken under the business standard mileage rate and
the maximum standard automobile cost for automobiles under
a FAVR allowance. Notice 2010–88, as modified by Announce-
ment 2011–40, is superseded.
Rev. Proc. 2012–12, page 275.
This procedure describes the procedures and standards that
organizations must follow to be identified by the Service as a
qualifying organization that may accredit continuing education
providers under section 10.9(a)(1)(iii) of Circular 230 and the
procedures and standards that individuals and entities must
follow to be approved as continuing education providers under
section 10.9(a)(1) of Circular 230.
Announcement 2012–2, page 285.
This announcement contains an update to Publication 1220,
Specifications for Filing Forms 1097, 1098, 1099, 3921,
3922, 5498, 8935 and W–2G, Electronically,revised 9–2011,
concerning the filing of Form 1099–K.
January 9, 20122012–2 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2012–2 I.R.B.January 9, 2012

January 9, 20122012–2 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
26 CFR 300.0: User fees; in general.
T.D. 9559
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 300
User Fee to Take the
Registered Tax Return
Preparer Competency
Examination
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
amendments to the user fee regulations.
The final regulations redesignate rules
pertaining to fee for obtaining a preparer
tax identification number. These final
regulations also establish a user fee for
individuals to take the registered tax re-
turn preparer competency examination.
The final regulations affect individuals
who take the registered tax return preparer
competency examination. The charging of
user fees is authorized by the Independent
Offices Appropriations Act of 1952.
DATES:Effective Date:These regulations
are effective beginning November 25,
2011.
Applicability Date:For date of applica-
bility, see §300.12(d).
FOR FURTHER INFORMATION
CONTACT: Concerning the final reg-
ulations, Emily M. Lesniak at (202)
622–4570; concerning cost methodology
Eva J. Williams at (202) 435–5514 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regula-
tions establishing a user fee to take the
registered tax return preparer competency
examination. New §300.12 establishes a
$27 IRS user fee to take the registered tax
return preparer competency examination;
this IRS user fee is in addition to any rea-
sonable, IRS-approved fee charged by the
third-party vendor. These regulations also
redesignate prior §300.12 as §300.13.
The Independent Offices Appropri-
ations Act of 1952 (IOAA), which is
codified at 31 U.S.C. 9701, authorizes
agencies to prescribe regulations estab-
lishing user fees for services provided
by the agency. Regulations prescribing
user fees are subject 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
requires agencies seeking to impose user
fees for providing special benefits to iden-
tifiable recipients to calculate the full cost
of providing those benefits.
These regulations are part of a broader
IRS effort to increase the oversight of
the tax return preparer community. As
part of this effort, Treasury and the IRS
published final regulations in theFederal
Register(T.D. 9527, 2011–27 I.R.B. 1
[76 FR 32286]) on June 3, 2011, amending
the regulations governing practice before
the IRS. These regulations are found in
31 CFR part 10 and have been reprinted
as Treasury Department Circular No.
230 (Circular 230). The amendments to
Circular 230, in part, include registered
tax return preparers as practitioners under
Circular 230. Registered tax return
preparers must demonstrate the necessary
qualifications and competency, which
includes passing a minimum competency
examination.Registered tax return
preparers receive the special benefit of
being able to prepare and sign tax returns,
claims for refund, and other documents as
provided in forms, instructions, or other
appropriate guidance.
On September 26, 2011, Treasury and
the IRS published a notice of proposed
rulemaking (REG–116284–11, 2011–43
I.R.B. 598) in theFederal Register
(76 FR 59239) proposing a user fee to
take the registered tax return preparer
competency examination. The notice of
proposed rulemaking also proposed to
establish a user fee to be fingerprinted
in conjunction with the preparer tax
identification number, acceptance agent,
and authorized e-file provider programs.
These regulations only finalize the user fee
to take the registered tax return preparer
competency examination.
The notice of proposed rulemaking an-
nounced a public hearing on October 7,
2011. Four individuals testified at the pub-
lic hearing. The testimony at the hear-
ing focused on the proposed fingerprinting
user fee. No individual at the hearing of-
fered testimony on the competency exam-
ination user fee.
Treasury and the IRS received writ-
ten comments responding to the notice
of proposed rulemaking. These com-
ments are available for public inspection
athttp://www.regulations.govor upon
request. After consideration of all the
comments, the proposed regulations are
adopted as modified by this Treasury de-
cision.
Summary of Comments and
Explanation of Revisions
Treasury and the IRS received more
than twenty written comments in response
to the notice of proposed rulemaking.
Treasury and the IRS received four writ-
ten comments relating to the user fee to
take the registered tax return preparer
competency examination. The majority
of the written comments concerned the
user fee to be fingerprinted in conjunc-
tion with the preparer tax identification
number, acceptance agent, and authorized
e-file provider programs. Treasury and
the IRS also received a few comments
regarding other aspects of the IRS’s ef-
forts to regulate tax return preparers. To
the extent that comments address other
aspects of the IRS’s increased oversight
of the tax return preparation industry, the
comments will be addressed, as appropri-
ate and practicable, in future guidance.
Further, some of the comments received
related to testing locations and whether
an online examination would be offered.
The IRS received similar comments in
response to Notice 2011–48, 2011–26
I.R.B. 927 (June 27, 2011) available at
www.irs.gov/pub/irs-irbs/irb11–26.pdf,
which specifically requested comments
regarding the registered tax return preparer
2012–2 I.R.B.252January 9, 2012

competency examination. The IRS and
the competency examination vendor con-
tinue to consider these comments, along
with other comments received in response
to Notice 2011–48, as they implement the
competency testing program. The IRS
is committed to addressing the concerns
expressed in these comments to the extent
practical and appropriate.
One comment regarding the proposed
user fee to take the registered tax return
preparer competency examination encour-
aged Treasury and the IRS to monitor the
fee charged by the third-party vendor. The
third-party vendor’s fee is approved by the
IRS, including any changes to the vendor’s
fee. Thus, the IRS will be aware of any
possible fee changes and will approve the
final vendor fee.
Three comments related to the total
cost and the components of the user fee
to take the registered tax return preparer
competency examination. These com-
ments expressed a general concern that the
fee may be a financial burden on tax return
preparation businesses. One commenta-
tor requested that a definitive, specific
fee amount be provided and expressed
confusion over whether a single user fee
covers multiple attempts to take the ex-
amination. Another commentator stated
that the fee was duplicative for preparers
who are independently tested under an
employer’s program, and requested that
the IRS develop a process to review and
certify employer testing programs.
Treasury and the IRS have considered
these comments, and for the reasons de-
scribed in this preamble, the portion of the
proposed regulations relating to the user
fee for the competency examination is fi-
nalized without substantive change.
As stated earlier in this preamble, the
OMB Circular generally requires agen-
cies to recover the full cost of providing a
special benefit to an identifiable recipient.
The full cost to the IRS to administer the
registered tax return preparer competency
examination is $27 per applicant each time
the applicant takes the examination. The
costs to the IRS to administer the com-
petency examination include conducting
background checks on employees of the
third-party vendor who are involved in
the administration of the examination and
the personnel, administrative, manage-
ment, and information technology costs
to the IRS for developing and reviewing
the competency examination, overseeing
the competency examination, validating
the competency examination results, and
establishing a review procedure for ap-
plicants who contest any portion of the
competency examination. The IRS will
make expenditures for all of these costs
associated with the competency exami-
nation and, thus, is generally required to
recover these costs through a user fee as
provided by the OMB Circular. The IRS
will inform the public of the total finalized
testing fee amount before the test becomes
available. Because each examination-sit-
ting will involve the same costs, a user
fee will be charged each time an applicant
takes the examination.
Further, these regulations are part of
Treasury’s and the IRS’s effort to increase
oversight of the tax return preparer indus-
try based upon findings and recommenda-
tions made by the IRS in Publication 4832,
“Return Preparer Review”(the Report),
which was published on January 4, 2010.
All individuals who wish to become a reg-
istered tax return preparer must pass the
competency examination because, during
the implementation process, Treasury and
the IRS concluded that all registered tax
return preparers should be subject to uni-
form standards of qualification and prac-
tice, which includes demonstrating a min-
imum level of competency. When obtain-
ing tax return preparation services, taxpay-
ers should know that all registered tax re-
turn preparers are subject to the same fed-
eral regulations and standards, regardless
of where the registered tax return preparer
is employed or in what state the individual
resides. Requiring all registered tax return
preparers to fulfill the same competency
examination requirements ensures that all
registered tax return preparers have met
the same minimum competency standards.
Additionally, requiring all registered tax
return preparers to pass the IRS approved
competency examination addresses con-
cerns raised by several commentators dur-
ing the IRS’s study of the tax return prepa-
ration industry about the potential for un-
fairness if certain tax return preparers are
exempt from these requirements. Accord-
ingly, Treasury and the IRS do not believe
that a process to review and certify em-
ployer testing is appropriate.
The comments on the user fee to be fin-
gerprinted in conjunction with the preparer
tax identification number, acceptance
agent, and authorized e-file provider pro-
grams by and large expressed concern with
the IRS’s plan to fingerprint participants
in these programs generally, as well as the
imposition and amount of the proposed
user fee. In light of the significant issues
raised at the hearing and in the written
comments received on the fingerprinting
user fee, Treasury and the IRS have de-
cided not to finalize the proposed user fee
to be fingerprinted in conjunction with the
preparer tax identification number, accep-
tance agent, and authorized e-file provider
programs at this time. Rather, Treasury
and the IRS will consider alternatives as
to how the IRS can best implement the
Circular 230 provision authorizing the IRS
to conduct a suitability check to become
a registered tax return preparer. In eval-
uating these alternatives, consideration
will be given to how the suitability check
achieves the goals of increasing oversight
of the tax return preparer community and
how the suitability check can be conducted
most efficiently while not creating undue
burden on the individual applicants and
the firms or other entities that employ
them. Thus, Treasury and the IRS are still
interested in receiving further comments
regarding the use of fingerprinting as part
of the suitability check to become a reg-
istered tax return preparer. If the result
of this reconsideration will require any
individual to pay a user fee in conjunction
with the implementation of the suitability
check, including a possible fingerprinting
requirement, Treasury and the IRS will
publish a new notice of proposed rulemak-
ing with respect to this user fee.
Treasury and the IRS adopt the pro-
posed regulations after eliminating the
proposed user fee to be fingerprinted in
conjunction with the preparer tax iden-
tification number, acceptance agent, and
authorized e-file provider programs. The
portion of the proposed regulations per-
taining to the user fee to take the registered
tax return preparer competency exam-
ination is adopted without substantive
modification.
Effective/Applicability Date
The Administrative Procedure Act pro-
vides that substantive rules will not be ef-
fective until thirty days after the final reg-
ulations are published in theFederal Reg-
ister(5 U.S.C. 553(d)). Final regulations
January 9, 20122532012–2 I.R.B.

may be effective prior to thirty days after
publication if the publishing agency finds
that there is good cause for an earlier ef-
fective date.
This regulation is part of the IRS’s con-
tinued efforts to implement the recommen-
dations in the Report. The recently pub-
lished amendments to Circular 230 estab-
lished registered tax return preparers as
practitioners under Circular 230 and re-
quired that individuals must pass a compe-
tency examination, among other require-
ments, to become a registered tax return
preparer. Before the competency exami-
nation can be offered, the competency ex-
amination user fee must be in place. Fur-
ther, to enable the IRS to begin designating
individuals as registered tax return prepar-
ers in time for the 2012 filing season, the
competency examination user fee must be
finalized significantly before the 2012 fil-
ing season.
Thus, the Treasury and the IRS find that
there is good cause for these regulations to
be effective upon the publication of these
final regulations in theFederal Register.
Special Analyses
It has been determined that these fi-
nal regulations are not a significant regu-
latory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563.
It has been determined that a final reg-
ulatory flexibility analysis under 5 U.S.C.
603 is required for this final rule. The anal-
ysis is set forth under the heading, “Final
Regulatory Flexibility Analysis.”
Pursuant to 26 U.S.C. 7805(f), the no-
tice of proposed rulemaking preceding
these final regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business. The
Chief Counsel for Advocacy did not sub-
mit comments on the notice of proposed
rulemaking.
FINAL REGULATORY FLEXIBILITY
ANALYSIS
When an agency either promulgates a
final rule that follows a required notice
of proposed rulemaking or promulgates
a final interpretative rule involving the
internal revenue laws that imposes a col-
lection of information requirement on
small entities as described in 5 U.S.C.
603(a), the Regulatory Flexibility Act
(5 U.S.C. chapter 6) requires the agency
to “prepare a final regulatory flexibility
analysis.” A final regulatory flexibil-
ity analysis must, pursuant to 5 U.S.C.
604(a), contain the five elements listed
in this final regulatory flexibility analy-
sis. For purposes of this final regulatory
flexibility analysis, a small entity is de-
fined as a small business, small nonprofit
organization, or small governmental ju-
risdiction. See 5 U.S.C. 601(3)-(6). The
Treasury and the IRS conclude that the
final regulations (together with other
contemplated guidance provided for in
these regulations) will impact a substantial
number of small entities and the economic
impact may be significant.
A statement of the need for, and the ob-
jectives of, the final rule.
TheTreasuryandtheIRSareimple-
menting regulatory changes that increase
the oversight of the tax return preparer
industry based upon findings and recom-
mendations in the Report. These regu-
latory changes include establishing regis-
tered tax return preparers as Circular 230
practitioners. Individuals who wish to be-
come a registered tax return preparer must
pass a competency examination. Individu-
als who pass the competency examination
and become a registered tax return pre-
parer will receive a special benefit that the
general public does not receive because a
registered tax return preparer is allowed to
prepare and sign Form 1040 series returns
(and accompanying schedules) for com-
pensation. The regulations under section
6109 (75 FR 60309) in conjunction with
Notice 2011–6, 2011–3 I.R.B. 315 (Jan-
uary 17, 2011), provide that only attor-
neys, certified publicaccountants, enrolled
agents, and registered tax return preparers
can prepare and sign all or substantially
all of a Form 1040 series return (and ac-
companying schedules) for compensation.
This final rule recovers the full costs to
the IRS to oversee the registered tax return
preparer competency examination.
Summaries of the significant issues
raised in the public comments responding
to the initial regulatory flexibility analysis
and of the agency’s assessment of the is-
sues, and a statement of any changes made
totheruleasaresultofthecomments.
Treasury and the IRS received no pub-
lic comments responding to the initial reg-
ulatory flexibility analysis related to com-
petency testing in the proposed regulations
that preceded these final regulations. Trea-
sury and the IRS did receive comments
from the public on the proposed regula-
tions in general. A summary of these com-
ments along with Treasury’s and the IRS’s
assessment of the issues raised in the com-
ments and descriptions of any revisions
resulting from the comments is set forth
elsewhere in this preamble under the Sum-
mary of Comments and Explanation of Re-
visions heading.
A description and an estimate of the
number of small entities to which the rule
will apply or an explanation of why an
estimate is not available.
These final regulations affect all indi-
viduals who want to become a registered
tax return preparer under the new over-
sight rules in Circular 230. Only indi-
viduals, not businesses, can practice be-
fore the IRS or become a registered tax
return preparer. Thus, the economic im-
pact of these regulations on any small en-
tity generally will be a result of applicants
owning a small business or a small en-
tity employing applicants. The NAICS
code that relates to taxpreparation services
(NAICS code 541213) is the appropriate
code for the registered tax return preparer
program. Entities identified as tax prepa-
ration services are considered small un-
der the Small Business Administration size
standards (13 CFR 121.201) if their annual
revenue is less than $7 million. The IRS
estimates that approximately 350,000 in-
dividuals will become registered tax return
preparers. The IRS estimates that approx-
imately 70 to 80 percent of the individuals
who apply to become registered tax return
preparers are operating as or employed by
small entities.
A description of the projected report-
ing, recordkeeping, and other compliance
requirements of the rule, including an esti-
mate of the classes of small entities subject
to the requirements and the type of profes-
sional skills necessary for preparation of a
report or record.
The final regulations do not directly im-
pose any reporting orrecordkeeping re-
quirements on any small entities. The fi-
nal regulations, however, require certain
tax return preparers to pay a user fee to
take the registered tax return preparer com-
petency examination. Small entities may
be affected by these costs if the entities
2012–2 I.R.B.254January 9, 2012

choose to pay some or all of these fees for
their employees.
Under the amendments to Circular 230,
taxreturnpreparersmayalsoincurcosts
for exam preparation courses, plus inci-
dental costs, such as for travel and accom-
modations, in order to obtain the designa-
tion of registered tax return preparer un-
der Circular 230. Course prices can vary
greatly, from free to hundreds of dollars.
Many small tax return preparation firms
may choose, as with the user fee, to bear
these costs for their employees. In some
cases, small entities may lose sales and
profits while their employed tax return pre-
parers attend exam preparation classes or
are studying and sitting for the examina-
tion. Some small entities that employ tax
return preparers may even need to alter
their business operations if a significant
number of their employees cannot satisfy
the necessary registration and competency
requirements. Treasury and the IRS con-
clude, however, that only a small percent-
age of small entities, if any, may need to
cease doing business or radically change
their business model due to these final reg-
ulations.
A description of the steps the agency
has taken to minimize the significant eco-
nomic impact on small entities consistent
with the stated objectives of applicable
statutes, including a statement of the fac-
tual, policy, and legal reasons for select-
ing any alternative adopted in the final rule
and why other significant alternatives af-
fecting the impact on small entities that the
agency considered were rejected.
Treasury and the IRS are not aware of
any steps that could be taken to minimize
the economic impact on small entities that
would also be consistent with the objec-
tives of these final regulations and have
determined that there is no viable alterna-
tive to these final regulations. These reg-
ulations do not impose any more require-
ments on small entities than are necessary
to effectively administer the internal rev-
enue laws. Further, the regulations do not
subject small entities to any requirements
that are not also applicable to larger enti-
ties covered by the regulations.
The IOAA authorizes the charging of
user fees for agency services, subject to
policies designated by the President. The
OMB Circular implements presidential
policies regarding user fees and encour-
ages user fees when a government agency
provides a special benefit to a member of
the public. As Congress has not appro-
priated funds to the registered tax return
preparer program, there are no viable al-
ternatives to the imposition of user fees,
which fees recover the costs to the IRS for
providing the special benefits associated
with the registered tax return preparer pro-
gram.
Drafting Inf
ormation
The principal author of these regula-
tions is Emily M. Lesniak, Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
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 in part as fol-
lows:
Authority: 31 U.S.C. 9701.
Par. 2. Section 300.0 is amended by
redesignating paragraph (b)(12) as para-
graph (b)(13) and adding new paragraph
(b)(12) to read as follows:
§300.0
User fees; in general.
*****
(b) * * *
(12) Taking the registered tax return
preparer competency examination.
*****
§300.12[Redesignated as §300.13]
Par. 3. Redesignate §300.12 as
§300.13.
Par. 4. Adding new §300.12 to read as
follows:
§300.12 Registered tax return preparer
competency examination fee.
(a)Applicability. This section applies
to the competency examination to become
a registered tax return preparer pursuant to
31 CFR 10.4(c).
(b)Fee. The fee for taking the regis-
tered tax return preparer competency ex-
amination is $27, which is the government
cost for overseeing the examination and
does not include any fees charged by the
administrator of the examination.
(c)Personliableforthefee. The person
liable for the competency examination fee
is the applicant taking the examination.
(d)Effective/applicability date.
This section is applicable beginning
November 25, 2011.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 21, 2011.
Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on November 22,
2011, 11:15 a.m., and published in the issue of the Federal
Register for November 25, 2011, 76 F.R. 72619)
Section 461.—General
Rule for Taxable Year
of Deduction
26 CFR 1.461–4: Economic performance.
Recurring item exception to the all
events test.This ruling clarifies the
treatment of certain liabilities under the
recurring item exception to the economic
performance requirement under section
461(h)(3) of the Code. It also addresses
the application of the “not material” and
“better matching” requirement of the re-
curring item exception in the context of a
lease and a service contract each having a
term of one year. The ruling distinguishes
contracts for the provision of services
from insurance and warranty contracts
and applies the recurring item exception
differently. Rev. Proc. 2011–14 modified
and amplified.
Rev. Rul. 2012–1
ISSUES
Under the situations described below:
(1) Is the amount of X’s liability ma-
terial for purposes of the recurring item
exception in §461(h)(3) of the Internal
Revenue Code if the liability accrues over
more than one taxable year for financial
accounting purposes?
(2) For purposes of the recurring item
exception, does the accrual of X’s liability
January 9, 20122552012–2 I.R.B.

