INCOME TAX EMPLOYEE PLANS - Internal Revenue Service · PDF fileBulletin No. 2008-16 April 21,...

Bulletin No. 2008-16April 21, 2008

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

T.D. 9384, page 792.Final regulations under section 199 of the Code revise certainrules and examples relating to the definitions of a qualified filmproduced by the taxpayer under section 199(c)(4)(A)(i)(II) and(c)(6) and an expanded affiliated group under section 199(d)(4).

T.D. 9386, page 788.Final regulations under section 165 of the Code provide guid-ance on the availability and character of a deduction for a losssustained from abandoned stock or other securities.

T.D. 9387, page 789.Final regulations under section 168 of the Code provideguidance regarding the application of normalization account-ing rules to balances of excess deferred income taxes andaccumulated deferred investment tax credits of public utilitieswhose assets cease to be public utility property.

REG–124590–07, page 801.Proposed regulations under section 954(d) of the Code provideguidance in cases in which personal property sold by a con-trolled foreign corporation is manufactured, produced, or con-structed pursuant to a contract manufacturing arrangement orby one or more branches of the controlled foreign corporation.

Notice 2008–44, page 799.2007 section 45K inflation adjustment factor. This noticeannounces the applicable inflation adjustment factor and phase-out amount for the nonconventional source fuel credit for the2007 calendar year.

EMPLOYEE PLANS

REG–151135–07, page 815.Proposed regulations under section 432 of the Code provideadditional rules for certain multiemployer defined benefit plansthat are in effect on July 16, 2006. The regulations affect spon-sors and administrators of, and participants in, multiemployerplans that are in either endangered or critical status. The reg-ulations are necessary to implement the new rules set forth insection 432 that are effective for plan years beginning after2007.

EXEMPT ORGANIZATIONS

Announcement 2008–32, page 826.The IRS has revoked its determination that Educate the Chil-dren Foundation of Long Beach, CA; CFIDS Walk-A-Thon Com-mittee of Hicksville, NY; Open Doors, Inc., of Duluth, GA; Amal-gamated Credit Counselors of Lauderhill, FL; Carter Lake Chari-table of Urbandale, IA; Christian Credit Counselors, Inc., of LasVegas, NV; In Time Youth Group of Ontario, OR; Young LionsFoundation of Sausalito, CA; Charity Connections, Ltd., of Pitts-ford, NY; and North-Tartan Area Girls Basketball Booster Clubof Oakdale, MN, qualify as organizations described in sections501(c)(3) and 170(c)(2) of the Code.

(Continued on the next page)

Finding Lists begin on page ii.

ESTATE TAX

Rev. Rul. 2008–22, page 796.Substitution power. This ruling provides guidance regardingwhether the corpus of an inter vivos trust is includible in thegrantor’s gross estate under section 2036 or 2038 of the Codeif the grantor retained the power, exercisable in a nonfiduciarycapacity, to acquire property held in the trust by substitutingother property of equivalent value. The ruling provides that,for estate tax purposes, the substitution power will not, by it-self, cause the value of the trust corpus to be includible in thegrantor’s gross estate, provided the trustee has a fiduciary obli-gation (under local law) to ensure the grantor’s compliance withthe terms of this power by satisfying itself that the propertiesacquired and substituted by the grantor are in fact of equivalentvalue and further provided that the substitution power cannotbe exercised in a manner that can shift benefits among thetrust beneficiaries.

ADMINISTRATIVE

Announcement 2008–30, page 825.This document contains corrections to final and temporary reg-ulations (T.D. 9368, 2008–6 I.R.B. 382) regarding the reduc-tion of the number of separate foreign tax credit limitation cat-egories under section 904(d) of the Code. The regulations af-fect taxpayers claiming foreign tax credits and provide guid-ance needed to comply with the statutory changes made bythe American Jobs Creation Act of 2004 (AJCA).

Announcement 2008–33, page 826.This document contains a correction to final regulations (T.D.9273, 2006–2 C.B. 394) addressing the carryover of certaintax attributes, such as earnings and profits and foreign incometax accounts, when two corporations combine in a corporatereorganization or liquidation that is described in both sections367(b) and 381 of the Code.