over more than one taxable year result in
better matching of the liability with related
income if X generates the related income
in its trade or business over more than one
taxable year and the liability accrues over
more than one taxable year for financial
accounting purposes?
(3) Is X’s liability that arises under a
service contract properly characterized as
a “liability arising out of the provision
of services” under § 1.461–4(d)(2), rather
than a “liability arising out of the provi-
sion of a warranty or service contract” un-
der § 1.461–4(g)(5)?
(4) Does the recurring item excep-
tionapplytoX’sliabilitytoprovide
services pursuant to a service contract
that is characterized as a “liability arising
out of the provision of services” under
§ 1.461–4(d)(2)?
FACTS
Xis a corporation that uses an ac-
crual method of accounting, including
the recurring item exception provided in
§ 461(h)(3) and § 1.461–5, for federal
income tax purposes.Xfiles its federal
income tax returns ona calendar year basis
and prepares annual financial statements
in accordance with generally accepted ac-
counting principles.
On July 1, 2011,Xenters into a
one-year lease agreement for property
it will use in its trade or business to
generate income over the period of the
lease. The lease of the property begins
on July 1, 2011, and continues through
June 30, 2012. The terms of the lease
agreement requireXto pay $50,000, the
entire balance of the lease liability, on
July 1, 2011, andXpays the $50,000 on
that date.X’s financial statements account
for the lease agreement by recognizing the
$50,000 expense ratably over the one-year
period of the lease.
In conjunction with entering into the
lease agreement,Xalso enters into a
one-year service contract with a mainte-
nance company unrelated to the lessor of
the property. The service contract begins
on July 1, 2011, and continues through
June 30, 2012. Under the terms of the ser-
vice contract, the maintenance company
will inspect and clean the leased property
monthly and provide any necessary repair
and maintenance services relating to the
normal wear and tear or routine mainte-
nance of the property. The services to be
provided toXunder the service contract
are general services to be provided on an
ongoing and recurring basis. The terms
of the service contract requireXto pay
$2,400, the entire balance of the liability,
on July 1, 2011, andXpays the $2,400 on
that date.X’s financial statements account
for the service contract by recognizing
the $2,400 expense as the services are
provided over the one-year period of the
contract.
Xreasonably expects that it will enter
into similar leases and service contracts on
a recurring basis in the future.
LAW
Section 461(a) provides that the amount
of any deduction or credit must be taken
for the taxable year that is the proper tax-
able year under the method of accounting
used in computing taxable income.
Section 1.461–1(a)(2)(i) provides that,
under an accrual method of accounting, a
liability is incurred, and generally taken
into account for federal income tax pur-
poses, in the taxable year in which (1) all
the events have occurred that establish the
fact of the liability, (2) the amount of the
liability can be determined with reason-
able accuracy (requirements (1) and (2) are
collectively referred to as the “all events
test”), and (3) economic performance has
occurred with respect to the liability. See
also § 1.446–1(c)(1)(ii)(A). All the events
have occurred that establish the fact of the
liability when (1) the event fixing the lia-
bility, whether that be the required perfor-
mance or other event, occurs, or (2) pay-
ment is due, whichever happens earliest.
Rev. Rul. 2007–3, 2007–1 C.B. 350; Rev.
Rul. 80–230, 1980–2 C.B. 169; Rev. Rul.
79–410, 1979–2 C.B. 213,amplified by
Rev Rul. 2003–90, 2003–2 C.B. 353.
Section 461(h)(1) and § 1.461–4(a)(1)
provide that, for purposes of determining
whether an accrual basis taxpayer can treat
the amount of any liability as incurred, the
all events test is not treated as met any
earlier than the taxable year in which eco-
nomic performance occurs with respect to
the liability.
Section 1.461–4(d)(2)(i) provides that
if the liability of a taxpayer arises out of
the providing of services or property to the
taxpayer by another person, economic per-
formance occurs as the services or prop-
erty is provided.
Section 1.461–4(d)(3)(i) provides that
if the liability of a taxpayer arises out of the
use of property by the taxpayer, economic
performance occurs ratably over the period
of time the taxpayer is entitled to the use of
the property.
Section 1.461–4(g)(5) provides that if
the liability of a taxpayer arises out of the
provision to the taxpayer of insurance, or
a warranty or service contract, economic
performance occurs as payment is made to
the person to which the liability is owed.
A warranty or service contract is a con-
tract that a taxpayer enters into in connec-
tion with property bought or leased by the
taxpayer, pursuant to which the other party
to the contract promises to replace or re-
pair the property under specified circum-
stances. Section 1.461–4(g)(5)(i).
Section 461(h)(3)(A) and § 1.461–5(b)
provide a recurring item exception to the
general rule of economic performance.
Under the recurring item exception, a li-
ability is treated as incurred for a taxable
year if: (i) at the end of the taxable year,
all events have occurred that establish the
fact of the liability and the amount can
be determined with reasonable accuracy;
(ii) economic performance occurs on or
before the earlier of (a) the date that the
taxpayer files a timely return (including
extensions) for the taxable year, or (b) the
15th day of the ninth calendar month after
the close of the taxable year; (iii) the lia-
bility is recurring in nature; and (iv) either
(A) the amount of the liability is not mate-
rial or (B) the accrual of the liability in the
taxable year results in a better matching
of the liability with the income to which
it relates than would result from accruing
the liability for the taxable year in which
economic performance occurs. Section
461(h)(3)(B) provides that in making a
determination under the materiality and
matching requirements, the treatment of
the liability on financial statements shall
be taken into account.
Section 1.461–5(b)(4)(i) provides that
in determining whether a liability is mate-
rial, consideration is given to the amount of
the liability in absolute terms and in rela-
tion to the amount of other items of income
and expense attributable to the same activ-
ity. Section 1.461–5(b)(4)(ii) provides that
a liability is material if it is material for
financial statement purposes under gener-
2012–2 I.R.B.256January 9, 2012

ally accepted accounting principles. Sec-
tion 1.461–5(b)(4)(iii) provides that a lia-
bility that is immaterial for financial state-
ment purposes under generally accepted
accounting principles may be material for
purposes of the materiality requirement of
the recurring item exception.
Section 1.461–5(b)(5)(i) provides that
in determining whether the matching re-
quirement of the recurring item exception
is satisfied, generally accepted accounting
principles are an important factor, but are
not dispositive. Section 1.461–5(b)(5)(ii)
provides that in the case of a liability de-
scribed in § 1.461–4(g)(5) (insurance, war-
ranty or service contract), the matching re-
quirement of the recurring item exception
is deemed satisfied.
ANALYSIS
Lease liability
On July 1, 2011, all the events have oc-
curred that establish the fact ofX’s lease li-
ability (becauseX’s payment is due under
the lease agreement on that date) and the
amount of the lease liability can be deter-
mined with reasonable accuracy. Because
the lease liability arises out of the use of
property provided toX, economic perfor-
mance occurs ratably over the period of
time thatXis entitled to use the property.
Section 1.461–4(d)(3)(i). Therefore, un-
less the recurring item exception applies,
X’s lease liability is incurred ratably over
the one-year lease period beginning July 1,
2011 and ending June 30, 2012.
To apply the recurring item exception to
its lease liability,Xmust, in part, demon-
strate either that the lease liability is im-
material or that recognizing the liability in
a year prior to the ratable use of the prop-
erty results in a better matching of the ex-
pense to the related income. In determin-
ing whether a liability is immaterial, the
legislative history of the recurring item ex-
ception provides:
If an item is considered material for fi-
nancial statement purposes, it will also
be considered material for tax purposes.
For example, assume that a calen-
dar-year taxpayer enters into a one-year
maintenance contract on July 1, 1985.
If the amount of the expense is prorated
between 1985 and 1986 for financial
statement purposes, it should be
prorated for tax purposes. If, however,
the full amount is deducted in 1985 for
financial statement purposes because it
is not material under generally accepted
accounting principles, it may (or may
not) be considered an immaterial item
for purposes of [the recurring item]
exception.
H.R. Conf. Rep. 98–861, at 874 (1984)
(original formatting omitted). The exam-
ple in the legislative history makes clear
that a liability is material under the recur-
ring item exception if it is deemed suf-
ficiently material for financial statement
purposes so that it accrues over more than
one taxable year.
Consistent with the legislative history,
and with the directive in § 461(h)(3)(B)
that the treatment of a liability on finan-
cial statements be taken into account,
§ 1.461–5(b)(4)(ii) provides that a liability
is material if it is material for financial
statement purposes under generally ac-
cepted accounting principles. BecauseX’s
lease liability accrues over more than one
taxable year for financial statement pur-
poses under generally accepted accounting
principles, the lease liability is material for
purposes of applying the recurring item
exception. Therefore,to apply the recur-
ring item exception to its lease liability,
Xmust demonstrate that recognizing the
liability in a year prior to the ratable use
of the property results in a better matching
of the liability to the income to which it
relates than would result from accrual of
the liability in the taxable year in which
economic performance occurs.
In determining whether the matching
requirement of the recurring item excep-
tion is satisfied, the treatment of a liability
on financial statements must be taken into
account. Section 461(h)(3)(B). Generally
accepted accounting principles are an im-
portant factor, but are not dispositive. Sec-
tion 1.461–5(b)(5)(i). Accruing a liabil-
ity over more than one taxable year results
in better matching than accrual in a sin-
gle, earlier year if: (1) the liability accrues
over more than one taxable year for finan-
cial accounting purposes under generally
accepted accounting principles; (2) the lia-
bility relates to income that a taxpayer gen-
erates in its trade or business over more
than one taxable year; and (3) there are no
overriding facts or circumstances that indi-
cate accrual of the full liability in the ear-
lier year results in a better match with the
income.
Xhas determined that under generally
accepted accounting principles, its lease li-
ability should be recognized ratably over
the period of the lease, and thus accrues
the liability on its financial statements over
the period of the lease. Furthermore,X
uses the leased property in its trade or busi-
ness to generate income over the period
of the lease. In addition, absent over-
riding facts or circumstances that indicate
that accrual in the earlier year would re-
sult in better matching, the accrual of the
lease liability in a year prior to the satis-
faction of economic performance will not
result in a better matching of the liabil-
ity with the related income as compared to
accruing the liability for the taxable year
in which economic performance occurs.
BecauseX’s lease liability is material un-
der § 1.461–5(b)(1)(iv)(A), and because it
does not satisfy the matching requirement
of § 1.461–5(b)(1)(iv)(B),Xcannot use the
recurring item exception to treat its lease
liability as incurred in 2011.
Service Contract Liability
On July 1, 2011, all the events have oc-
curred that establish the fact ofX’s service
contract liability (becauseX’s payment is
due under the service contract on that date)
and the amount of the service contract li-
ability can be determined with reasonable
accuracy. The applicable economic perfor-
mance rule depends on whether the service
contract liability arises out of the provision
of services toXunder § 1.461–4(d)(2)(i)
(a “service liability”), or whether the li-
ability arises out of the provision toX
of a warranty or service contract under
§ 1.461–4(g)(5) (a “payment liability”).
Further, the matching requirement of the
recurring item exception applies differ-
ently depending on whether the service
contract liability is a service liability under
§ 1.461–4(d)(2)(i) or a payment liability
under § 1.461–4(g)(5).
Section 1.461–4(g)(5)(i) defines a war-
ranty or service contract as a contract that
a taxpayer enters into in connection with
property bought or leased by the taxpayer,
pursuant to which the other party to the
contract promises to replace or repair the
property under specified circumstances.
The term “specified circumstances” im-
plies the occurrence of a unique or irreg-
ular circumstance necessitating the repair
or replacement of property. Thus, the war-
January 9, 20122572012–2 I.R.B.

ranty and service contracts contemplated
in § 1.461–4(g)(5) are similar to insurance
contracts, which also are characterized by
the occurrence of a unique or irregular
circumstance necessitating the repair or
replacement of property. The regulations
recognize this similarity by treating in-
surance, warranty contracts, and service
contracts collectively as a single category
of payment liability under § 1.461–4(g)(5).
The service contracts addressed in
§ 1.461–4(g)(5)(i) are distinguishable
from contracts for general services that
are provided on an ongoing and re-
curring basis. This distinction is rein-
forced in the deemed matching rule of
§ 1.461–5(b)(5)(ii), which provides that
the matching requirement is deemed sat-
isfied only for certain payment liabilities,
including service contract liabilities ad-
dressed in § 1.461–4(g)(5). Deemed
matching for these types of liabilities is
appropriate because a liability is triggered
only by the occurrence of a unique or irreg-
ular circumstance. In contrast, a deemed
matching rule would be inappropriate for
services that are performed on an ongoing
and recurring basis and contribute to the
taxpayer’s income-generating activities
over a certain period.
The services to be provided toXun-
der the terms of the service contract are
general services to be provided on an
ongoing and recurring basis rather than
services to be provided only in “specified
circumstances.” Therefore,X’s service
contract liability is a service liability
under §1.461–4(d)(2)(i), rather than a
payment liability under §1.461–4(g)(5),
for purposes of applying the economic
performance rules. Accordingly, under
§ 1.461–4(d)(2), economic performance
ofX’s service contract liability occurs as
the services are provided toXover the
term of the contract.
To apply the recurring item exception
to its service contract liability,Xmust, in
part, demonstrate either that its liability is
not material or that recognizing the liabil-
ity in a year prior to the performance of
the services results in a better matching
of the expense to the related income. In
determining whether a liability is not ma-
terial, § 461(h)(3)(B) provides that finan-
cial statement treatment is considered, and
both the legislative history of § 461(h)(3)
and § 1.461–5(b)(4)(ii) provide that a li-
ability is material if it is material for fi-
nancial statement purposes under gener-
ally accepted accounting principles. Be-
cause X’s service contract liability accrues
over more than one taxable year for fi-
nancial statement purposes under gener-
ally accepted accounting principles, the li-
ability is material for purposes of apply-
ing the recurring item exception. There-
fore, to apply the recurring item excep-
tion to its service contract liability,Xmust
demonstrate that recognizing the liability
in a year prior to the performance of the
services results in a better matching of the
liability to the income to which it relates
than would result from accruing the lia-
bility in the taxable year in which eco-
nomic performance occurs. The deemed
matching rule for certain payment liabil-
ities in §1.461–5(b)(5)(ii) does not apply
toX’s service contractliability becauseX’s
liability does not arise out of the provi-
sion of a warranty or service contract under
§1.461–4(g)(5).
In determining whether the matching
requirement of the recurring item ex-
ception is satisfied, generally accepted
accounting principles are an impor-
tant factor, but not dispositive. Section
1.461–5(b)(5)(i). Under generally ac-
cepted accounting principles,Xhas de-
termined that its service contract liability
should be recognized as services are pro-
vided over the period of the contract.
Furthermore, the services provided toX
are used in the ongoing operation of X’s
trade or business to generate income over
the period of the contract. Absent any
other overriding facts or circumstances
that would indicate better matching, the
accrual of the service contract liability
in a year prior to the satisfaction of eco-
nomic performance will not result in a
better matching of the liability with the
related income as compared to accruing
the liability for the taxable year in which
economic performance occurs. Because
X’s service contract liability is material
under § 1.461–5(b)(1)(iv)(A), and because
it does not satisfy the matching require-
ment of § 1.461–5(b)(1)(iv)(B),Xcannot
use the recurring item exception to treat
its service contract liability as incurred in
2011.
Some contracts call for services to be
performed on a recurring basis and for ad-
ditional performance to be provided only
in “specified circumstances.” This revenue
ruling does not address the tax treatment
for a mixed service and warranty contract.
HOLDINGS
(1) For purposes of the recurring item
exception in § 461(h)(3), the amount ofX’s
lease liability is material.
(2) For purposes of the recurring item
exception, the accrual ofX’s lease liability
over more than one taxable year results in
better matching of the liability with related
income.
(3)X’s service contract liability is prop-
erly characterized as a liability arising out
of the provision of services to the taxpayer
under § 1.461–4(d)(2), rather than as a li-
ability arising out of the provision to the
taxpayer of a warranty or service contract
under § 1.461–4(g)(5).
(4) The recurring item exception does
not apply toX’s service contract liability.
APPLICATION
Any change in a taxpayer’s method of
accounting to conform to any of the hold-
ings in this revenue ruling is a change in
method of accounting to which the provi-
sions of §§ 446 and 481 and the regulations
thereunder apply. A taxpayer that wants
to change its method of accounting to con-
form to any of the holdings in this ruling
must follow the automatic change in ac-
counting method provisions of Rev. Proc.
2011–14, 2011–4 C.B. 330, with the fol-
lowing modifications:
(1) The scope limitations in section 4.02
of Rev. Proc. 2011–14 do not apply to
a taxpayer that wants to make the change
for its first taxable year ending on or after
December 13, 2011, provided an issue is
not under consideration, as defined in sec-
tion 3.09 of Rev. Proc. 2011–14, regarding
whether all the events have occurred that
establish the fact of the liability; and
(2) For purposes of section 6.02(4) of
Rev. Proc. 2011–14, the taxpayer must
include on line 1a of the Form 3115 the
designated automatic accounting method
change number “161.”
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2011–14 is modified and
amplified to include this automatic change
in section 19 of the APPENDIX.
2012–2 I.R.B.258January 9, 2012

DRAFTING INFORMATION
The principal author of this revenue
ruling is Charles H. Kim of the Office of
the Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact
Charles H. Kim at (202) 622–5020 (not a
toll-free call).
January 9, 20122592012–2 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
2012 Standard Mileage Rates
Notice 2012–1
SECTION 1. PURPOSE
This notice provides the 2012 standard
mileage rates for taxpayers to use in com-
puting the deductible costs of operating an
automobile for business, charitable, med-
ical, or moving expense purposes. This
notice also provides the amount taxpayers
must use in calculating reductions to basis
for depreciation taken under the business
standard mileage rate, and the maximum
standard automobile cost that may be used
in computing the allowance under a fixed
and variable rate (FAVR) plan.
SECTION 2. BACKGROUND
Rev. Proc. 2010–51, 2010–51 I.R.B.
883, provides rules for computing the de-
ductible costs of operating an automobile
for business, charitable, medical, or mov-
ing expense purposes, and for substantiat-
ing, under § 274(d) of the Internal Rev-
enue Code and § 1.274–5 of the Income
Tax Regulations, the amount of ordinary
and necessary business expenses of local
transportation or travel away from home.
Taxpayers using the standard mileage rates
must comply with Rev. Proc. 2010–51.
An independent contractor conducts an
annual study for the Internal Revenue Ser-
vice of the fixed and variable costs of oper-
ating an automobile to determine the stan-
dard mileage rates for business, medical,
and moving use reflected in this notice.
The standard mileage rate for charitable
use is set by § 170(i).
Notice 2010–88, 2010–51 I.R.B. 882,
requested comments on the limitation in
section 4.05(1) of Rev. Proc. 2010–51 on
using the business standard mileage rate
for five or more automobiles (such as in
fleet operations). Only one responsive
comment was received, which suggested
extending the business standard mileage
rate to larger fleets. After considering this
comment, and in light of the limited num-
ber of comments, the Service has decided
to make no changes to section 4.05(1) at
this time.
SECTION 2. STANDARD MILEAGE
RATES
The standard mileage rate for trans-
portation or travel expenses is 55.5 cents
per mile for all miles of business use (busi-
ness standard mileage rate). See section 4
of Rev. Proc. 2010–51.
The standard mileage rate is 14 cents
per mile for use of an automobile in ren-
dering gratuitous services to a charitable
organization under § 170. See section 5 of
Rev. Proc. 2010–51.
The standard mileage rate is 23 cents
per mile for use of an automobile (1) for
medical care described in § 213, or (2) as
part of a move for which the expenses are
deductible under § 217. See section 5 of
Rev. Proc. 2010–51.
SECTION 3. BASIS REDUCTION
AMOUNT
For automobiles a taxpayer uses for
business purposes, the portion of the
business standard mileage rate treated as
depreciation is 21 cents per mile for 2008
and 2009, 23 cents per mile for 2010,
22 cents per mile for 2011, and 23 cents
per mile for 2012. See section 4.04 of Rev.
Proc. 2010–51.
SECTION 4. MAXIMUM STANDARD
AUTOMOBILE COST
For purposes of computing the al-
lowance under a FAVR plan, the standard
automobile cost may not exceed $28,000
for automobiles (excluding trucks and
vans) or $29,300 for trucks and vans. See
section 6.02(6) of Rev. Proc. 2010–51.
SECTION 5. EFFECTIVE DATE
This notice is effective for (1) de-
ductible transportation expenses paid or
incurred on or after January 1, 2012, and
(2) mileage allowances or reimbursements
paid to an employee or to a charitable
volunteer (a) on or after January 1, 2012,
and (b) for transportation expenses the
employee or charitable volunteer pays or
incurs on or after January 1, 2012.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Notice 2010–88, as modified by Ann.
2011–40, 2011–29 I.R.B. 56, is super-
seded.
DRAFTING INFORMATION
The principal author of this notice
is Bernard P. Harvey of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information on
this notice, contact Bernard P. Harvey at
(202) 622–4930 (not a toll-free call).
2012–2 I.R.B.260January 9, 2012

26 CFR 601.201: Rulings and determination letters.
Rev. Proc. 2012–9
TABLE OF CONTENTS
SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?
.............................................. 262
.01Descriptionoftermsusedinthisrevenueprocedure.............................................................. 262
.02Updatedannually............................................................................................ 263
SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES......................................... 263
.01Rev.Proc.2011–9issuperseded .............................................................................. 263
.02Relatedrevenueprocedures................................................................................... 263
.03WhatchangeshavebeenmadetoRev.Proc.2011–9?............................................................ 263
SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT
STATUS?
............................................................................................. 264
.01Ingeneral................................................................................................... 264
.02Userfee.................................................................................................... 264
.03Form1023application....................................................................................... 264
.04Form1024application....................................................................................... 264
.05Letterapplication............................................................................................ 264
.06Form1028application....................................................................................... 264
.07Form8871noticeforpoliticalorganizations.................................................................... 264
.08Requirementsforasubstantiallycompletedapplication .......................................................... 264
.09Terroristorganizationsnoteligibletoapplyforrecognitionofexemption........................................... 265
SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING
ON EXEMPT STATUS?
................................................................................. 265
.01Exemptstatusmustbeestablishedinapplicationandsupportingdocuments ........................................ 265
.02Determinationletterorrulingbasedsolelyonadministrativerecord................................................ 265
.03Exemptstatusmayberecognizedinadvanceofactualoperations ................................................. 265
.04NoletterifexemptstatusissueinlitigationorunderconsiderationwithintheService................................ 266
.05Incompleteapplication....................................................................................... 266
.06Evenifapplicationiscomplete,additionalinformationmayberequired............................................ 266
.07Expeditedhandling.......................................................................................... 266
.08Maydeclinetoissuegroupexemption ......................................................................... 266
SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING?.................... 267
.01EODeterminationsissuesadeterminationletterinmostcases .................................................... 267
.02CertainapplicationsreferredtoEOTechnical................................................................... 267
.03Technicaladvicemayberequestedincertaincases .............................................................. 267
.04Technicaladvicemustberequestedincertaincases.............................................................. 267
SECTION 6. WITHDRAWAL OF AN APPLICATION................................................................... 267
.01Applicationmaybewithdrawnpriortoissuanceofadeterminationletterorruling .................................. 267
.02§7428implicationsofwithdrawalofapplicationunder§501(c)(3)................................................ 267
SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?..................................... 267
.01Proposedadversedeterminationletterorruling.................................................................. 267
.02AppealofaproposedadversedeterminationletterissuedbyEODeterminations .................................... 268
.03ProtestofaproposedadverserulingissuedbyEOTechnical...................................................... 268
.04Finaladversedeterminationletterorrulingwherenoappealorprotestissubmitted.................................. 268
.05HowEODeterminationshandlesanappealofaproposedadversedeterminationletter............................... 268
.06ConsiderationbytheAppealsOffice........................................................................... 268
.07IfaprotestofaproposedadverserulingissubmittedtoEOTechnical.............................................. 268
.08Anappealorprotestmaybewithdrawn ........................................................................ 268
.09Appealorprotestandconferencerightsnotapplicableincertainsituations ......................................... 268
SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS....................... 268
January 9, 20122612012–2 I.R.B.

.01Disclosureofapplications,supportingdocuments,andfavorabledeterminationlettersorrulings...................... 269
.02Disclosureofadversedeterminationlettersorrulings............................................................ 269
.03DisclosuretoStateofficialswhentheServicerefusestorecognizeexemptionunder§501(c)(3)....................... 269
.04DisclosuretoStateofficialsofinformationabout§501(c)(3)applicants............................................ 269
SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL........................................... 269
.01DeterminationlettersmaybereviewedbyEOTechnicaltoassureuniformity....................................... 269
.02ProceduresforcaseswhereEOTechnicaltakesexceptiontoadeterminationletter .................................. 269
SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428................................................... 270
.01Actualcontroversyinvolvingcertainissues..................................................................... 270
.02Exhaustionofadministrativeremedies......................................................................... 270
.03Notearlierthan270daysafterseekingdetermination............................................................ 270
.04Servicemusthavereasonabletimetoactonanappealorprotest .................................................. 270
.05Finaldeterminationtowhich§7428applies.................................................................... 270
SECTION 11. EFFECT OF DETERMINATIONLETTER OR RULING RECOGNIZING EXEMPTION....................... 270
.01Effectivedateofexemption................................................................................... 270
.02Relianceondeterminationletterorruling....................................................................... 271
SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULING
RECOGNIZING EXEMPTION
.......................................................................... 271
.01Revocationormodificationofadeterminationletterorrulingmayberetroactive.................................... 271
.02Appealandconferenceproceduresinthecaseofrevocationormodificationofexemptstatusletter.................... 271
SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES......................................................... 272
SECTION 14. EFECTIVE DATE..................................................................................... 272
SECTION 15. PAPERWORK REDUCTION ACT....................................................................... 272
DRAFTING INFORMATION........................................................................................ 272
SECTION 1. WHAT IS THE
PURPOSE OF THIS REVENUE
PROCEDURE?
This revenue procedure sets forth proceduresfor issuing determination letters and rulings
on the exempt status of organizations under §§ 501 and 521 of the Internal Revenue Code other
than those subject to Rev. Proc. 2012–6, last bulletin (relating to pension, profit-sharing, stock
bonus, annuity, and employee stock ownership plans). Generally, the Service issues these de-
termination letters and rulings in response to applications for recognition of exemption from
Federal income tax. These procedures also apply to revocation or modification of determi-
nation letters or rulings. This revenue procedure also provides guidance on the exhaustion of
administrative remedies for purposes of declaratory judgment under § 7428 of the Code.
Description of terms used in this
revenue procedure
.01 For purposes of this revenue procedure —
(1) The term “Service” means the Internal Revenue Service.
(2) The term “application” means the appropriate form or letter that an organization must
file or submit to the Service for recognition ofexemption from Federal income tax under the
applicable section of the Internal Revenue Code.Seesection 3 for information on specific
forms.
(3) The term “EO Determinations” means the office of the Service that is primarily respon-
sible for processing initial applications for tax-exempt status. It includes the main EO Deter-
minations office located in Cincinnati, Ohio, and other field offices thatare under the direction
and control of the Manager, EO Determinations. Applications are generally processed in the
centralized EO Determinations office in Cincinnati, Ohio. However, some applications may
be processed in other EO Determinations offices or referred to EO Technical.
(4) The term “EO Technical” means the office of the Service that is primarily responsible for
issuing letter rulings to taxpayers on exempt organization matters, and for providing technical
2012–2 I.R.B.262January 9, 2012

advice or technical assistance to other officesof the Service on exempt organization matters.
The EO Technical office is located in Washington, DC.
(5) The term “Appeals Office” means any officeunder the direction and control of the Chief,
Appeals. The purpose of the Appeals Office is to resolve tax controversies, without litigation,
on a fair and impartial basis. The Appeals Office is independent of EO Determinations and EO
Technical.
(6) The term “determination letter” means a written statement issued by EO Determinations
or an Appeals Office in response to an application for recognition of exemption from Federal
income tax under §§ 501 and 521. This includes a written statement issued by EO Determina-
tions or an Appeals Office on the basis of advice secured from EO Technical pursuant to the
procedures prescribed herein and in Rev. Proc. 2012–5.
(7) The term “ruling” means a written statement issued by EO Technical in response to an
application for recognition of exemption from Federal income tax under §§ 501 and 521.
(8) The term “Code” means the Internal Revenue Code.
Updated annually.02 This revenue procedure is updated annually, but may be modified or amplified during
the year.
SECTION 2. NATURE OF
CHANGES AND RELATED
REVENUE PROCEDURES
Rev. Proc. 2011–9 is superseded.01 This revenue procedure is a general update of Rev. Proc. 2011–9, 2011–2 I.R.B. 283,
which is hereby superseded.
Related revenue procedures.02 This revenue procedure supplements Rev. Proc. 2012–10, this Bulletin, with respect
to the effects of § 7428 of the Code on the classification of organizations under §§ 509(a) and
4942(j)(3). Rev. Proc. 80–27, 1980–1 C.B. 677, sets forth procedures under which exemption
may be recognized on a group basis for subordinate organizations affiliated with and under the
general supervision and control of a central organization. Rev. Proc. 72–5, 1972–1 C.B. 709,
provides information for religious and apostolic organizations seeking recognition of exemp-
tion under § 501(d). General procedures for requests for a determination letter or ruling are
provided in Rev. Proc. 2012–4. User fees for requests for a determination letter or ruling are
set forth in Rev. Proc. 2012–8.
What changes have been made to
Rev. Proc. 2011–9?
.03 Notable changes to Rev. Proc. 2011–9 that appear in this year’s update include —
(1) Section 3.01 clarifies that Form 8718,User Fee for Exempt Organization Determination
Letter Request, is not a determination letter application.
(2)Areferenceto§501(r)isaddedtosection3.03tocoverhospitalsseekingexemption
under § 501(c)(3).
(3) Section 4.08 is added to describe existing practice that the Service may decline to issue
a group exemption letter when appropriate in the interest of sound tax administration.SeeRev.
Proc. 2012–4, section 8.01.
(4)Anewitem(6)isaddedtosection12toreflect revocation of exemption automatically
pursuant to § 6033(j) for failure to file a required annual return or notice for three consecutive
years.
January 9, 20122632012–2 I.R.B.

SECTION 3. WHAT ARE
THE PROCEDURES FOR
REQUESTING RECOGNITION
OF EXEMPT STATUS?
In general.01 An organization seeking recognition of exempt status under § 501 or § 521 is required
to submit the appropriate application. In the case of a numbered application form, the current
version of the form must be submitted. A central organization that has previously received
recognition of its own exemption can request a group exemption letter by submitting a letter
application along with Form 8718,User Fee for Exempt Organization Determination Letter
Request. SeeRev. Proc. 80–27. Form 8718 is not a determination letter application. Attach
this form to the determination letter application.
User fee.02 An application must be submitted with the correct user fee, as set forth in Rev. Proc.
2012–8.
Form 1023 application.03 An organization seeking recognition of exemptionunder§501(c)(3)and§501(e),(f),
(k), (n), (q), or (r) must submit a completed Form 1023,Application for Recognition of Exemp-
tion Under Section 501(c)(3) of the Internal Revenue Code. In the case of an organization that
provides credit counseling services, see § 501(q) of the Code. In the case of an organization
that is a hospital and is seeking exemption under § 501(c)(3), see § 501(r) of the Code.
Form 1024 application.04 An organization seeking recognition of exemption under § 501(c)(2), (4), (5), (6), (7),
(8), (9), (10), (12), (13), (15), (17), (19), or (25) must submit a completed Form 1024,Appli-
cation for Recognition of Exemption Under Section 501(a), along with Form 8718. In the case
of an organization that provides credit counseling services and seeks recognition of exemption
under § 501(c)(4), see § 501(q) of the Code.
Letter application.05 An organization seeking recognition of exemption under § 501(c)(11), (14), (16), (18),
(21), (22), (23), (26), (27), (28), or (29), or under § 501(d), must submit a letter application
along with Form 8718.
Form 1028 application.06 An organization seeking recognition of exemption under § 521 must submit a completed
Form 1028,Application for Recognition of Exemption Under Section 521 of the Internal Rev-
enue Code,along with Form 8718.
Form 8871 notice for political
organizations
.07 A political party, a campaign committee for a candidate for federal, state or local office,
and a political action committee are all political organizations subject to tax under § 527. To be
tax-exempt, a political organization may be required to notify the Service that it is to be treated
as a § 527 organization by electronically filing Form 8871,Political Organization Notice of
Section 527 Status. For details, go to the IRS website atwww.irs.gov/polorgs.
Requirements for a substantially
completed application
.08 A substantially completed application,including a letter application, is one that:
(1) is signed by an authorized individual;
(2) includes an Employer Identification Number (EIN);
(3) for organizations other than those described in § 501(c)(3), includes a statement of re-
ceipts and expenditures and a balance sheet for the current year and the three preceding years
(or the years the organization was in existence, ifless than four years), and if the organization
has not yet commenced operations or has not completed one accounting period, a proposed
budget for two full accounting periods and a current statement of assets and liabilities; for or-
ganizations described in § 501(c)(3), see Form 1023 and Notice 1382;
(4) includes a detailed narrative statement of proposed activities, including each of the
fundraising activities of a § 501(c)(3) organization, and a narrative description of anticipated
receipts and contemplated expenditures;
2012–2 I.R.B.264January 9, 2012

(5) includes a copy of the organizing or enabling document that is signed by a principal
officer or is accompanied by a written declaration signed by an authorized individual certify-
ing that the document is a complete and accuratecopy of the original or otherwise meets the
requirements of a “conformed copy” as outlined in Rev. Proc. 68–14, 1968–1 C.B. 768;
(6) if the organizing or enabling document is in the form of articles of incorporation, includes
evidence that it was filed with and approved by an appropriate state official (e.g.,stamped
“Filed” and dated by the Secretary of State); alternatively, a copy of the articles of incorporation
may be submitted if accompanied by a written declaration signed by an authorized individual
that the copy is a complete and accurate copy ofthe original copy that was filed with and
approved by the state; if a copy is submitted, the written declaration must include the date the
articles were filed with the state;
(7) if the organization has adopted by-laws, includes a current copy; the by-laws need not be
signed if submitted as an attachment to the application for recognition of exemption; otherwise,
the by-laws must be verified as current by an authorized individual; and
(8) is accompanied by the correct userfee and Form 8718, when applicable.
Terrorist organizations not
eligible to apply for recognition of
exemption
.09 An organization that is identified or designated as a terrorist organization within the
meaning of § 501(p)(2) of the Code is not eligible to apply for recognition of exemption.
SECTION 4. WHAT ARE THE
STANDARDS FOR ISSUING A
DETERMINATION LETTER OR
RULING ON EXEMPT STATUS?
Exempt status must be established
in application and supporting
documents
.01 A favorable determination letter or ruling will be issued to an organization only if its
application and supporting documents establishthat it meets the particular requirements of the
section under which exemption from Federal income tax is claimed.
Determination letter or ruling
basedsolelyonadministrative
record
.02 A determination letter or ruling on exempt status is issued based solely upon the facts
and representationscontained in the administrative record.
(1) The applicant is responsible for the accuracy of any factual representations contained in
the application.
(2) Any oral representation of additional facts or modification of facts as represented or
alleged in the application must be reduced to writing over the signature of an officer or director
of the taxpayer under a penalties of perjury statement.
(3) The failure to disclose a material fact or misrepresentation of a material fact on the ap-
plication may adversely affect the reliance that would otherwise be obtained through issuance
by the Service of a favorable determination letter or ruling.
Exempt status may be recognized
in advance of actual operations
.03 Exempt status may be recognized in advance of the organization’s operations if the pro-
posed activities are described in sufficient detail to permit a conclusion that the organization
will clearly meet the particular requirements for exemption pursuant to the section of the Code
under which exemption is claimed.
(1) A mere restatement of exempt purposes or astatement that proposed activities will be
in furtherance of such purposes will not satisfy this requirement.
(2) The organization must fully describe all of the activities in which it expects to engage,
including the standards, criteria, procedures, or other means adopted or planned for carrying out
the activities, the anticipatedsources of receipts, and the natureof contemplated expenditures.
(3) Where the organization cannot demonstrate to the satisfaction of the Service that it qual-
ifies for exemption pursuant to the section of the Code under which exemption is claimed, the
January 9, 20122652012–2 I.R.B.