Announcement 2008–36, page 827.This document cancels a public hearing on proposed regula-tions (REG–114126–07, 2008–6 I.R.B. 410) that provide guid-ance relating to the reduction of the number of separate for-eign tax credit limitation categories under section 904(d) ofthe Code.

April 21, 2008 2008–16 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents 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 ofthe 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 internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2008–16 I.R.B. April 21, 2008

April 21, 2008 2008–16 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 165.—Losses26 CFR 1.165–5: Worthless securities.

T.D. 9386

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Abandonment of Stock orOther Securities

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains finalregulations concerning the availability andcharacter of a loss deduction under section165 of the Internal Revenue Code (Code)for losses sustained from abandoned stockor other securities. The final regulationsclarify the tax treatment of losses fromabandoned securities, and affect any tax-payer claiming a deduction for a loss fromabandoned securities after the date theseregulations are published in the FederalRegister.

DATES: Effective Date: These final regu-lations are effective on March 12, 2008.

Applicability Date: For dates of appli-cability, see §1.165–5(i)(2).

FOR FURTHER INFORMATIONCONTACT: Sean M. Dwyer at (202)622–5020 or Peter C. Meisel at (202)622–7750 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 1. On July 30, 2007, the IRSpublished a notice of proposed rulemaking(REG–101001–05, 2007–36 I.R.B. 548)in the Federal Register (72 FR 41468).The notice of proposed rulemaking clari-fied the treatment of abandoned stock orother securities under section 165 of theCode, specifically providing that a loss

from an abandoned security is governed bysection 165(g), and that the loss is only al-lowed if all rights in the security are per-manently surrendered and relinquished forno consideration. The IRS received nocomments in response to the notice of pro-posed rulemaking. No public hearing wasrequested or held.

The proposed regulations are adoptedas final regulations by this Treasury deci-sion.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations. Because theregulations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking that preceded this fi-nal regulation was submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Drafting Information

The principal authors of these final reg-ulations are Sean M. Dwyer, Office of theAssociate Chief Counsel (Income Tax &Accounting), and Peter C. Meisel, Officeof the Associate Chief Counsel (Corpo-rate). However, other personnel from theIRS and Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.165–5 is amended by:1. Redesignating paragraph (i) as para-

graph (j).2. Adding a new paragraph (i).The addition reads as follows:

§1.165–5 Worthless securities.

* * * * *(i) Abandonment of securities—(1)

In general. For purposes of section 165and this section, a security that becomeswholly worthless includes a security de-scribed in paragraph (a) of this section thatis abandoned and otherwise satisfies therequirements for a deductible loss undersection 165. If the abandoned securityis a capital asset and is not described insection 165(g)(3) and paragraph (d) of thissection (concerning worthless securitiesof certain affiliated corporations), the re-sulting loss is treated as a loss from thesale or exchange, on the last day of thetaxable year, of a capital asset. See section165(g)(1) and paragraph (c) of this section.To abandon a security, a taxpayer mustpermanently surrender and relinquish allrights in the security and receive no con-sideration in exchange for the security.For purposes of this section, all the factsand circumstances determine whether thetransaction is properly characterized as anabandonment or other type of transaction,such as an actual sale or exchange, contri-bution to capital, dividend, or gift.

(2) Effective/applicability date. Thisparagraph (i) applies to any abandonmentof stock or other securities after March 12,2008.

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved March 3, 2008.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on March 11,2008, 8:45 a.m., and published in the issue of the FederalRegister for March 12, 2008, 73 F.R. 13124)

2008–16 I.R.B. 788 April 21, 2008

Section 168.—AcceleratedCost Recovery System26 CFR 1.168(i)–3: Treatment of excess deferredincome tax reserve upon disposition of deregulatedpublic utility property.

T.D. 9387


Application of NormalizationAccounting Rules to Balancesof Excess Deferred IncomeTaxes and AccumulatedDeferred Investment TaxCredits of Public UtilitiesWhose Assets Cease to bePublic Utility Property


ACTION: Final Regulations.