Service will generally issue a proposedadverse determination letter or ruling.See alsosection
7 of this revenue procedure.
No letter if exempt status issue in
litigation or under consideration
within the Service
.04 A determination letter or ruling on exempt status ordinarily will not be issued if an issue
involving the organization’s exempt status under § 501 or § 521 is pending in litigation, is under
consideration within the Service, or if issuanceof a determination letter or ruling is not in the
interest of sound tax administration. If the Service declines to issue a determination or ruling
to an organization seeking exempt status under§ 501(c)(3), the organization may be able to
pursue a declaratory judgment under § 7428, provided that it has exhausted its administrative
remedies.
Incomplete application.05 If an application does not contain all of the items set out in section 3.08 of this revenue
procedure, the Service may return it to the applicant for completion.
(1) In lieu of returning an incomplete application, the Service may retain the application and
request additional information needed for asubstantially completed application.
(2) In the case of an application under § 501(c)(3) that is returned incomplete, the 270-day
period referred to in § 7428(b)(2) will not be considered as starting untilthe date a substantially
completed Form 1023 is refiled with or remailed to the Service. If the application is mailed
to the Service and a postmark is not evident, the 270-day period will start to run on the date
the Service actually receives the substantially completed Form 1023. The same rules apply for
purposes of the notice requirement of § 508.
(3) Generally, the user fee will not be refunded if an incomplete application is filed.See
Rev. Proc. 2012–8, section 10.
Even if application is complete,
additional information may be
required
.06 Even though an application is substantially complete, the Service may request additional
information before issuing a determination letter or ruling.
(1) If the application involves an issue where contrary authorities exist,an applicant’s failure
to disclose and distinguish contrary authorities may result in requests for additional informa-
tion, which could delay final action on the application.
(2) In the case of an application under § 501(c)(3), the period of time beginning on the date
the Service requests additional information until the date the information is submitted to the
Service will not be counted for purposes of the 270-day period referred to in § 7428(b)(2).
Expedited handling.07 Applications are normally processed in the order of receipt by the Service. However,
expedited handling of an application may be approved where a request is made in writing and
contains a compelling reason for processing the application ahead of others. Upon approval
of a request for expedited handling, an application will be considered out of its normal order.
This does not mean the application will be immediately approved or denied. Circumstances
generally warranting expedited processing include:
(1) a grant to the applicant is pending and the failure to secure the grant may have an adverse
impact on the organization’s ability to continue to operate;
(2) the purpose of the newly created organization is to provide disaster relief to victims of
emergencies such as flood and hurricane; and
(3) there have been undue delays in issuing a determination letter or ruling caused by a
Service error.
Maydeclinetoissuegroup
exemption
.08 The Service may decline to issue a group exemption letter when appropriate in the in-
terest of sound tax administration.
2012–2 I.R.B.266January 9, 2012

SECTION 5. WHAT OFFICES
ISSUEANEXEMPTSTATUS
DETERMINATION LETTER
OR RULING?
EO Determinations issues a
determination letter in most cases
.01 Under the general procedures outlinedin Rev. Proc. 2012–4, EO Determinations is
authorized to issue determination letters on applications for exempt status under §§ 501 and
521.
Certain applications referred to
EO Technical
.02 EO Determinations will refer to EO Technical those applications that present issues
which are not specifically covered by statute or regulations, or by a ruling, opinion, or court
decision published in the Internal Revenue Bulletin. In addition, EO Determinations will refer
those applications that have been specifically reserved by revenue procedure or by other official
Service instructions for handling by EO Technical for purposes of establishing uniformity or
centralized control of designated categories of cases. EO Technical will notify the applicant
organization upon receipt of a referred application, and will consider each such application and
issue a ruling directly to the organization.
Technical advice may be requested
in certain cases
.03 If at any time during the course of consideration of an exemption applicati
on by EO
Determinations the organization believes that its case involves an issue on w
hich there is no
published precedent, or there has beennon-uniformity in the Service’s handl
ing of similar
cases, the organization may request thatEO Determinations either refer the a
pplication to EO
Technical or seek technical advice from EO Technical.SeeRev. Proc. 2012–5,
sections 4.04
and 4.05.
Technical advice must be
requested in certain cases
.04 If EO Determinations proposes to recognize the exemption of an organization to which
EO Technical had issued a previous contrary ruling or technical advice, EO Determinations
must seek technical advice from EO Technical before issuing a determination letter. This does
not apply where EO Technical issued an adverse ruling and the organization subsequently made
changes to its purposes, activities, or operations to remove the basis for which exempt status
was denied.
SECTION 6. WITHDRAWAL OF
AN APPLICATION
Application may be withdrawn
prior to issuance of a
determination letter or ruling
.01Anapplicationmaybewithdrawnuponthewritten request of an authorized individual
atanytimepriortotheissuanceofadetermination letter or ruling. Therefore, an application
may not be withdrawn after the issuance of a proposed adverse determination letter or ruling.
(1) When an application is withdrawn, the Service will retain the application and all sup-
porting documents. The Service may consider the information submitted in connection with
the withdrawn request in a subsequent examination of the organization.
(2) Generally, the user fee will not be refunded if an application is withdrawn.SeeRev.
Proc. 2012–8, section 10.
§ 7428 implications of withdrawal
of application under § 501(c)(3)
.02 The Service will not consider the withdrawal of an application under § 501(c)(3) as
either a failure to make a determination withinthe meaning of § 7428(a)(2) or as an exhaustion
of administrative remedies within the meaning of § 7428(b)(2).
SECTION 7. WHAT ARE
THE PROCEDURES WHEN
EXEMPT STATUS IS DENIED?
Proposed adverse determination
letter or ruling
.01 If EO Determinations or EO Technical reaches the conclusion that the organization does
not satisfy the requirements for exempt status pursuant to the section of the Code under which
exemption is claimed, the Service generally will issue a proposed adverse determination letter
or ruling, which will:
(1) include a detailed discussion of the Service’s rationale for the denial of tax-exempt sta-
tus; and
January 9, 20122672012–2 I.R.B.

(2) advise the organization of its opportunity to appeal or protest the decision and request a
conference.
Appeal of a proposed adverse
determination letter issued by EO
Determinations
.02 A proposed adverse determination letter issued by EO Determination
s will advise the
organization of its opportunity to appeal the determination by reques
ting Appeals Office con-
sideration. To do this, the organization must submit a statement of the
facts, law and arguments
in support of its position within 30 daysfromthedateoftheadversedet
ermination letter. The
organization must also state whether it wishes an Appeals Office confe
rence. Any determina-
tion letter issued on the basis of technical advice from EO Technical ma
y not be appealed to
the Appeals Office on issues that were the subject of the technical ad
vice.
Protest of a proposed adverse
ruling issued by EO Technical
.03 A proposed adverse ruling issued by EO Technical will advise the organization of its
opportunity to file a protest statement within30 days and to request a conference. If a confer-
ence is requested, the conference procedures outlined in Rev. Proc. 2012–4, section 12, are
applicable.
Final adverse determination letter
or ruling where no appeal or
protest is submitted
.04 If an organization does not submit a timely appeal of a proposed adverse determination
letter issued by EO Determinations, or a timely protest of a proposed adverse ruling issued by
EO Technical, a final adverse determination letter or ruling will be issued to the organization.
The final adverse letter or ruling will provideinformation about the filing of tax returns and
the disclosure of the proposed and final adverse letters or rulings.
How EO Determinations handles
an appeal of a proposed adverse
determination letter
.05 If an organization submits an appeal of the proposed adverse determination letter, EO
Determinations will first review the appeal, and, if it determines that the organization qualifies
for tax-exempt status, issue a favorable exempt status determination letter. If EO Determina-
tions maintains its adverse position after reviewing the appeal, it will forward the appeal and
the exemption application case file to the Appeals Office.
Consideration by the Appeals
Office
.06 The Appeals Office will consider the organization’s appeal. If the Appeals Office agrees
with the proposed adverse determination, it will either issue a final adverse determination or,
if a conference was requested, contact the organization to schedule aconference. At the end
of the conference process, which may involve the submission of additional information, the
Appeals Office will either issue a final adversedetermination letter or a favorable determina-
tion letter. If the Appeals Office believes that an exemption or private foundation status issue
is not covered by published precedent or that there is non-uniformity, the Appeals Office must
request technical advice from EO Technical inaccordance with Rev. Proc. 2012–5, sections
4.04 and 4.05.
If a protest of a propo
sed
adverse ruling is sub
mitted to EO
Technical
.07 If an organizatio
n submits a protest of a proposed adverse exempt status ruling, EO
Technical will revie
w the protest statement. If the protest convinces EO Technical that the
organization qualif
ies for tax-exempt status, a favorable ruling will be issued. If EO Technical
maintains its advers
e position after reviewing the protest, it will either issue a final adverse
ruling or, if a confe
rence was requested, contact the organization to schedule a conference. At
the end of the confer
ence process, which may involve the submission of additional information,
EO Technical will ei
ther issue a final adverse ruling or a favorable exempt status ruling.
An appeal or protest may be
withdrawn
.08 An organization may withdraw its appealor protest before the Service issues a final
adverse determination letter or ruling. Upon receipt of the withdrawal request, the Service will
complete the processing of the case in the same manner as if no appeal or protest was received.
Appeal or protest and conference
rights not applicable in certain
situations
.09 The opportunity to appeal or protest a proposed adverse determination letter or ruling
and the conference rights described above are not applicable to matters where delay would be
prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the immi-
nence of the expiration of the statute of limitations, or where immediate action is necessary to
protect the interestsof the Government).
SECTION 8. DISCLOSURE
OF APPLICATIONS AND
DETERMINATION LETTERS
AND RULINGS
Sections 6104 and 6110 of the Code provide rules for the disclosure of applications, includ-
ing supporting documents, and determination letters and rulings.
2012–2 I.R.B.268January 9, 2012

Disclosure of applications,
supporting documents, and
favorable determination letters or
rulings
.01 The applications, any supporting documents, and the favorable determination letter or
ruling issued, are available for public inspection under § 6104(a)(1) of the Code. However,
there are certain limited disclosure exceptions for a trade secret, patent, process, style of work,
or apparatus, if the Service determines that the disclosure of the information would adversely
affect the organization.
(1) The Service is required to make the applications, supporting documents, and favorable
determination letters or rulings available upon request. The public can request this information
by submitting Form 4506–A,Request for Public Inspection or Copy of Exempt or Political Or-
ganization IRS Form.Organizations should ensure that applications and supporting documents
do not include unnecessary personal identifying information (suchas bank account numbers
or social security numbers) that could result inidentity theft or otheradverse consequences if
publicly disclosed.
(2) The exempt organization is required to make its exemption application, supporting doc-
uments, and determination letter or ruling available for public inspection without charge. For
more information about the exempt organization’s disclosure obligations, see Publication 557,
Tax-Exempt Status for Your Organization.
Disclosure of adverse
determination letters or rulings
.02 The Service is required to make adverse determination letters and rulings available for
public inspection under § 6110 of the Code. Uponissuance of the final adverse determination
letter or ruling to an organization, both the proposed adverse determination letter or ruling and
the final adverse determination letter or ruling will be released pursuant to § 6110.
(1) These documents are made available to the public after the deletion of names, addresses,
and any other information that might identify the taxpayer.See§ 6110(c) for other specific
disclosure exemptions.
(2) The final adverse determination letter or ruling will enclose Notice 437,Notice of Inten-
tion to Disclose,and redacted copies of the final and proposed adverse determination letters
or rulings. Notice 437 provides instructions ifthe organization disagrees with the deletions
proposed by the Service.
Disclosure to State officials when
the Service refuses to recognize
exemption under § 501(c)(3)
.03 The Service may notify the appropriate State officials of a refusal to recognize an or-
ganization as tax-exempt under § 501(c)(3).See§ 6104(c) of the Code. The notice to the State
officials may include a copy of a proposed or final adverse determination letter or ruling the
Service issued to the organization. In addition, upon request by the appropriate State official,
the Service may make available for inspection and copying the exemption application and other
information relating to the Service’s determination on exempt status.
Disclosure to State officials of
information about § 501(c)(3)
applicants
.04 The Service may disclose to State officialsthe name, address, and identification number
of any organization that has applied for recognition of exemption under § 501(c)(3).
SECTION 9. REVIEW OF
DETERMINATION LETTERS
BY EO TECHNICAL
Determination letters may be
reviewed by EO Technical to
assure uniformity
.01 Determination letters issued by EO Determinations may be reviewed by EO Technical,
ortheOfficeoftheAssociateChiefCounsel(Passthroughs and Special Industries) (for cases
under § 521), to assure uniform application of the statutes or regulations, or rulings, court
opinions, or decisions published in the Internal Revenue Bulletin.
Procedures for cases where EO
Technical takes exception to a
determination letter
.02 If EO Technical takes exception to a determination letter issued by EO Determinations,
the manager of EO Determinations will be advised. If EO Determinations notifies the organ-
ization of the exception taken, and the organization disagrees with the exception, the file will
be returned to EO Technical. The referral to EOTechnical will be treated as a request for tech-
nical advice, and the procedures in Rev. Proc. 2012–5 will be followed.
January 9, 20122692012–2 I.R.B.

SECTION 10. DECLARATORY
JUDGMENT PROVISIONS OF
§7428
Actual controversy involving
certain issues
.01 Generally, a declaratory judgment proceeding under § 7428 of the Code can be filed in
the United States Tax Court, the United States Court of Federal Claims, or the district court of
the United States for the District of Columbia with respect to an actual controversy involving
a determination by the Service or a failure of theService to make a determination with respect
to the initial or continuing qualification or classification of an organization under § 501(c)(3)
(charitable, educational, etc.); § 170(c)(2) (deductibility of contributions); § 509(a) (private
foundation status); § 4942(j)(3) (operating foundation status); or § 521 (farmers cooperatives).
Exhaustion of administrative
remedies
.02 Before filing a declaratory judgment action, an organization must exhaust its adminis-
trative remedies by taking, in a timely manner,all reasonable steps to secure a determination
from the Service. These include:
(1) the filing of a substantially completed application Form 1023 under § 501(c)(3) pursuant
to section 3.08 of this revenue procedure, or the request for a determination of foundation status
pursuant to Rev. Proc. 2012–10, this Bulletin, or its successor;
(2) in appropriate cases, requesting relief pursuant to Treas. Reg. § 301.9100–1 of the Pro-
cedure and Administration Regulations regarding the extension of time for making an election
or application for relief from tax;
(3) the timely submission of all additional information requested by the Service to perfect
an exemption application or request for determination of private foundation status; and
(4) exhaustion of all administrative app
eals available within the Service pursuant to section
7 of this revenue procedure.
Not earlier than 270 days after
seeking determination
.03 An organization will in no event be deemed to have exhausted its administrative reme-
dies prior to the earlier of:
(1) the completion of the steps in section 10.02, and the sending by the Service by certified
or registered mail of a final determination letter or ruling; or
(2) the expiration of the 270-day period described in § 7428(b)(2) in a case where the Service
has not issued a final determination letter or ruling, and the organization has taken, in a timely
manner, all reasonable steps to secure a determination letter or ruling.
Service must have reasonable time
toactonanappealorprotest
.04 The steps described in section 10.02 willnot be considered completed until the Service
has had a reasonable time to act upon an appeal or protest, as the case may be.
Final determination to which
§7428applies
.05 A final determination to which § 7428 of theCode applies is a determination letter or
ruling, sent by certified or registered mail, which holds that the organization is not described in
§ 501(c)(3) or § 170(c)(2), is a public charity described in a part of § 509 or § 170(b)(1)(A) other
than the part under which the organization requested classification, is not a private foundation
as defined in § 4942(j)(3), or is a private foundation and not a public charity described in a part
of § 509 or § 170(b)(1)(A).
SECTION 11. EFFECT OF
DETERMINATION LETTER
OR RULING RECOGNIZING
EXEMPTION
Effectivedateofexemption.01 A determination letter or ruling recognizing exemption is usually effective as of the date
of formation of an organization if its purposesand activities prior to the date of the determi-
nation letter or ruling were consistent with the requirements for exemption. However, special
rules under § 508(a) of the Code may apply to an organization applying for exemption under
§ 501(c)(3), and special rules under § 505(c) may apply to an organization applying for ex-
emption under § 501(c)(9), (17), or (20).
2012–2 I.R.B.270January 9, 2012

(1) If the Service requires the organization to alter its activities or make substantive amend-
ments to its enabling instrument, the exemption will be effective as of the date specified in a
determination letter or ruling.
(2) If the Service requires the organization to make a nonsubstantive amendment, exemp-
tion will ordinarily be recognized as of the date of formation. Examples of nonsubstantive
amendments include correction of a clerical error in the enabling instrument or the addition of
a dissolution clause where the activities of the organization prior to the determination letter or
ruling are consistent with the requirements for exemption.
Reliance on determination letter
or ruling
.02 A determination letter or ruling recognizing exemption may not be relied upon if there is
a material change, inconsistent with exemption, in the character, the purpose, or the method of
operation of the organization, or a change in theapplicable law. Also, a determination letter or
ruling may not be relied upon if it was based on any inaccurate material factual representations.
Seesection 12.01.
SECTION 12. REVOCATION
OR MODIFICATION OF
DETERMINATION LETTER
OR RULING RECOGNIZING
EXEMPTION
A determination letter or ruling recognizing exemption may be revoked or modified: (1) by
a notice to the taxpayer to whom the determination letter or ruling was issued; (2) by enactment
of legislation or ratification of a tax treaty; (3) by a decision of the Supreme Court of the United
States; (4) by the issuance of temporary or final regulations; (5) by the issuance of a revenue
ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin; or
(6) automatically, pursuant to § 6033(j), for failure to file a required annual return or notice for
three consecutive years.
Revocation or modification of a
determination letter or ruling may
be retroactive
.01 The revocation or modification of a determination letter or ruling recognizing exemption
may be retroactive if there has been a change in the applicable law, the organization omitted
or misstated a material fact, operated in a manner materially different from that originally rep-
resented, or, in the case of organizations to which § 503 of the Code applies, engaged in a
prohibited transaction with the purpose of diverting corpus or income of the organization from
its exempt purpose and such transaction involved a substantial part of the corpus or income of
such organization. In certain cases an organization may seek relief from retroactive revocation
or modification of a determination letter or ruling under § 7805(b). Requests for § 7805(b)
relief are subject to the procedures set forth in Rev. Proc. 2012–4.
(1) Where there is a material change, inconsistent with exemption, in the character, the pur-
pose, or the method of operation of an organization, revocation or modification will ordinarily
take effect as of the date of such material change.
(2) In the case where a determination letter or ruling is issued in error or is no longer in
accord with the Service’s positionand § 7805(b) relief is granted (seesections 13 and 14 of
Rev. Proc. 2012–4), ordinarily, the revocation or modification will be effective not earlier than
the date when the Service modifies or revokesthe original determination letter or ruling.
Appeal and conference procedures
in the case of revocation or
modification of exempt status
letter
.02 In the case of a revocation or modification of a determination letter or ruling, the appeal
and conference procedures are generally the same as set out in section 7 of this revenue proce-
dure, including the right of the organization to request that EO Determinations or the Appeals
Office seek technical advice from EO Technical. However, appeal and conference rights are
not applicable to matters where delay would be prejudicial to the interests of the Service (such
as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limita-
tions, or where immediate action is necessaryto protect the interests of the Government).
(1) If the case involves an exempt status issue on which EO Technical had issued a previous
contrary ruling or technical advice, EO Determinations generally must seek technical advice
from EO Technical.
(2) EO Determinations does not have to seek technical advice if the prior ruling or technical
advice has been revoked by subsequent contrary published precedent or if the proposed revo-
cation involves a subordinate unit of an organization that holds a group exemption letter issued
by EO Technical, the EO Technical ruling or technical advice was issued under the Internal
January 9, 20122712012–2 I.R.B.

Revenue Code of 1939 or prior revenue acts, or if the ruling was issued in response to Form
4653,Notification Concerning Foundation Status.
SECTION 13. EFFECT
ON OTHER REVENUE
PROCEDURES
Rev. Proc. 2011–9 is superseded.
SECTION 14. EFECTIVE DATEThis revenue procedure is effective January 9, 2012.
SECTION 15. PAPERWORK
REDUCTION ACT
The collection of information for a letter application under section 3.05 of this revenue pro-
cedure has been reviewed and approved by the Office of Management and Budget (OMB)
in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number
1545–2080. All other collections of information under this revenue procedure have been ap-
proved under separate OMB control numbers.
An agency may not conduct or sponsor, and a person is not required to respond to, a collec-
tion of information unless the collection of information displays a valid OMB control number.
The collection of this information is required if an organization wants to be recognized as
tax-exempt by the Service. We need the information to determine whether the organization
meets the legal requirements for tax-exempt status. In addition, this information will be used
to help the Service delete certain information from the text of an adverse determination letter
or ruling before it is made available for public inspection, as required by § 6110.
The time needed to complete and file a letter application will vary depending on individual
circumstances. The estimated average time is 10 hours.
Books and records relating to the collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law. The rules
governing the confidentiality of letter applications are covered in § 6104.
DRAFTING INFORMATIONThe principal authors of this revenue procedure are Mr. Dave Rifkin and Mr. Matt Perdoni
of the Exempt Organizations, Tax Exempt and Government Entities Division. For further
information regarding this revenue procedure, please contact the TE/GE Customer Service
office at (877) 829–5500 (a toll-free call), or send an e-mail totege.eo@irs.govand include
“Question about Rev. Proc. 2012–9” in the subject line.
2012–2 I.R.B.272January 9, 2012

Rev. Proc. 2012–10
SECTION 1. PURPOSE AND SCOPE
The purpose of this revenue proce-
dure is to set forth updated procedures of
the Internal Revenue Service (the “Ser-
vice”) with respect to issuing rulings and
determination letters on private founda-
tion status under § 509(a) of the Internal
Revenue Code (the “Code”), operating
foundation status under § 4942(j)(3),
and exempt operating foundation sta-
tus under § 4940(d)(2), of organizations
exempt from Federal income tax under
§ 501(c)(3). This revenue procedure also
applies to the issuance of determination
letters on the foundation status under
§ 509(a)(3) of nonexempt charitable trusts
describedin§4947(a)(1).
SECTION 2. WHAT CHANGES
HAVE BEEN MADE TO REV. PROC.
2011–10?
.01 This revenue procedure is a general
update of Rev. Proc. 2011–10, 2011–2
I.R.B. 294.
.02 Section 6.02 is rewritten to reflect
changes since the introduction of Form
8940,Request for Miscellaneous Determi-
nation Under Section 507, 509(a), 4940,
4942, 4945, and 6033 of the Internal Rev-
enue Code, and the Instructions for Form
8940. Refer to Form 8940 and the Instruc-
tions for Form 8940 for information about
the types of requests that require the filing
of a Form 8940.
SECTION 3. BACKGROUND
.01 All § 501(c)(3) organizations are
classified as private foundations under
§ 509(a) unless they qualify as a public
charity under § 509(a)(1) (which cross-ref-
erences § 170(b)(1)(A)(i)-(vi)), (2), (3),
or (4).SeeTreas. Reg. §§ 1.170A–9,
1.509(a)–1 through 1.509(a)–7. The Ser-
vice determines an organization’s private
foundation or public charity status when
the organization files its Form 1023. This
status will be included in the organiza-
tion’s determination letter.
.02 In its Form 990,Return of Or-
ganization Exempt From Income Tax
Under section 501(c), 527, or 4947(a)(1)
of the Internal Revenue Code (except
black lung benefit trust or private founda-
tion), a public charity indicates the para-
graph of § 509(a), and subparagraph of
§ 170(b)(1)(A), if applicable, under which
it qualifies as a public charity. Because of
changes in its activities or operations, this
may differ from the public charity status
listed in its original determination letter.
Although an organization is not required to
obtain a determination letter to qualify for
the new public charity status, in order for
Service records to recognize any change in
public charity status, an organization must
obtain a new determination of foundation
status pursuant to this revenue procedure.
.03 If a public charity no longer
qualifies as a public charity under
§ 509(a)(1)-(4), then it becomes a private
foundation, and as such, it must file Form
990–PF,Return of Private Foundation or
Section 4947(a)(1) Nonexempt Charitable
Trust Treated as a Private Foundation.It
is not necessary for the organization to
obtain a determination letter on its new
private foundation status (although it is
permitted to do so pursuant to this revenue
procedure). The organization indicates
this change in foundation status by filing
its Form 990–PF return and following
any procedures specified in the form, in-
structions, or other published guidance.
Thereafter, the organization may termi-
nate its private foundation status, such
as by giving notice and qualifying as a
public charity again under § 509(a)(1)-(3)
during a 60-month termination period
in accordance with the procedures un-
der § 507(b)(1)(B) and Treas. Reg.
§ 1.507–2(b).
.04 This revenue procedure applies to
organizations that may have erroneously
determined that the organization was a
private foundation and wish to correct the
error. For example, an organization may
have erroneously classified an item or
items in its calculation of public support,
causing the organization to classify itself
as a private foundation and to file Forms
990–PF. Pursuant to this revenue proce-
dure, the organization can request to be
classified as a public charity by showing
that it continuously met the public support
tests during the relevant periods.Seesec-
tion 7 below
.05 A private foundation may qualify as
an operating foundation under § 4942(j)(3)
without a determination letter from the
Service, but the Service will not recog-
nize such status in its records without a
determination letter from the Service. An
organizationclaimingtobeanexempt
operating foundation under § 4940(d)(2)
must obtain a determination letter from
the Service recognizing such status to be
exempt from the § 4940 tax on net invest-
ment income.
SECTION 4. DETERMINATIONS OF
FOUNDATION STATUS
.01 EO Determinations will issue deter-
mination letters on foundation status, in-
cluding whether an organization is:
(1) a private foundation;
(2) a public charity described in
§§ 509(a)(1) and 170(b)(1)(A) (other than
clauses (v), (vii), and (viii));
(3) a public charity described in
§509(a)(2)or(4);
(4) a public charity described in
§ 509(a)(3), whether such organization
is described in § 509(a)(3)(B)(i), (ii), or
(iii) (“supporting organization type”), and
whether or not a Type III supporting or-
ganization is functionally integrated;
(5) a private operating foundation de-
scribedin§4942(j)(3);or
(6) an exempt operating foundation de-
scribed in § 4940(d)(2).
.02 EO Determinations will also is-
sue determination letters on whether a
nonexempt charitable trust described in
§ 4947(a)(1) is described in § 509(a)(3).
.03 EO Determinations will issue such
determinations in response to applications
for recognition of exempt status under
§ 501(c)(3), submitted by organizations
pursuant to § 508(b). EO Determinations
will also issue such determinations in
response to separate requests for deter-
mination of foundation status submitted
on Form 8940,Request for Miscellaneous
Determination, pursuant to Rev. Proc.
2012–10 or its successor revenue proce-
dures.
SECTION 5. APPLICABILITY OF
ANNUAL REVENUE PROCEDURES
.01 Rev. Proc. 2012–9 (updated annu-
ally) provides procedures of the Service in
processing applications for recognition of
exemption from Federal income tax under
§ 501(c)(3). Rev. Proc. 2012–4 (updated
annually) governs requests for rulings and
determination letters. Rev. Proc. 2012–8
(updated annually) prescribes user fees for
January 9, 20122732012–2 I.R.B.

applications, rulings, and other determina-
tions. Except as specifically noted herein,
those revenue procedures and their annual
successors also apply to requests for deter-
minations of foundation status.
.02 The provisions of Rev. Proc.
2012–9 and any successor revenue proce-
dure regarding § 7428, protest, conference,
and appeal rights also apply to all deter-
minations of foundation status described
in section 4.01 (except section 4.01(6)
relating to exempt operating foundation
status) and section 4.02, whether or not
the request for determination is made in
connection with an application for recog-
nition of tax-exempt status.
.03 Where the issue of exemption un-
der § 501(c)(3) is referred to EO Technical
for decision under the procedures of Rev.
Proc. 2012–9, the foundation status issue
will be referred along with it.
SECTION 6. GENERALLY NO NEW
DETERMINATION LETTER IF
SAME STATUS IS SOUGHT
The Service generally will not issue a
new determination letter to a taxpayer that
seeks a determination of private founda-
tion status that is identical to its current
foundation status as determined by the
Service. For example, an organization
that is already recognized as described
in §§509(a)(1) and 170(b)(1)(A)(ii) as a
school generally will not receive a new
determination letter that it is still described
in §§ 509(a)(1) and 170(b)(1)(A)(ii) un-
der the currently extant facts. However,
the organization in such case could re-
quest a letter ruling, pursuant to Rev.
Proc. 2012–4, that a given change of
facts and circumstances will not adversely
affect its status under §§ 509(a)(1) and
170(b)(1)(A)(ii).
SECTION 7. FORMAT OF REQUEST
.01 Organizations that are seeking to
change their foundation status, including
requests from public charities for private
foundation status and requests from public
charities to change from one public char-
ity classification to another public char-
ity classification, or seeking a determi-
nation or a change as to supporting or-
ganization type or functionally integrated
status, or seeking operating foundation or
exempt operating foundation status, must
submit Form 8940,Request Miscellaneous
Determination Under Section 507, 509(a),
4940, 4942, 4945, and 6033 of the Inter-
nal Revenue Code, along with all informa-
tion, documentation, and other materials
required by Form 8940 and the instructions
thereto, as well as the appropriate user fee
pursuant to Rev. Proc. 2012–8 or its suc-
cessor revenue procedures.
.02 For complete information about
filing requirements and the submission
process, refer to Form 8940 and the In-
structions for Form 8940.
SECTION 8. REQUESTS BY
NONEXEMPT CHARITABLE
TRUSTS
.01 A nonexempt charitable trust de-
scribed in § 4947(a)(1) seeking a determi-
nation that it is described in § 509(a)(3)
should submit a written request for a deter-
mination pursuant to Rev. Proc. 2012–4 or
its successor revenue procedure.
.02 The request for determination must
include the following information items,
from the date that the organization became
described in § 4947(a)(1) (but not before
October 9, 1969) to the present:
(1) A subject line or other indica-
tor on the first page of the request in
bold, underlined, or all capitals font in-
dicating “NONEXEMPT CHARITABLE
TRUST REQUEST FOR DETERMI-
NATION THAT IT IS DESCRIBED IN
§ 509(a)(3)”;
(2) The name, address, and Employer
Identification Number of the beneficiary
organizations, together with a statement
whether each such beneficiary organiza-
tion is described in § 509(a)(1) or (2);
(3) A list of all of the trustees that have
served, together with a statement stating
whether such trustees were disqualified
persons within the meaning of § 4946(a)
(other than as foundation managers);
(4) A copy of the original trust instru-
ment and all subsequently adopted amend-
ments to that instrument;
(5) Sufficient information to other-
wise establish that the trust has met the
requirements of § 509(a)(3) as provided
for in Treas. Reg. § 1.509(a)–4 (other
than § 1.509(a)–4(i)(4)); If the trust did
not qualify under § 509(a)(3) in one or
more prior years (after October 9, 1969)
in which it was described in § 4947(a)(1),
then it cannot be issued a § 509(a)(3) deter-
mination letter except in accordance with
the procedures for termination of private
foundation status under § 507(b)(1)(B);
and
(6) Such other information as is re-
quired for a determination under Rev.
Proc. 2012–4 or any successor revenue
procedure.
SECTION 9. DETERMINATIONS
OPEN TO PUBLIC INSPECTION
Determinations and rulings as to foun-
dation status are open to public inspection
pursuant to § 6104(a).
SECTION 10. NOT APPLICABLE
TO PRIVATE FOUNDATION
TERMINATIONS UNDER § 507 OR
CHANGES OF STATUS PURSUANT
TO EXAMINATION
These procedures do not apply to a pri-
vate foundation seeking to terminate its
status under § 507. These procedures also
do not apply to the examination of an or-
ganization which results in changes to its
foundation status.
SECTION 11. EFFECT ON OTHER
REVENUE PROCEDURES
Rev. Proc. 2011–10 is superseded.
SECTION 12. EFFECTIVE DATE
This revenue procedure is effective Jan-
uary 9, 2012.
SECTION 13. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. § 3507) under control number
1545–1520.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in sections 7.02 and
8.02. This information is required to eval-
uate and process the request for a letter
2012–2 I.R.B.274January 9, 2012

ruling or determination letter. The collec-
tions of information are required to obtain
a letter ruling or determination letter. The
likely respondents are tax-exempt organi-
zations.
DRAFTING INFORMATION
The principal authors of this rev-
enue procedure are Mr. Dave Rifkin
and Mr. Matt Perdoni of the Exempt
Organizations, Tax Exempt and
Government Entities Division.For
further information about this revenue
procedure, contact Customer Account
Services at 877–829–5500. Dave Rifkin
or Matt Perdoni can be reached by
e-mail attege.eo@irs.gov. Please include
“Question about Rev. Proc. 2012–10” in
the subject line.
26 CFR 601.601: Rules and regulations.
(Also: 31 USC 330, 31 CFR 10.6, 31 CFR 10.9.)
Rev. Proc. 2012–12
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to describe the procedures and standards
that organizations must follow to be iden-
tified by the Internal Revenue Service as a
qualifying organization that may accredit
continuing education providers under sec-
tion 10.9(a)(1)(iii) of Circular 230. This
revenue procedure also describes the stan-
dards for a continuing education provider
under section 10.9(a)(1) and the proce-
dures that individuals and entities must fol-
lowtobeapprovedbytheInternalRev-
enue Service as a continuing education
provider under section 10.9(a)(1)(iv).
SECTION 2. BACKGROUND
.01 On June 3, 2011, the Treasury De-
partment and the Internal Revenue Ser-
vice published final regulations in the Fed-
eral Register (T.D. 9527, 2011–28 I.R.B.
38 [76 FR 32286]) under 31 CFR Part 10
(reprinted as Treasury Department Circu-
lar 230) that require registered tax return
preparers to complete continuing educa-
tion offered by qualified continuing edu-
cation providers. Enrolled agents and en-
rolled retirement plan agents also are re-
quired to complete continuing education
under Circular 230. Section 10.9(a)(1) of
Circular 230 provides that continuing edu-
cation providers must be:
(i) An accredited educational institu-
tion;
(ii) Recognized for continuing educa-
tion purposes by the licensing body of any
State, territory, or possession of the United
States, including a Commonwealth, or the
District of Columbia;
(iii) Recognized and approved by a
qualifying organization as a provider of
continuing education on subject matters
within section 10.6(f) of Circular 230; or
(iv) Recognized by the IRS as a pro-
fessional organization, society, or business
whose programs include offering continu-
ing professional education opportunities in
subject matters withinsection10.6(f).
For purposes of this revenue procedure,
an entity referred to as a “qualifying organ-
ization” in section 10.9(a)(1)(iii) will be
referred to as an “accrediting organization”
andanindividualorentityapprovedbythe
IRS as a continuing education provider un-
der section 10.9(a)(1)(iv) will be referred
to as a “section iv CE provider.”
.02 Section 10.9(a)(1)(iii) provides that
the IRS, at its discretion, may identify the
accrediting organizations that maintain
minimum education standards compara-
bletothosesetforthinCircular230in
appropriate forms, instructions, and other
appropriate guidance.
.03 Section 10.9(a)(1)(iv) provides that
the IRS, at its discretion, may require sec-
tion iv CE providers to file an agreement
and/or obtain IRS approval of each pro-
gram as a qualified continuing education
program in appropriate forms, instruc-
tions, or other appropriate guidance.
.04 Under section 10.9(a)(2), a con-
tinuing education provider must obtain a
continuing education provider number and
pay any applicable user fee. A continuing
education provider also must maintain its
status as a continuing education provider
during each continuing education provider
cycle by renewing its continuing education
provider number as prescribed by forms,
instructions, or other appropriate guidance
and paying any applicable user fee.
.05 Sections 10.6(f) and 10.9(a)(3)
provide initial criteria that continuing ed-
ucation programs must meet to qualify
for continuing education credit for en-
rolled agents, enrolled retirement plan
agents, and registered tax return preparers.
A qualifying continuing education pro-
gram generally must enhance professional
knowledge in Federal taxation or Federal
tax related matters, including ethics, must
be consistent with the Internal Revenue
Code and effective tax administration, and
must be conducted by a qualified instruc-
tor.
.06OnJuly18,2011,Treasuryandthe
IRS published Notice 2011–61 soliciting
the feedback of education providers, tax
return preparers, the associated industry
and consumer groups, and taxpayers on
the procedures and standards that will gov-
ern the process for identifying accrediting
organizations or for those individuals and
entities seeking approval as section iv CE
providers. Numerous comments were re-
ceived and were taken into account in the
development of the standards and proce-
dures prescribed in this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to any
organization seeking to be identified as an
accrediting organization or any individual
or entity seeking approval as a section iv
CE provider; and applies to any continuing
education provider seeking to obtain con-
tinuing education provider and program
numbers under section 10.9. This rev-
enue procedure supplements sections 10.6
and 10.9 by describing the specific stan-
dards and procedures that those organiza-
tions, individuals, and entities must follow
to be identified as an accrediting organiza-
tion or accepted as a continuing education
provider.
SECTION 4. ACCREDITING
ORGANIZATIONS
.01Standards. Any organization seek-
ing to be identified as an accrediting organ-
ization that may approve individuals and
entities as continuingeducation providers
under section 10.9(a)(1)(iii) must:
(1) Have an established framework and
effective means of review and approval for
continuing education providers.
(2) Publish requirements for continuing
education provider approval.
(3) Have written procedures sufficient
to ensure that the continuing education
providers it accredits comply with any
standards set forth in Circular 230, the
requirements described in section 5.02
January 9, 20122752012–2 I.R.B.