SUMMARY: This document contains fi-nal regulations that provide guidance onthe normalization requirements applica-ble to public utilities that benefit (or havebenefited) from accelerated depreciationmethods or from the investment tax creditpermitted under pre–1991 law. Theseregulations permit a utility whose assetscease, whether by disposition, deregu-lation, or otherwise, to be public utilityproperty with respect to the utility (dereg-ulated public utility property) to return toits ratepayers the normalization reservefor excess deferred income taxes (EDFIT)with respect to those assets and, in certaincircumstances, also permit the return ofpart or all of the reserve for accumulateddeferred investment tax credits (ADITC)with respect to those assets.

DATES: Effective Date: These regulationsare effective March 20, 2008.

Applicability Date: For dates ofapplicability, see §1.46–6(k)(4) and§1.168(i)–3(d) of these regulations.

FOR FURTHER INFORMATIONCONTACT: Patrick Kirwan, at (202)622–3040 (not a toll-free number).


Background and Explanation ofProvisions

This document amends the Income TaxRegulations (26 CFR Part 1) relating tothe normalization requirements of sections168(f)(2) and 168(i)(9) of the InternalRevenue Code (Code), section 203(e)of the Tax Reform Act of 1986, PublicLaw 99–514 (100 Stat. 2146), and for-mer section 46(f) of the Code. Proposedregulations relating to the normalizationrequirements applicable to electric utili-ties that benefit (or have benefited) fromaccelerated depreciation methods or fromthe investment tax credit permitted underpre–1991 law (REG–104385–01, 2003–1C.B. 634) were published in the FederalRegister on March 4, 2003 (the 2003 pro-posed regulations) and again on December21, 2005 (2006–1 C.B. 389, the 2005proposed regulations). The preambles ofboth the 2003 proposed regulations andthe 2005 proposed regulations describethe normalization method of accountingand the reserves under the normalizationmethod for excess deferred federal incometax (EDFIT) and accumulated deferredinvestment tax credits (ADITC).

The 2003 proposed regulations pro-vided that electric utilities whose gener-ation assets become deregulated publicutility property could continue to flowthrough EDFIT reserves associated withthose assets without violating the nor-malization requirements. The rate offlowthrough was limited to the rate thatwould have been permitted under a nor-malization method of accounting if theassets had remained public utility prop-erty.

The 2003 proposed regulations pro-vided similar rules under which electricutilities could continue to flow throughADITC reserves associated with gen-eration assets that become deregulatedpublic utility property without violatingthe normalization requirements. The 2003proposed regulations addressed the treat-ment of these assets under former section46(f)(2) (relating to the use of the invest-ment credit to reduce the taxpayer’s cost ofservice) but did not address their treatmentunder former section 46(f)(1) (relating tothe use of the investment credit to reducethe taxpayer’s rate base). The 2003 pro-

posed regulations would have applied topublic utility generation property deregu-lated after March 4, 2003. Utilities wouldhave been permitted an election to applythe proposed rules to generation propertythat was deregulated on or before that date.

In response to the public comments andafter further analysis, the 2003 proposedregulations were withdrawn and were re-placed by the 2005 proposed regulations.The 2005 proposed regulations generallyretain the rule of the 2003 proposed regu-lations regarding the return of EDFIT re-serves and extend the application of therule to all public utility property.

The 2005 proposed regulations permitflowthrough of the ADITC reserve withrespect to deregulated public utility prop-erty to continue after its deregulation onlyto the extent the reduction in cost of ser-vice does not exceed, as a percentage ofthe ADITC with respect to the propertyat the time of deregulation, the percentageof the total stranded cost that the taxpayeris permitted to recover with respect to theproperty. In addition, the 2005 proposedregulations provide that the credit may notbe flowed through more rapidly than therate at which the taxpayer is permitted torecover the stranded cost with respect tothe property. The 2005 proposed regula-tions provide similar rules for property towhich former section 46(f)(1) (relating torate base restoration) applies and extendthe application of the ADITC flowthroughrules to all public utility property.

The 2005 proposed regulations gener-ally apply to any public utility propertythat becomes deregulated public util-ity property after December 21, 2005.They do not include an election to ap-ply the regulations retroactively. Forpublic utility property that became dereg-ulated public utility property on or be-fore December 21, 2005, the preambleof the 2005 proposed regulations statesthat the IRS will follow the holdings setforth in the private letter rulings pro-hibiting flowthrough of the EDFIT andADITC reserves associated with an assetafter the asset’s disposition. The 2005proposed regulations provide, however,that flowthrough will be permitted ifit is consistent with the 2003 proposedregulations and occurs during the periodbeginning on March 5, 2003, and endingon the earlier of (1) the last date on whichthe utility’s rates are determined under the

April 21, 2008 789 2008–16 I.R.B.

rate order in effect on December 21, 2005,or (2) December 21, 2007.