below, and any other standards prescribed
by the IRS in other appropriate guidance.
(4) Have experience evaluating contin-
uing education providers in Federal taxa-
tion or Federal tax related matters, includ-
ing ethics. The minimum level of experi-
ence required typically will be two years.
(5) Have an established process for an-
nually auditing or reviewing selected pro-
grams of selected approved continuing ed-
ucation providers. Reviews of selected
programs must be performed periodically,
at least annually.
(6) Maintain records for each approved
continuing education provider for four
years and submit reports to the IRS peri-
odically on the individuals and entities ap-
plying for continuing education provider
status.
(7) Maintain an internet listing of all
continuing education providers approved
by the accrediting organization.
(8) Employ at least one full-time staff
member with subject-matter expertise in
Federal taxation or Federal tax related mat-
ters, including ethics. That staff member
must be qualified to evaluate continuing
education provider programsasoutlinedin
Circular 230.
.02Requirements. Any organization
identified as an accrediting organization
must:
(1) Comply with all IRS guidance and
requirements, including Circular 230. The
IRS may require an accrediting organiza-
tion to provide additional information re-
garding such compliance. The IRS may
revoke an organization’s status as an ac-
crediting organization if the organization
fails to adequately and timely respond to
the IRS’s request for information.
(2) Have an established process for
in-depth reviews of selected approved
continuing education providers on an an-
nual basis.
(3) Act only as an approver of continu-
ing education providers, and not offer Fed-
eral tax related continuing education com-
mercially.
(4) Respond to IRS requests for infor-
mation regarding the individuals or enti-
ties approved or not approved as continu-
ingeducationproviders.
.03How to Apply. An organization
seeking to be identified as an accrediting
organization authorized to approve indi-
viduals and entities as continuing educa-
tion providers may apply by providing the
information set forth in section 4.04 be-
low. The applicant must include all rele-
vant information requiredbythisrevenue
procedure, including how the organization
meets the standards described in section
4.01 above, in the application. Completed
applications must be sent to:
Internal Revenue Service
Attention: RPO Continuing
Education Program
Rm. 7238 IR
1111 Constitution Ave., NW
Washington, DC 20224
Applicants will be notified, in writ-
ing, whether the application has been
approved. Only after an applicant has
received written notification of approval
from the IRS may the accrediting or-
ganization begin accepting applications
from individuals or entities seeking to
become a continuing education provider
under section 10.9(a)(1)(iii). Individuals
or entities approved by the accrediting
organization as a continuing education
provider under section 10.9(a)(1)(iii) must
obtain a provider number and program
number(s) from the IRS by filing a com-
pleted Form 8498,Continuing Education
Provider Application and Request for
Provider Number, (and pay any applica-
ble fee) online atwww.irs.gov/taxpros/ce
or they may request a paper applica-
tion by calling the IRS Continuing Ed-
ucation Provider Processing Center at
1–855–296–3150 (toll-free) in the United
States or 202–499–5606 (not a toll-free
call) outside the United States. The pro-
cessing time for a paper application will
be six to eight weeks. Continuing educa-
tion providers who have been approved
by an accrediting organization may of-
fer continuing education for purposes of
section 10.6 only after they have received
a continuing education provider number
and program number(s)fromtheIRS,and
followed all applicable procedures pre-
scribedbytheIRS.
An accrediting organization must re-
new its status as an accrediting organi-
zation every three calendar years as pre-
scribed in forms, instructions, or other ap-
propriate guidance. The renewal period
will be from July through September of the
applicable renewal year.
.04Required Information.Anyor-
ganization seeking to be identified as
an accrediting organization that may ap-
prove individuals and entities as contin-
uing education providers under section
10.9(a)(1)(iii) must provide the follow-
ing information, including any supporting
documentation, in its application to be
identified as an accrediting organization:
(1) Full name, mailing address, tele-
phone number, and web address (URL) of
the organization.
(2) Tax identification number of the or-
ganization.
(3) Name and contact information of the
organization’s point of contact, including
mailing address, telephone number, and
e-mail address.
(4) Description of the requirements an
individual or entity must meet to obtain the
organization’s approval as a continuing ed-
ucation provider. Supporting documenta-
tion must be attached.
(5) Description of the organization’s
experience and qualifications evaluating
continuing education providers.
(6) Description of the process the or-
ganization uses to review applications
it receives from continuing education
providers and to ensure that continuing
education providers will comply with the
standards set forth in Circular 230, require-
ments described in section 5.02 below, and
any other standards prescribed by the IRS
in other appropriate guidance. Supporting
documentation must be attached.
(7) Statement that the organization will
not directly or indirectly offer continuing
education in Federal tax matters or ethics
commercially during any period that the
organization is operating as an accrediting
organization.
(8) Statement that the organization
agrees to comply with all IRS guidance
and requirements, including Circular 230.
(9) Statement that the organization ac-
knowledges that its status as an IRS ac-
crediting organization is subject to review
at any time by the IRS, including but not
limited to, IRS requests for information
about the organization’s review and ap-
proval process, interviews, and site vis-
itations (including site visitations of the
organization’s approved continuing edu-
cation providers). Statement also must
acknowledge that the organization’s fail-
ure to provide any data or information re-
quested by the IRS or its denial of an IRS
site visitation may result in suspension or
2012–2 I.R.B.276January 9, 2012

revocation of its accrediting organization
status.
(10) Signed and dated statement by the
organization’s point of contact (see section
4.04(3)) or an officer, partner, member, or
owner of the organization providing that
the individual has examined and read the
application and all accompanying infor-
mation and to the best of the individual’s
knowledge and belief, the information pro-
vided is true, correct, and complete. The
statement must be made under penalties of
perjury and acknowledge that any false or
misleading information may result in crim-
inal penalties and/or the denial or termina-
tion of the organization’s status as an ac-
crediting organization.
SECTION 5. CONTINUING
EDUCATION PROVIDERS
.01General. Individuals or entities ap-
proved as a continuingeducation provider
under section 10.9(a)(1)(i), (ii), or (iii)
are required to obtain and renew an-
nually a continuing education provider
number. These continuing education
providers also are required to obtain con-
tinuing education program numbers for
each qualifying program they intend to
offer. Continuing education providers
may obtain and renew their continuing
education provider numbers and program
numbers by submitting a completed Form
8498,Continuing Education Provider
Application and Request for Provider
Number, online atwww.irs.gov/taxpros/ce
or they may request a paper applica-
tion by calling the IRS Continuing Ed-
ucation Provider Processing Center at
1–855–296–3150 (toll-free) in the United
States or 202–499–5606 (not a toll-free
call) outside the United States. The pro-
cessing time for a paper application will
be six to eight weeks. Continuing edu-
cationprovidersmayberequiredtopay
a reasonable annual fee to the third-party
vendor who administers this program for
the IRS. The third-party vendor will not
charge an additional fee if a continuing
education provider adds programs during
a calendar year.
Individuals or entities approved as a
continuing education provider may be re-
quired, as prescribed by the IRS and the
third-party vendor, to provide identifying
information of preparer tax identifica-
tion number holders who successfully
complete programs with IRS program
numbers.
Continuing education providers must
have a current or otherwise valid con-
tinuing education provider number prior
to advertising that programs offered by
the provider may be used to meet any
IRS continuing education requirements.
Additionally, any program offered by a
continuing education provider must have a
current or otherwisevalid program number
before the continuing education provider
advertises that the program meets IRS
requirements for continuing education.
.02Requirements. Any individual or
organization approved as a continuing ed-
ucation provider must:
(1) Offer continuing education pro-
grams designed to enhance professional
knowledge in Federal taxation or Federal
tax related matters, including ethics, con-
sistent with the Internal Revenue Code and
principles of effective tax administration.
a) If the continuingeducation program
will be offered for the purpose of qualify-
ing for continuing education credit for reg-
istered tax return preparers, the program
must directly relate to the preparation of
Federal tax returns or Federal tax ethics.
b) If the continuing education pro-
gram will be offered for the purpose of
qualifying for continuing education credit
for enrolled retirement plan agents, the
program must enhance the participant’s
professional knowledge in qualified retire-
ment plan matters, including ethics.
Continuing education programs fo-
cused primarily on state tax related mat-
ters generally will not be eligible for
continuing education credit unless the in-
structional material demonstrates that the
program is designed to illustrate the differ-
ence between state law and Federal law in
the same tax related matter. Providers of-
fering continuing education programs with
only limited professional benefit not de-
signed to improve skills related to Federal
tax related matters will not be approved.
(2) Provide continuing education pro-
gram content that is accurate, current, and
effectively designed to communicate con-
tent through program materials, activities,
and delivery systems, whether classroom-
based, computer-based, or for self-study.
(3) Use continuing education program
presenters, instructors, discussion leaders,
and speakers who have subject-matter ex-
pertise in Federal taxation or Federal tax
related matters, including ethics, as well
as demonstrable teaching and communica-
tion skills.
(4) Comply with any standards set forth
in Circular 230 and any other standards
prescribed by the IRS in other appropriate
guidance.
(5) Ensure that all continuing education
programs are developed and written by in-
dividual(s) with expertise in Federal tax re-
lated matters, or ethics in the case of an
ethics program.
(6) Provide continuing education pro-
grams that utilize materials specifically de-
veloped for instructional use. General pro-
fessional literature or IRS publications and
referencemanualsmaybeusedonlyto
supplement specific program materials.
(7) Review and update programs peri-
odically, at least annually, to ensure ac-
curacy and consistency with currently ac-
cepted standards relating to the program’s
subject matter. This review must be con-
ducted by a qualified individual to ensure
that the program is current, technically ac-
curate, and addresses the stated learning
objectives.
(8) Provide a means for evaluation
of attendees’ successful completion of
the program. Providers must ensure that
self-study programs include verification
of completion of required material and
demonstrated mastery of program content.
(9) Develop programs that meet the
standards of Circular 230 for continuing
education credit earned upon completion,
based upon the standard of 50 minutes
of contact time required for 1 continuing
education credit earned. Credit is granted
onlyforafullcontacthourof50min-
utes, or multiples thereof; no credit will
be awarded for partial continuing educa-
tion consisting of less than 50 minutes of
contact time.
(10) Collect and maintain reliable
records to document participation and at-
tendance, and issue certificates with IRS
program numbers to students upon suc-
cessful completion.
(11) Provide for voluntary program
evaluations by individuals who have com-
pleted the program. The provider must
ensure that participants have an opportu-
nity to provide feedback concerning the
quality and knowledge of the speaker/in-
structor, the quality of program materials,
and whether the program met stated ob-
jectives. Any participant evaluations
January 9, 20122772012–2 I.R.B.

received by the provider must be made
available to the IRS on request.
.03How to Apply to Become a Section
IV CE Provider. Individuals or entities
that do not meet the requirements of sec-
tion 10.9(a)(1)(i), (ii), or (iii) may apply
to the IRS for approval as a section iv
CE provider. An applicant under sec-
tion 10.9(a)(1)(iv) must apply for status
asasectionivCEproviderbysubmit-
ting a completed Form 8498,Continuing
Education Provider Application and Re-
quest for Provider Number,onlineat
www.irs.gov/taxpros/ceor these individ-
uals or entities may request a paper ap-
plication by calling the IRS Continuing
Education Provider Processing Center at
1–855–296–3150 (toll-free) in the United
States or 202–499–5606 (not a toll-free
call) outside the United States. The pro-
cessing time for a paper application will
be six to eight weeks. The applicant also
must pay any applicable third-party ven-
dor fee with the application and include
all relevant information required in the ap-
plication, including how the section iv CE
provider meets the requirements described
in section 5.02 above. Approved appli-
cants will receive a continuing education
provider number and program numbers
and must renew their status annually in
accordance with section 5.01 above.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1726.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number.
The collection of information in this
revenue procedure is in sections 4 and 5.
This information is required in order for
the IRS to ensure that individuals and or-
ganizations permitted to provide continu-
ing education or accredit others to provide
continuing education meet all of the ap-
propriate procedures and standards for ed-
ucation in Federal tax practice. The likely
respondents are individuals and organiza-
tions that want to provide continuing edu-
cation or accredit others to provide contin-
uing education.
The estimated total annual reporting or
recordkeeping burden is 2,750 hours.
The estimated annual burden per re-
spondent/recordkeeper varies from .6
hours to 1 hour, depending on individual
circumstances, with an estimated average
of .75 hours. The estimated number of
respondents or recordkeepers is 3,000.
The estimated frequency of responses
(used for reporting requirements only) un-
der section 4 is once every three years;
the estimated frequency of responses un-
der section 5 is twice annually.
Books or records relating to a collection
of information must be retained as long
as their contents might become material in
the administration of any internal revenue
law.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective De-
cember 6, 2011.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Janet Engel Kidd of the Office
of Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue procedure, contact
Janet Engel Kidd at (202) 622–4940 (not
a toll-free call).
2012–2 I.R.B.278January 9, 2012

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Application o
ftheSegregation
Rules to Small
Shareholders
REG–149625–
10
AGENCY: Inte
rnal Revenue Service
(IRS), Treas
ury.
ACTION: Noti
ce of proposed rulemaking.
SUMMARY: Thi
s document contains pro-
posed regula
tions under section 382 of
the Internal
Revenue Code (Code). These
proposed re
gulations provide guidance
regarding t
he application of the segrega-
tion rules t
o public groups under section
382 of the Co
de. These regulations affect
corporati
ons.
DATE: Writ
ten or electronic comments
and reques
ts for a public hearing must be
received b
y February 21, 2012.
ADDRESSES
: Send submissions to:
CC:PA:LPD
:PR (REG–149625–10), room
5203, Inte
rnal Revenue Service, PO Box
7604, Ben
Franklin Station, Washing-
ton, DC 20
044. Submissions may be
hand deli
vered Monday through Friday
between t
he hours of 8 a.m. and 4 p.m.
to CC:PA:
LPD:PR (REG–149625–10),
Courier
’s Desk, Internal Revenue Ser-
vice, 11
11 Constitution Avenue, NW,
Washing
ton, DC, or sent electroni-
cally vi
a the Federal eRulemaking Por-
tal atht
tp://www.regulations.gov/(IRS
REG–14
9625–10).
FOR FUR
THER INFORMATION
CONTAC
T: Concerning the proposed
regula
tions, Stephen R. Cleary, (202)
622–77
50; concerning submission of
commen
ts or to request a public hearing,
Oluwa
funmilayo (Funmi) P. Taylor, (202)
622–7
180 (not toll-free numbers).
SUPPLEMENTAR
Y INFORMATION:
Background
1.Segregatio
n and Aggregation —
Statute, Leg
islative History, and Current
Regulations
Section 382 i
mposes a limitation on a
corporatio
n’s use of net operating loss car-
ryovers fol
lowing a change in ownership.
The legisla
tive history explains that a lim-
itation is n
ecessary following a change in
ownership
because new shareholders oth-
erwise wou
ld have an opportunity to con-
tribute in
come-producing assets (or divert
income opp
ortunities) to the corporation,
thus inapp
ropriately accelerating the use
of net ope
rating loss carryovers. The sec-
tion 382 l
imitation is intended to prevent
acorpora
tion from obtaining greater loss
utilizat
ion than it could have achieved ab-
sent a ch
ange in ownership. S. Rep. No.
99–313 a
t 232 (1986).
Alossco
rporation has an ownership
change i
f the percentage of stock of a loss
corpora
tion that is owned by one or more
5-perce
nt shareholders has increased by
more tha
n 50 percentage points over the
lowest
percentage of stock of the loss cor-
porati
on owned by such shareholders at
any tim
e during the testing period (gen-
erally
, a three-year period). For purposes
of sect
ion 382, the attribution rules of
secti
on 318(a)(2) apply, without limita-
tion,
to treat individuals as the owners of
loss c
orporation stock. Pursuant to sec-
tion 3
82(g)(4)(A), individual shareholders
who ow
n less than five percent of a loss
corp
oration are aggregated and treated as
asin
gle 5-percent shareholder (a public
grou
p).
The r
egulations extend the public group
conc
ept to situations in which a loss cor-
pora
tion is owned by one or more entities,
as de
fined in §1.382–3(a) (generally, part-
ner
ships, corporations, estates, and trusts).
If a
n entity directly or indirectly owns five
per
cent or more of the loss corporation,
tha
t entity has its own public group if its
own
ers who are not 5-percent sharehold-
ers
own, in the aggregate, five percent or
mo
re of the loss corporation. (Such an en-
ti
ty is referred to as a 5-Percent Entity in
th
is preamble.)
The segregati
on rules, which are gen-
erally contai
ned in §1.382–2T(j), and the
exceptions th
ereto, which are generally
contained in §
1.382–3(j), apply to certain
transactions
affecting ownership by the
loss corpora
tion’s direct public group and
by the public
groups of a 5-Percent Entity.
The applicat
ion of the segregation rules
results in th
e creation of a new public
group in add
ition to the one (or more)
that existe
d previously. That new group
is treated a
s a new 5-percent shareholder
that increa
ses its ownership interest in the
loss corpo
ration.
Section 382
(g)(4)(B) mandates applica-
tion of the
segregation rules to transactions
constitut
ing equity structure shifts of the
loss corpo
ration. Generally, equity struc-
ture shift
s are acquisitive asset reorgani-
zations an
d recapitalizations under section
368. Sect
ion 382(g)(3)(B) provides reg-
ulatory a
uthority to treat public offerings
and simil
ar transactions as equity struc-
ture shif
ts. Pursuant to that authority, the
current
segregation rules, subject to the
cash iss
uance and small issuance excep-
tions (d
escribed in this preamble), treat is-
suances
of stock under section 1032, re-
demptio
ns, and redemption-like transac-
tions a
s segregation events. The segrega-
tion ru
les also apply to transfers of loss cor-
porati
on stock by an individual 5-percent
shareh
older to public shareholders and a
5-Perc
ent Entity’s transfer of loss corpora-
tion s
tock to public shareholders.
The sma
ll issuance and cash issuance
excep
tions exempt certain amounts of
stock
issuances from the segregation rules.
Gener
ally, the small issuance exception
exemp
ts the total amount of stock issued
durin
g a taxable year to the extent it does
not e
xceed 10 percent of the total value of
the c
orporation’s outstanding stock at the
begi
nning of the taxable year or 10 percent
of th
e class of stock issued and outstanding
at th
e beginning of the taxable year (the
sma
ll issuance limitation). However, the
sma
ll issuance exception does not apply
to a
ny issuance of stock that, by itself,
exc
eeds the small issuance limitation. If
sto
ck is issued solely for cash, the cash is-
sua
nce exception exempts a percentage of
th
e total stock issued equal to 50 percent
of
the aggregate percentage ownership
in
terest of the public groups of the cor-
January 9, 20122792012–2 I.R.B.