Written comments were received in re-sponse to the 2005 proposed regulations,and a public hearing was held on April 5,2006. Three commentators spoke at thepublic hearing. After consideration of allthe comments, the 2005 proposed regula-tions are adopted as amended by this Trea-sury decision. In general, the final regula-tions follow the approach of the 2005 pro-posed regulations.

A number of commentators suggestedthat the proposed rules should apply on anelective basis to public utility property thatwas deregulated prior to March 5, 2003, ifregulatory proceedings for the deregulatedpublic utility property are pending. Thepreamble to the 2005 proposed regulationsexplains that the Secretary’s authorityunder section 7805(b)(7) to provide forretroactive elections should not be exer-cised in a manner that impairs existingagreements between utilities and their reg-ulators. Many commentators agreed withthe objective of not disturbing previouslysettled and finalized agreements and be-lieved that a retroactive election wouldlikely result in taxpayers being compelledto reopen such agreements. The commen-tators suggested, however, that applyingthe regulations to regulatory proceedingsthat have yet to be finally decided wouldnot impair any existing agreement, andthat the final regulations should permitcontinued flowthrough of the EDFIT andADITC reserves if no final order or settle-ment agreement prescribing the treatmentof those reserves after deregulation wasin effect on December 21, 2005. Othercommentators suggested that the section7805 limitations on retroactivity do notapply to these regulations because thenormalization provisions were enacted be-fore the effective date of those limitations.The IRS and Treasury Department agreethat there is no statutory impediment thatwould prohibit the application of the regu-lations to previously deregulated property.Nevertheless, the IRS and Treasury De-partment have concluded that there is nocompelling argument in this instance forfrustrating the expectations of taxpayerswho embarked upon deregulation of theirpublic utility property before the publi-cation of the new rules. Accordingly, thefinal regulations do not depart from thegeneral practice of applying amendments

to the regulations without retroactive ef-fect and retain the prospective effectivedate of the 2005 proposed regulationswithout a retroactive election. The finalregulations retain the proposed transitionrule under which flowthrough is permittedif it is consistent with the 2003 proposedregulations and occurs during the periodbeginning on March 5, 2003, and endingon the earlier of (1) the last date on whichthe utility’s rates are determined under therate order in effect on December 21, 2005,or (2) December 21, 2007.

One commetator suggested that the reg-ulations should provide guidance concern-ing when deregulation occurs. Under theregulations, property becomes deregulatedpublic utility property when it ceases to bepublic utility property with respect to thetaxpayer. This depends on the particularfacts and circumstances and is more appro-priately addressed on a case-by-case basis.

Some commentators suggested thatthe final regulations should permitflowthrough of ADITC reserves even incases in which ratepayers do not bear thecost of the asset giving rise to the credit.The comments generally argued that thiswould be consistent with Congressionalintent to share the benefit of the creditbetween ratepayers and shareholders. TheIRS and Treasury Department agree thatthe Code provides for such sharing inthe typical situation in which ratepayersultimately bear the full cost of an assetthrough ratemaking depreciation. On theother hand, neither the statutory provi-sion nor the legislative history providesany indication that Congress intended forratepayers to share in benefits attributableto costs that they do not bear. Accordingly,for the reasons set forth in the preambleof the 2005 proposed regulations, the finalregulations retain the proposed rules relat-ing to flowthrough of the ADITC reserveand rate base restoration, including therule allowing flowthrough consistent withthe 2003 proposed regulations during thetransition period.

Commentators suggested that the use ofterms other than deregulated public utilityproperty in the preamble of the 2005 pro-posed regulations implies that a distinctionexists between property that ceases to bepublic utility property because of deregu-lation and property that ceases to be pub-lic utility property because of a dispositionor other event. To clarify that this is not

the case, the term deregulated public utilityproperty is the sole term used in the finalregulations to describe property that ceasesto be public utility property.