poration immediately before the issuance.
In determining the size of the issuance
for this purpose, stock issued to 5-percent
shareholders is taken into account. If the
small issuance exception excludes only a
portion of a stock issuance, the cash is-
suance exception mayapply to the portion
not excluded under the small issuance ex-
ception. Pursuant to a grant of regulatory
authority in section 382(m)(4), the small
issuance exception can apply to recapital-
izations, but otherwise, neither exception
applies to equity structure shifts.
2.Notice 2010–49
Notice 2010–49, 2010–27 I.R.B. 10,
invited public comment relating to pos-
sible modifications to the regulations
under section 382 regarding the treatment
of shareholders who are not 5-percent
shareholders (Small Shareholders). See
§601.601(d)(2)(ii)(b).
Notice 2010–49 describes two general
approaches — the Ownership Tracking
Approach and the Purposive Approach
— and sets forth some of the policy con-
siderations underlying each approach.
Both approaches recognize that a primary
abuse section 382 seeks to prevent in-
volves an acquisition of loss corporation
stock followed by the contribution of in-
come-producing assets or the diversion
of income-producing opportunities to the
corporation. The twoapproaches differ,
however, in the extent they seek to identify
and limit their effect to circumstances in
which that abuse is most likely to occur.
Under the Ownership Tracking Ap-
proach, generally itis of no significance
whether the shareholders who increase
their ownership are Small Shareholders
or 5-percent shareholders. This approach
ensures that abusive transactions are ad-
dressed by tracking all changes in own-
ership without regard to their particular
circumstances. Thus, any transaction
that allows the corporation to track the
increase in ownership interests held by
Small Shareholders results in the segre-
gation of Small Shareholders into a new
public group, which is treated as a 5-per-
cent shareholder. However, the Ownership
Tracking Approach makes a concession to
administrative convenience and acknowl-
edges that “public trading,” which is the
purchase by one Small Shareholder of
stock from another Small Shareholder,
should not be taken into account because
it is unduly burdensome for a corporation
to take into account all such transactions.
See §1.382–2T(e)(1)(ii).
Consistent with the purpose of sec-
tion 382, the Purposive Approach seeks
to identify more specifically the circum-
stances in which abuses are likely to arise.
This approach reflects the view that it is
unnecessary to take into account all read-
ily identifiable acquisitions of stock by
Small Shareholders, because Small Share-
holders generally are not in a position to
acquire loss corporation stock in order
to contribute income-producing assets or
divert income-producing opportunities.
The current regulations primarily re-
flect the Ownership Tracking Approach.
Although certain provisions may seem
to follow the Purposive Approach, their
justification is nevertheless based upon
the Ownership Tracking Approach. For
example, the cash issuance exception of
§1.382–3(j)(3) reduces the segregation ef-
fect of an issuance of stock to Small Share-
holders but is justified on the grounds that
there is likely to be substantial overlap
between Small Shareholders who acquire
stock in such an issuance and the Small
Shareholders who already own stock.
Explanation of Provisions
1.Overview
The IRS and the Treasury Department
received a range of comments in response
to Notice 2010–49. Some comments
endorsed substantialchanges to the ex-
isting regulations, while others supported
changes within the existing regulatory
framework. One commenter supporting
more modest changes to the existing reg-
ulations suggested that an overhaul of
the current regulations likely would pro-
duce new uncertainties and complexities.
Additionally, the comment observed that
revisions allowing substantial infusions
of capital into a loss corporation without
section 382 implications would be counter
to section 382 policies.
After consideration of the comments
received, these regulations propose revi-
sions following the Purposive Approach
within the existing regulatory framework.
Consistent with the Purposive Approach,
these proposed regulations are intended
to lessen the administrative burden and
section 382 implications associated with
transactions that are unlikely to implicate
section 382 policy concerns. In general,
these proposed regulations employ objec-
tive criteria to implement the Purposive
Approach. The IRS and the Treasury De-
partment believe that, where practicable,
objective rules best serve the interests of
loss corporations thatdesire certainty with
respect to their section 382 positions, and
best serve the interests of the government
in fairly and consistently administering a
complex statutory scheme.
Comments that embraced a more funda-
mental reform of the existing regulations
were not incorporated into this proposal
primarily because the approaches intro-
duced significant subjectivity. For exam-
ple, one commenter suggested that, subject
to an anti-abuse rule, the segregation rules
should not apply to redemption transac-
tions. Another commenter suggested that
if certain stock issuances and redemptions
of Small Shareholders are sufficiently re-
lated, those transactions should be treated
as public trading. These suggestions were
not incorporated in favor of proposals that
will provide greater certainty of result to
the government and to loss corporations.
2.Proposed Revisions
A.Inapplicability of the Segregation Rules
to Certain Secondary Transfers
Several of the comments supported
rendering the segregation rules inoperative
to transfers of loss corporation stock to
Small Shareholders by 5-Percent Entities
or individuals who are 5-percent share-
holders. These comments also supported
relief from the segregation rules for trans-
actions in which an ownership interest in a
5-Percent Entity is transferred to a public
owner or a 5-percent owner who is not a
5-percent shareholder.
The IRS and the Treasury Department
agree that adoption of these exceptions
is appropriate because these transactions
do not introduce new capital into the loss
corporation and because direct or indirect
ownership of the loss corporation becomes
less concentrated, thus diminishing the
opportunity for loss trafficking. Further-
more, limiting the creation of additional
public groups where loss trafficking is
not implicated simplifies tax compliance
and administration. Accordingly, these
2012–2 I.R.B.280January 9, 2012

proposed regulations generally render the
segregation rules inoperative to trans-
fers of loss corporation stock to Small
Shareholders by 5-Percent Entities or in-
dividuals who are 5-percent shareholders.
In these cases, the stock transferred will
be treated as being acquired proportion-
ately by the public groups existing at the
time of the transfer. This rule also ap-
plies to transfers of ownership interests in
5-Percent Entities to public owners and to
5-percent owners whoare not 5-percent
shareholders.
B.Inapplicability of the Segregation Rules
to Certain Redemptions
Two of the comments supported lim-
iting application of the segregation rules
in the case of redemptions. These com-
menters observed that, generally, a loss
corporation’s redemption of its stock from
Small Shareholders does not raise loss traf-
ficking concerns because (i) the capital of
the loss corporation is contracting, and (ii)
Small Shareholders generally cannot traf-
fic in losses. One comment supported a
rule that would, subject to an anti-abuse
rule, render the segregation rules inappli-
cable to all redemptions. In addition to
supporting the inapplicability of the segre-
gation rules to all redemptions, the com-
ment supported an objective rule for ex-
empting redemptions based upon the me-
chanics of the small issuance exception.
In general, these proposed regulations
adopt a rule based upon the mechanics of
the small issuance exception to obviate the
need for a subjective anti-abuse rule. Like
the small issuance exception, this excep-
tion for redemptions exempts from segre-
gation, at the loss corporation’s option, ei-
ther 10 percent of the total value of the loss
corporation’s stock at the beginning of the
taxable year, or 10 percent of the number
of shares of the redeemed class outstand-
ing at the beginning of the taxable year.
Where this exception applies, each public
group existing immediately before the re-
demption will be treated as redeeming its
proportionate share of exempted stock.
Like the small issuance exception, the
small redemption exception will allow a
loss corporation to plan its affairs as of the
beginning of each taxable year. Further-
more, consistent with the Purposive Ap-
proach, the exception reduces administra-
tive burden and the section 382 impact of
transactions in which the abuses that sec-
tion 382 is intended to prevent are unlikely
to arise.
C.Inapplicability of the Segregation
Rules to 5-Percent Entities in Certain
Circumstances
One commenter expressed the need for
relief from tracking shifts of ownership by
Small Shareholders of 5-Percent Entities.
The comment expressed that, in many
cases, a loss corporation cannot obtain
information relating to this ownership —
either because the entity chooses not to
respond or because the entity is prohib-
ited from sharing information regarding
its owners with the loss corporation. The
inability to obtain this information may
restrict capital-raising activities beyond
what section 382 requires, because the
loss corporation may choose to make
worst-case assumptions about shifts in
ownership when the relevant information
cannot be obtained. The IRS and the Trea-
sury Department agree that it is appropri-
ate to provide relief in situations in which
tracking shifts in ownership by Small
Shareholders does not further the policy
objectives of section 382. Furthermore,
the IRS and the Treasury Department
recognize that application of the segre-
gation rules and the exceptions thereto
present compliance issues for taxpayers
and issues of tax administration for the
government. Accordingly, these proposed
regulations limit the situations in which
the segregation rules apply to situations
that potentially implicate the policies un-
derlying section 382.
Under these proposed regulations, the
segregation rules will not apply to a trans-
action if, on a testing date on which the
rules would otherwise apply (i) the 5-Per-
cent Entity owns ten percent or less (by
value) of all the outstanding stock of the
loss corporation (the ownership limita-
tion), and (ii) the 5-Percent Entity’s direct
or indirect investment in the loss corpo-
ration does not exceed 25 percent of the
entity’s gross assets (the asset threshold).
For purposes of the asset threshold, the
entity’s cash and cash items within the
meaning of section 382(h)(3)(B)(ii) are
not taken into account. Generally, the loss
corporation may establish the ownership
limitation through either actual knowledge
or, absent actual knowledge to the con-
trary, the presumptions regarding stock
ownership in §1.382–2T(k)(1).
The IRS and the Treasury Department
believe that the proposal strikes an appro-
priate balance between reducing complex-
ity and safeguarding section 382 policies.
The proposal will enable loss corporations
to disregard indirect changes in its own-
ership that may, under the current regu-
lations, require burdensome information
gathering and may unnecessarily impede
the loss corporation’s ability to reorganize
its affairs. At the same time, however, the
proposal imposes criteria that protect the
government’s interests. The asset thresh-
old makes it unlikely that the loss corpo-
ration’s attributes motivate transactions in
the equity of 5-Percent Entities. Addi-
tionally, like the small issuance exception
and the relief for redemptions that appears
elsewhere in this proposal, the ownership
limitation makes it unlikely that transac-
tions among Small Shareholders one or
more tiers removed from the loss corpo-
ration implicate loss trafficking concerns.
(Note that the asset threshold and the own-
ership limitation do not apply to the excep-
tion for secondary transfers described else-
where in this preamble because secondary
transfers do not implicate the same policy
concerns as transactions in which loss cor-
porations can obtainadditional capital.)
D.Clarification of §1.382–2T(j)(3)
Section 1.382–2T(j)(3) provides that,
in general, the segregation rules apply to
sales of loss corporation stock by individ-
ual 5-percent shareholders and by first tier
entities. This section further provides that
the “principles” of the foregoing apply to
“transactions in which an ownership inter-
est in a higher tier entity that owns five per-
cent or more of the loss corporation (with-
out regard to §1.382–2T(h)(2)(i)(A)) or a
first tier entity is transferred to a public
owner or a 5-percent owner who is not a
5-percent shareholder.” This proposed reg-
ulation clarifies that the segregation rules
apply to such a transfer only if the seller
indirectly owns five percent or more of the
loss corporation. In the case of a sale by
an entity, ownership is determined without
regard to §1.382–2T(h)(2)(i)(A).
January 9, 20122812012–2 I.R.B.

E.Small Issuance and Cash Issuance
Exceptions
Several of the comments requested ex-
pansion of the small issuance and cash
issuance exceptions as a percentage of
stock that is exempted from the segrega-
tion rules. Some of these comments also
suggested that the cash issuance excep-
tion should apply to issuances of stock for
non-cash property, including debt.
As previously discussed, transactions
that infuse new capital into a loss corpo-
ration are of particular concern to section
382 policies because the capital infusion
can accelerate the use of tax attributes.
This is the case even if the new investors
are Small Shareholders. Moreover, in its
current form, the cash issuance exception
dilutes the owner shifts that are attributable
to capital-raising transactions.
The IRS and the Treasury Department
request comments as to whether further re-
finement of either or both of these excep-
tions might be warranted in the context of
any potential expansion of the exceptions
proposed in this document.
F.Coordinated Acquisitions
Questions have arisen concerning the
application of §1.382–3(a), which pro-
vides, in part, that a group of persons
making a coordinated acquisition of stock
can constitute an entity for purposes of sec-
tion 382. Adding additional distinctions
between larger and smaller shareholders,
as proposed here, will increase the sig-
nificance of this provision. The IRS and
the Treasury Department are interested
in comments as to circumstances under
which a group of investors should be ag-
gregated into a single entity based on their
understandings or communications with
each other or with third persons, such as
the loss corporation or an underwriter.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866, as supplemented by Execu-
tive Order 13563. Therefore, a regulatory
assessment is not required. It is hereby cer-
tified that these regulations will not have a
significant economic impact on a substan-
tial number of small entities. The certifica-
tion is based on the fact that this rule would
not impose new burdens on small entities
and in fact, may reducethe recordkeeping
burden on small entities. Therefore, a Reg-
ulatory Flexibility Analysis under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Request for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submit-
ted timely to the IRS. In addition to the
specific requests for comments made
elsewhere in this preamble, the IRS and
the Treasury Department specifically re-
quest comments on the clarity of the
proposed regulations and how they may be
made easier to understand. All comments
will be available for public inspection
atwww.regulations.govor upon request.
A public hearing may be scheduled if
requested in writing by any person who
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place of the hearing will be
published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is Stephen R. Cleary of the Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382–3 also issued under
26 U.S.C. 382(g)(4)(C) and 26 U.S.C.
382(m). * * *
Par. 2. Section 1.382–3 is amended as
follows:
1. Adding paragraph (i).
2. Revising the heading of paragraph
(j) and the introductory text of paragraph
(j)(1).
3. Redesignating paragraphs (j)(13)
and (j)(14) as (j)(16) and (j)(17).
4. Adding new paragraphs (j)(13)
through (j)(14).
5. Adding newExamples5, 6, 7, 8,
9, 10, 11, and 12 to newly redesignated
paragraph (j)(16).
6. Revising newly redesignated para-
graph (j)(17).
The revisions and additions read as fol-
lows:
§1.382–3 Definitions and rules relating to
a 5-percent shareholder.
*****
(i)Segregation rules applicable to
transactions involving first tier or higher
tier entities—(1)In general.Thelast
sentence of §1.382–2T(j)(3)(i) applies
only if the transferor of the ownership
interest indirectly owns five percent or
more of the loss corporation. If the
transferor is an entity, ownership is deter-
mined without regard to the application of
§1.382–2T(h)(2)(i)(A).
(2)Effective/Applicability date.This
paragraph (i) applies to testing dates oc-
curring on or after the date these regula-
tions are published as final regulations in
theFederal Register.
(j)Modification of the segregation rules
of §1.382–2T(j)(2)(iii) and (3)—(1)In-
troduction. This paragraph (j) exempts,
in whole or in part, certain transfers
of stock from the segregation rules of
§1.382–2T(j)(2)(iii) and (3). Terms and
nomenclature used in this paragraph (j),
and not otherwise defined herein, have the
same meanings as in section 382 and the
regulations issued under section 382.
*****
(13)Secondary transfer exception.The
segregation rules of §1.382–2T(j)(3)(i)
will not apply to the transfer of a direct
ownership interest in the loss corporation
by a first tier entity or an individual that
owns five percent or more of the loss
2012–2 I.R.B.282January 9, 2012