One commentator questioned whetherthe term deregulated public utility prop-erty includes normal retirements. The finalregulations clarify that they do not apply toordinary retirements within the meaning ofsection 1.167(a)–11(d)(3)(ii).

One commentator suggested that dereg-ulated public utility property should in-clude property that is public utility prop-erty in the hands of a transferee. Thecommentator further suggested that if thetransferee of public utility property willcontinue the flowthrough of the trans-feror’s EDFIT and ADITC reserves, fur-ther flowthrough by the transferor shouldnot be required. The IRS and TreasuryDepartment agree with these suggestions.Accordingly, the final regulations provide,on a prospective basis, that they apply toa taxpayer with respect to public utilityproperty that ceases to be public utilityproperty with respect to the taxpayer.Thus, the regulations will apply even if theproperty remains regulated public utilityproperty in the hands of a transferee. Theregulations further provide an exceptionfrom the generally applicable rule per-mitting transferor flowthrough when thetransferee will continue flowthrough ofthe EDFIT reserves. A similar exceptionwas not provided for the ADITC reservebecause transferor flowthrough of thatreserve does not occur if the transferee,rather than the transferor, is recovering thecost of the property through ratemakingdepreciation.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations and, becausethe regulations do not impose a collectionof information on small entities, the Reg-ulatory Flexibility Act (5 U.S.C. chapter6) does not apply. Therefore, a Regula-tory Flexibility Analysis is not required.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking preced-

2008–16 I.R.B. 790 April 21, 2008

ing these regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small businesses.


The principal author of the regulationsis Patrick S. Kirwan, Office of AssociateChief Counsel (Passthroughs & Special In-dustries). However, other personnel fromthe IRS and the Treasury Department par-ticipated in the development of the regula-tions.

* * * * *





Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.46–6 is amended by

adding paragraph (k) to read as follows:

§1.46–6 Limitation in case of certainregulated companies.

* * * * *(k) Treatment of accumulated deferred

investment tax credits upon the dereg-ulation of public utility property—(1)Scope—(i) In general. This paragraph(k) provides rules for the application offormer sections 46(f)(1) and 46(f)(2) ofthe Internal Revenue Code to a taxpayerwith respect to public utility property thatceases, whether by disposition, deregu-lation, or otherwise, to be public utilityproperty with respect to the taxpayer andthat is not described in paragraph (k)(1)(ii)of this section (deregulated public utilityproperty).

(ii) Exception. This paragraph (k)does not apply to property that ceasesto be public utility property with respectto the taxpayer on account of an ordi-nary retirement within the meaning of§1.167(a)–11(d)(3)(ii).

(2) Ratable amount—(i) Restorationof rate base reduction. A reduction inthe taxpayer’s rate base on account ofthe credit with respect to public utilityproperty that becomes deregulated public

utility property is restored ratably dur-ing the period after the property becomesderegulated public utility property if theamount of the reduction remaining to berestored does not, at any time during theperiod, exceed the restoration percentageof the recoverable stranded cost of theproperty at such time.

For this purpose—(A) The stranded cost of the property

is the cost of the property reduced by theamount of such cost that the taxpayer hasrecovered through regulated depreciationexpense during the period before the prop-erty becomes deregulated public utilityproperty;

(B) The recoverable stranded cost of theproperty at any time is the stranded cost ofthe property that the taxpayer will be per-mitted to recover through rates after suchtime; and

(C) The restoration percentage for theproperty is determined by dividing the re-duction in rate base remaining to be re-stored with respect to the property immedi-ately before the property becomes deregu-lated public utility property by the strandedcost of the property.

(ii) Cost of service reduction. Reduc-tions in the taxpayer’s cost of service onaccount of the credit with respect to pub-lic utility property that becomes deregu-lated public utility property are ratable dur-ing the period after the property becomesderegulated public utility property if thecumulative amount of the reduction duringsuch period does not, at any time during theperiod, exceed the flowthrough percentageof the cumulative stranded cost recoveryfor the property at such time.

For this purpose—(A) The stranded cost of the property

is the cost of the property reduced by theamount of such cost that the taxpayer hasrecovered through regulated depreciationexpense during the period before the prop-erty becomes deregulated public utilityproperty;

(B) The cumulative stranded cost re-covery for the property at any time isthe stranded cost of the property that thetaxpayer has been permitted to recoverthrough rates on or before such time; and

(C) The flowthrough percentage forthe property is determined by dividing theamount of credit with respect to the prop-erty remaining to be used to reduce cost ofservice immediately before the property

becomes deregulated public utility prop-erty by the stranded cost of the property.

(3) Cross reference. See §1.168(i)–(3)for rules relating to the treatment of bal-ances of excess deferred income taxeswhen public utility property becomesderegulated public utility property.

(4) Effective/applicability dates—(i) Ingeneral. Except as provided in paragraph(k)(4)(ii) of this section, this paragraph (k)applies to public utility property that be-comes deregulated public utility propertywith respect to a taxpayer after December21, 2005.

(ii) Property that becomes public utilityproperty of the transferee. This paragraph(k) does not apply to property that becomesderegulated public utility property with re-spect to a taxpayer on account of a transferon or before March 20, 2008, if after thetransfer the property is public utility prop-erty of the transferee.

(iii) Application of regulation project(REG–104385–01). A reduction inthe taxpayer’s cost of service will betreated as ratable if it is consistent withthe proposed rules in regulation project(REG–104385–01) (68 FR 10190) March4, 2003, and occurs during the period be-ginning on March 5, 2003, and ending onthe earlier of—

(A) The last date on which the utility’srates are determined under the rate order ineffect on December 21, 2005; or

(B) December 21, 2007.Par. 3. Section 1.168(i)–3 is added to

read as follows:

§1.168(i)–3 Treatment of excess deferredincome tax reserve upon disposition ofderegulated public utility property.

(a) Scope—(1) In general. This sec-tion provides rules for the application ofsection 203(e) of the Tax Reform Act of1986, Public Law 99–514 (100 Stat. 2146)to a taxpayer with respect to public util-ity property (within the meaning of section168(i)(10)) that ceases, whether by dispo-sition, deregulation, or otherwise, to bepublic utility property with respect to thetaxpayer and that is not described in para-graph (a)(2) of this section (deregulatedpublic utility property).

(2) Exceptions. This section does notapply to the following property:

(i) Property that ceases to be public util-ity property with respect to the taxpayer on

April 21, 2008 791 2008–16 I.R.B.

account of an ordinary retirement withinthe meaning of §1.167(a)–11(d)(3)(ii).

(ii) Property transferred by the taxpayerif after the transfer the property is publicutility property of the transferee and thetaxpayer’s excess tax reserve with respectto the property (within the meaning of sec-tion 203(e) of the Tax Reform Act of 1986)is treated as an excess tax reserve of thetransferee with respect to the property.

(b) Amount of reduction. If public util-ity property of a taxpayer becomes dereg-ulated public utility property to which thissection applies, the reduction in the tax-payer’s excess tax reserve permitted undersection 203(e) of the Tax Reform Act of1986 is equal to the amount by which thereserve could be reduced under that provi-sion if all such property had remained pub-lic utility property of the taxpayer and thetaxpayer had continued use of its normal-ization method of accounting with respectto such property.

(c) Cross reference. See §1.46–6(k) forrules relating to the treatment of accumu-lated deferred investment tax credits whenutilities dispose of regulated public utilityproperty.

(d) Effective/applicability dates—(1) Ingeneral. Except as provided in paragraph(d)(2) of this section, this section applies topublic utility property that becomes dereg-ulated public utility property after Decem-ber 21, 2005.

(2) Property that becomes public util-ity property of the transferee. This sectiondoes not apply to property that becomesderegulated public utility property with re-spect to a taxpayer on account of a transferon or before March 20, 2008, if after thetransfer the property is public utility prop-erty of the transferee.

(3) Application of regulation project(REG–104385–01). A reduction in thetaxpayer’s excess deferred income taxreserve will be treated as ratable if it isconsistent with the proposed rules in reg-ulation project (REG–104385–01) (68 FR10190) March 4, 2003, and occurs duringthe period beginning on March 5, 2003,and ending on the earlier of—

(i) The last date on which the utility’srates are determined under the rate orderin effect on December 21, 2005; or

(ii) December 21, 2007.