corporation to publicshareholders. In-
stead, each public group existing at the
time of the transfer will be treated under
§1.382–2T(j)(3)(i) as acquiring its propor-
tionate share of the stock exempted from
the application of §1.382–2T(j)(3)(i). The
segregation rules also will not apply if an
ownership interest in an entity that owns
five percent or more of the loss corporation
(determined without regard to the appli-
cation of §1.382–2T(h)(2)(i)(A)) is trans-
ferred by either a 5-percent owner that is a
5-percent shareholder or a higher tier en-
tity owning five percent or more of the loss
corporation (determined without regard to
the application of §1.382–2T(h)(2)(i)(A)),
provided that the transferee is either a
public owner or a 5-percent owner who
is not a 5-percent shareholder. Instead,
each public group of the entity existing
at the time of the transfer is treated under
§1.382–2T(j)(3)(i) as acquiring its propor-
tionate share of the transferred ownership
interest.
(14)Small redemption exception—(i)
In general. Section 1.382–2T(j)(2)(iii)(C)
does not apply to a small redemption (as
defined in paragraph (j)(14)(ii) of this
section), except to the extent that the
total amount of stock redeemed in that re-
demption and all other small redemptions
previously made in the same taxable year
(determined in each case on redemption)
exceeds the small redemption limitation.
This paragraph (j)(14) does not apply to a
redemption of stock that, by itself, exceeds
the small redemption limitation.
(ii)Small redemption defined.Small
redemptionmeans a redemption of public
shareholders by the loss corporation of an
amount of stock not exceeding the small
redemption limitation.
(iii)Small redemption limitation—(A)
In general. For each taxable year, the loss
corporation may, at its option, apply this
paragraph (j)(14)—
(1) On a corporation-wide basis, in
which case the small redemption limita-
tion is 10 percent of the total value of the
loss corporation’s stock outstanding at the
beginning of the taxable year (excluding
the value of stock described in section
1504(a)(4)); or
(2) On a class-by-class basis, in which
case the small redemption limitation is 10
percent of the number of shares of the class
redeemed that are outstanding at the begin-
ning of the taxable year.
(B)Class of stock defined. For pur-
poses of this paragraph (j)(14)(iii), a class
of stock includes all stock with the same
material terms.
(C)Adjustments for stock splits and
similar transactions. Appropriate adjust-
ments to the number of shares of a class
outstanding at the beginning of a taxable
year must be made to take into account
any stock split, reverse stock split, stock
dividend to which section 305(a) applies,
recapitalization, or similar transaction oc-
curring during the taxable year.
(D)Exception. The loss corporation
may not apply this paragraph (j)(14)(iii)
on a class-by-class basis if, during the tax-
able year, more than one class of stock
is redeemed in a single redemption (or in
two or more redemptions that are treated
as a single redemption under paragraph
(j)(14)(v) of this section).
(E)Short taxable years. In the case of a
taxable year that is less than 365 days, the
small redemption limitation is reduced by
multiplying it by a fraction, the numerator
of which is the number of days in the tax-
able year, and the denominator of which is
365.
(iv)Proportionate redemption of ex-
empted stock—(A)In general. Each direct
public group that exists immediately be-
fore a redemption to which this paragraph
(j)(14) applies is treated as having been
redeemed of its proportionate share of the
amount of stock exempted from the ap-
plication of §1.382–2T(j)(2)(iii)(C) under
this paragraph (j)(14).
(B)Actual knowledge of greater re-
demption. Under the last sentence of
§1.382–2T(k)(2), the loss corporation may
treat direct public groups existing im-
mediately before a redemption to which
this paragraph (j)(14) applies as hav-
ing been redeemed of more stock than
the amount determined under paragraph
(j)(14)(iv)(A) of this section, but only if
the loss corporation actually knows that
the amount redeemed from those groups
in the redemption exceeds the amount so
determined.
(v)Certain related redemptions.For
purposes of this paragraph (j)(14), two or
more redemptions (including redemptions
of stock by first tier or higher tier entities)
are treated as a single redemption if—
(A) The redemptions occur at approxi-
mately the same time pursuant to the same
plan or arrangement; or
(B) A principal purpose of redeeming
the stock in separate redemptions rather
than in a single redemption is to minimize
or avoid an owner shift under the rules of
this paragraph (j)(14).
(vi)Certain non-stock ownership inter-
ests. As the context may require, a non-
stock ownership interest in an entity other
than a corporation is treated as stock for
purposes of this paragraph (j)(14).
(15)Exception for firsttier and higher
tier entities—(i)In general. The segrega-
tion rules of §1.382–2T(j)(3)(iii) will not
apply if, after taking into account the re-
sults of such transaction and all other trans-
actions occurring on that date—
(A) The first tier or higher tier entity
owns 10 percent or less (by value) of all
the outstanding stock (without regard to
§1.382–2(a)(3)) of the loss corporation;
and
(B) The entity’s direct or indirect in-
vestment in the loss corporation does not
exceed 25 percent of the entity’s gross as-
sets. For this purpose, the entity’s cash and
cash items within the meaning of section
382(h)(3)(B)(ii) are not taken into account.
(ii)Special Rules. If paragraph
(j)(15)(i) applies to combine one or more
public groups, then—
(A) the amount of increase in the per-
centage of stock ownership of the continu-
ing public group will be the sum of its in-
crease and a proportionate amount of any
increase by any public group that is com-
bined with the continuing public group
(the former public group); and
(B) the continuing public group’s low-
est percentage ownership will be the sum
of its lowest percentage ownership and a
proportionate amount of the former public
group’s lowest percentage ownership.
(iii)Ownership of the loss corporation.
In making the determination under para-
graph (j)(15)(i)(A) of this section—
(A) The rules of §1.382–2T(h)(2) will
not apply;
(B) The entity will be treated as own-
ing the loss corporation stock that it actu-
ally owns, and any loss corporation stock
if that stock would be attributed to the en-
tity under section 318(a) (without regard
to paragraph (4) thereof unless an option
is treated as exercised under §1.382–4(d));
and
(C) The operating rules of paragraph
(j)(15)(iv) of this section will apply.
January 9, 20122832012–2 I.R.B.

(iv)Operating Rules. Subject to the
principles of §1.382–2T(k)(4), a loss cor-
poration may establish the ownership lim-
itation of paragraph (j)(15)(i)(A) of this
section through either—
(A) Actual knowledge; or
(B) Absent actual knowledge to the
contrary, the presumptions regarding stock
ownership in §1.382–2T(k)(1).
(16)Examples.***
*****
Example 5.Secondary transfer exception to seg-
regation rules — no new public group.(i)Facts.Lis
owned 60 percent by one public group (Public L
1
)and
40 percent by another public group (Public L
2
). On
July 1, 2010, A acquires 10 percent of L’s stock over
a public stock exchange. On December 31, 2010, A
sells all of his L stock over a public stock exchange.
No individual or entity acquires as much as five per-
cent of L’s stock as a result of A’s disposition of his L
stock. On January 3, 2011, B acquires 10 percent of
L’s stock over a public stock exchange. On June 30,
2011, B sells all of her L stock over a public stock ex-
change. No individual or entity acquires as much as
five percent of L’s stock as a result of B’s disposition
of her L stock.
(ii)Analysis. The dispositions of the L stock by A
and B are not transactions that cause the segregation
of L’s direct public groups that exist immediately be-
fore the transaction (Public L
1
and Public L
2
). When
A and B sell their shares to public shareholders over
the public stock exchange, the shares are treated as
beingreacquiredbyPublicL
1
and Public L
2
.As
a result, Public L
1
’s ownership interest is treated as
increasing from 54 percent to 60 percent during the
testing period, and Public L
2
’s ownership interest is
treated as increasing from 36 percent to 40 percent
during the testing period.
Example 6.Secondary transfer exception — first
tier entity.(i)Facts. L has a single class of common
stock outstanding that is owned 60 percent by a di-
rect public group (Public L) and 40 percent by P. P is
owned 20 percent by Individual A and 80 percent by
a direct public group (Public P). On October 6, 2013,
A sells 50 percent of his interest in P to B, an individ-
ual who is a member of Public P.
(ii)Analysis. P is an entity that owns five percent
or more of L. A is a 5-percent owner of P that is a
5-percent shareholder of L. Because A’s sale of the P
stock is to a member of Public P, the disposition of
the P stock by A is not a transaction that causes the
segregation of P’s direct public group that exists im-
mediately before the transaction (Public P). See para-
graph (j)(13) of this section. When A sells his shares
to B, the shares are treated as being acquired by Pub-
lic P. As a result, Public P’s ownership interest in L
is treated as increasing from 32 percent to 36 percent
during the testing period.
Example 7.Small redemption exception.(i)
Facts. L is a calendar year taxpayer. On January 1,
2010, L has 1,060 shares of a single class of common
stock outstanding, all of which are owned by a single
direct public group (Public L). On July 1, 2010, L
acquires 60 shares of its stock for cash. On Decem-
ber 31, 2010, in an unrelated redemption, L acquires
90 more shares of its stock for cash. Following each
redemption, L’s stock is owned entirely by public
shareholders. No other changes in the ownership of
L’s stock occur prior to December 31, 2010.
(ii)Analysis. The July redemption is a small
redemption because the number of shares redeemed
(60) does not exceed 106, the small redemption
limitation (10 percent of the number of common
shares outstanding on January 1, 2010). Under
paragraph (j)(14) of this section, the segregation
rules of §1.382–2T(j)(2)(iii)(C) do not apply to the
July redemption. Under paragraph (j)(14)(iv) of this
section, Public L is treated as having all 60 shares
redeemed.
(iii) The December redemption is a small redemp-
tion because the number of shares redeemed (90) does
not exceed 106, the small redemption limitation (10
percent of the number of common shares outstand-
ing on January 1, 2010). However, under paragraph
(j)(14)(i) of this section, only 46 of the 90 shares re-
deemed are exempted from the segregation rules of
§1.382–2T(j)(2)(iii)(C) because the total number of
shares of common stock redeemed in the July and De-
cember redemptions exceeds 106, the small redemp-
tion limitation, by 44. Accordingly, under paragraph
(j)(14)(iv) of this section, Public L is treated as hav-
ing 46 shares redeemed in the December redemption.
Section 1.382–2T(j)(2)(iii)(C) applies to the remain-
ing 44 shares redeemed. Accordingly, Public L is seg-
regated into two different public groups immediately
before the transaction (and thereafter) so that the re-
deemed interests (Public RL) are treated as part of a
public group that is separate from the ownership in-
terests that are not redeemed (Public CL). Therefore,
as a result of the December redemption, Public CL’s
interest in L increases by 4.4 percentage points (from
95.6 percent (956/1,000) to 100 percent (910/910))
on the December 31, 2010 testing date. For purposes
of determining whether an ownership change occurs
on any subsequent testing date having a testing period
that includes such redemption, Public CL is treated as
a 5-percent shareholder whose percentage ownership
interests in L increased by 4.4 percentage points as a
result of the redemption.
Example 8.Segregation rules inapplicable —
proportionate amount.(i)Facts.P
1
is a corporation
that owns 8 percent of the stock of L. The remaining
L stock (92 percent) is owned by Public L. P
1
is en-
tirely owned by Public P
1
. Excluding cash and cash
items within the meaning of section 382(h)(3)(B)(ii),
P
1
’s investment in L represents 11 percent of P
1
’s
gross assets. P
2
is a corporation owned 90 percent by
individual A and 10 percent by a public group (Public
P
2
). On May 22, 2013, P
1
merges into P
2
with the
shareholders of P
1
receiving an amount of P
2
stock
equal to 25 percent of the value of P
2
immediately
after the reorganization. Following the merger, P
2
’s
investment in L represents 6 percent of the combined
gross assets of P
1
and P
2
(excluding cash and cash
items). L was owned 92 percent by Public L and 8
percent by P
1
throughout the testing period ending
on the date of the merger.
(ii)Analysis. Assuming L can establish that P
2
owns 10 percent or less (by value) of L on May 22,
2013 pursuant to the operating rules of paragraph
(j)(15)(iv) of this section, the segregation rules of
§1.382–2T(j)(3)(iii) will not apply to segregate P
1
’s
direct public group (Public P
1
) immediately before
the merger from P
2
’s direct public group (Public P
2
).
Thus, following the merger, P
2
is owned 67.5 per-
cent (90% x 75%) by A and 32.5 percent (25% +
(10% x 75%)) by Public P
2
. Pursuant to paragraph
(j)(15)(ii)(B) of this section, Public P
2
’s lowest per-
centage of ownership is the sum of its lowest percent-
age of ownership (zero) and a proportionate amount
of former Public P
1
’s lowest ownership percentage of
L of 2.6 percent (32.5% x 8%). P
2
will be treated
as having one public group whose ownership interest
in L was 2.6 percent before the merger and remains
2.6 percent after the merger. Because Public P
2
owns
less than 5 percent of L, Public P
2
is treated as part
of Public L. See §1.382–2T(j)(1)(iv). Thus, pursuant
to paragraph (j)(15)(ii)(B) of this section, Public L’s
lowest ownership percentage of L during the testing
period is 94.6 percent.
Example 9.Segregation rules inapplicable —
prior increase in ownership by former public group
during testing period.(i)Facts. The facts are the
same asExample 8, except that P
1
acquired its 8
percent interest in L during the testing period that
includes the merger.
(ii)Analysis. Pursuant to the rules of paragraph
(j)(15)(ii)(A) of this section, the amount of increase
in the percentage of stock ownership by Public P
2
is the sum of its increase and any increase by a for-
mer public group (Public P
1
). Accordingly, Public
P
2
, the continuing public group, is treated as having
increased its ownership interest by 2.6 percent, and
Public L is treated as increasing its ownership inter-
est by 2.6 percent.
Example 10.Ownership limitation based upon
fair market value.(i)Facts. L has two classes
of stock outstanding, common stock and preferred
stock. The preferred stock is stock within the mean-
ing of §1.382–2(a)(3). A direct public group (Public
L) owns all of the common stock of L. P purchased
100 percent of the preferred stock of L at a time when
the preferred stock represented 9 percent of the value
of all the outstanding stock of L. The common stock
owned by Public L represents the remaining 91 per-
cent of the value of the stock of L. P has one class of
common stock outstanding, all of which is owned by
a direct public group (Public P). On October 7, 2013,
P redeems 30 percent of its single outstanding class
of common stock. Due to a decline in the relative
value of the common stock of L, the preferred stock
of L represents 40 percent of the value of all the
outstanding stock of L on the date of the redemption.
(ii)Analysis. The rules of paragraph (j)(15) of
this section do not apply to the redemption because
P owns more than 10 percent of L (by value) on that
date.
Example 11.Ownership limitation — fair market
value includes preferred stock. The facts are the same
as inExample 10, except that the preferred stock is
not stock within the meaning of §1.382–2(a)(3). The
results are the same as inExample 10.
Example 12.Ownership limitation — applica-
tion of attribution rules.(i)Facts. Individual A
owns all the outstanding stock of X. A also owns pre-
ferred stock in Y that is not stock within the mean-
ing §1.382–2(a)(3), which represents 50 percent of
the value of Y. All the Y common stock is owned by
public owners. Each of X and Y own 6 percent of the
single class of L stock outstanding. On October 6,
2013, Y redeems 15 percent of its common stock.
(ii)Analysis. In determining the ownership lim-
itation of this paragraph, the attribution rules of sec-
tion 318(a) apply. Pursuant to section 318(a)(2), A
is treated as owning the L stock owned by X. Pur-
2012–2 I.R.B.284January 9, 2012

suant to section 318(a)(3), Y is treated as owning the
L stock that A indirectly owns. Because Y’s owner-
ship of L exceeds the ownership limitation, the rules
of paragraph (j)(15) of this section do not apply.
(17)Effective/applicability date.This
paragraph (j) generally applies to is-
suances or deemed issuances of stock
in taxable years beginning on or after
November 4, 1992. However, paragraphs
(j)(13) through (j)(15) and Examples 5
through 12 of paragraph (j)(16) apply to
testing dates occurring on or after the
date these regulations are published as
final regulations in theFederal Regis-
ter. See §1.382–3(j)(14)(ii) and (iii), as
contained in 26 CFR part 1 revised as
of April 1, 1994, for the application of
paragraph (j)(10) to stock issued on the
exercise of certain options exercised on
or after November 4, 1992 and for an
election to apply paragraphs (j)(1) through
(12) retroactively to certain issuances and
deemed issuances of stock occurring in
taxable years prior to November 4, 1992.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on November 22,
2011, 8:45 a.m., and published in the issue of the Federal
Register for November 23, 2011, 76 F.R. 72362)
Change to Publication 1220,
Specifications for Filing Forms
1097, 1098, 1099, 3921,
3922, 5498, and W–2G,
Electronically (Rev. 9–2011)
Announcement 2012–2
This announcement contains an update
to Publication 1220,Specifications for Fil-
ing Forms 1097, 1098, 1099, 3921, 3922,
5498, 8935 and W–2G, Electronically, re-
vised (9–2011),concerning the filing of
Form 1099–K.
Part C. Section 6(14), Payee “B”
Record Layout for Form 1099–K, field
positions 605–608 (page 73), the reference
to Rev. Proc. 2004–43 related to Merchant
Category Codes has been deleted.
January 9, 20122852012–2 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2012–2 I.R.B.iJanuary 9, 2012

Numerical Finding List
1
Bulletins 2012–1 through 2012–2
Announcements:
2012-1, 2012-1 I.R.B.249
2012-2, 2012-2 I.R.B.285
Notices:
2012-1, 2012-2 I.R.B.260
Proposed Regulations:
REG-149625-10, 2012-2 I.R.B.279
Revenue Procedures:
2012-1, 2012-1 I.R.B.1
2012-2, 2012-1 I.R.B.92
2012-3, 2012-1 I.R.B.113
2012-4, 2012-1 I.R.B.125
2012-5, 2012-1 I.R.B.169
2012-6, 2012-1 I.R.B.197
2012-7, 2012-1 I.R.B.232
2012-8, 2012-1 I.R.B.235
2012-9, 2012-2 I.R.B.261
2012-10, 2012-2 I.R.B.273
2012-12, 2012-2 I.R.B.275
Revenue Rulings:
2012-1, 2012-2 I.R.B.255
Treasury Decisions:
9559, 2012-2 I.R.B.252
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin
2011–52, dated December 27, 2011.
January 9, 2012ii2012–2 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2012–1 through 2012–2
Notices:
2010-88
as modified by Ann. 2011-40, is superseded by
Notice 2012-1, 2012-2 I.R.B.260
Revenue Procedures:
2011-1
Superseded by
Rev. Proc. 2012-1, 2012-1 I.R.B.1
2011-2
Superseded by
Rev. Proc. 2012-2, 2012-1 I.R.B.92
2011-3
Superseded by
Rev. Proc. 2012-3, 2012-1 I.R.B.113
2011-4
Superseded by
Rev. Proc. 2012-4, 2012-1 I.R.B.125
2011-5
Superseded by
Rev. Proc. 2012-5, 2012-1 I.R.B.169
2011-6
Superseded by
Rev. Proc. 2012-6, 2012-1 I.R.B.197
2011-7
Superseded by
Rev. Proc. 2012-7, 2012-1 I.R.B.232
2011-8
Superseded by
Rev. Proc. 2012-8, 2012-1 I.R.B.235
2011-9
Superseded by
Rev. Proc. 2012-9, 2012-2 I.R.B.261
2011-10
Superseded by
Rev. Proc. 2012-10, 2012-2 I.R.B.273
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27,
2011.
2012–2 I.R.B.iiiJanuary 9, 2012

January 9, 20122012–2 I.R.B.

INTERNAL REVENUE BULLETIN
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