Linda E. Stiff,Acting Deputy Commissioner for

Services and Enforcement.





Section 199.—IncomeAttributable to DomesticProduction Activities26 CFR 1.199–3: Domestic production gross re-ceipts.

T.D. 9384


Qualified Films Under Section199


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations involving the deduction forincome attributable to domestic produc-tion activities under section 199. The finalregulations revise certain rules and exam-ples relating to the definitions of a quali-fied film produced by the taxpayer undersection 199(c)(4)(A)(i)(II) and (c)(6) andan expanded affiliated group under section199(d)(4). The final regulations affect tax-payers who produce qualified films andtaxpayers who are members of expandedaffiliated groups.

DATES: Effective Date: These regulationsare effective March 7, 2008.

Applicability Date: For dates of appli-cability, see §1.199–8(i)(8) and (9).

FOR FURTHER INFORMATIONCONTACT: Concerning §1.199–3(k),David McDonnell, at (202) 622–3040;

concerning §1.199–7, Ken Cohen (202)622–7790 (not toll-free numbers).


Background

This document amends §§1.199–3(k)and 1.199–7 of the Income Tax Regula-tions (26 CFR Part 1). Section 1.199–3(k)relates to the definition of qualified filmproduced by the taxpayer under section199(c)(4)(A)(i)(II) and (c)(6) of the Inter-nal Revenue Code (Code) and §1.199–7involves expanded affiliated groups undersection 199(d)(4). Section 199 was addedto the Code by section 102 of the Ameri-can Jobs Creation Act of 2004 (Public Law108–357, 118 Stat. 1418), and amendedby section 403(a) of the Gulf OpportunityZone Act of 2005 (Public Law 109–135,119 Stat. 25), section 514 of the Tax In-crease Prevention and Reconciliation Actof 2005 (Public Law 109–222, 120 Stat.345), and section 401 of the Tax Reliefand Health Care Act of 2006 (Public Law109–432, 120 Stat. 2922).

On June 7, 2007, the IRS and TreasuryDepartment published proposed regula-tions under section 199 (REG–103842–07,2007–28 I.R.B. 79 [72 FR 31478]). Theproposed regulations revise certain rulesand examples in T.D. 9263, 2006–25I.R.B. 1063 [71 FR 31268] relating toqualified films produced by the taxpayerunder section 199(c)(4)(A)(i)(II) and(c)(6) and expanded affiliated groups un-der section 199(d)(4). No comments werereceived responding to the notice of pro-posed rulemaking and no public hearingwas requested or held. Therefore, theproposed regulations are adopted withoutchange by this Treasury decision.

Explanation of Provisions

General Overview

Section 199(a)(1) allows a deductionequal to 9 percent (3 percent in the case oftaxable years beginning in 2005 or 2006,and 6 percent in the case of taxable yearsbeginning in 2007, 2008, or 2009) of thelesser of (A) the qualified production ac-tivities income (QPAI) of the taxpayer forthe taxable year, or (B) taxable income (de-termined without regard to section 199) forthe taxable year (or, in the case of an indi-vidual, adjusted gross income).

2008–16 I.R.B. 792 April 21, 2008

Section 199(c)(1) defines QPAI for anytaxable year as an amount equal to the ex-cess (if any) of (A) the taxpayer’s domes-tic production gross receipts (DPGR) forsuch taxable year, over (B) the sum of (i)the cost of goods sold (CGS) that are al-locable to such receipts; and (ii) other ex-penses, losses, or deductions (other thanthe deduction under section 199) that areproperly allocable to such receipts.

Section 199(c)(4)(A)(i) provides thatthe term DPGR means the taxpayer’s grossreceipts that are derived from any lease,rental, license, sale, exchange, or otherdisposition of (I) qualifying productionproperty (QPP) that was manufactured,produced, grown, or extracted by the tax-payer in whole or in significant part withinthe United States; (II) any qualified filmproduced by the taxpayer; or (III) electric-ity, natural gas, or potable water producedby the taxpayer in the United States.

Section 199(c)(6) defines a qualifiedfilm to mean any property described in sec-tion 168(f)(3) if not less than 50 percentof the total compensation relating to pro-duction of the property is compensationfor services performed in the United Statesby actors, production personnel, directors,and producers. The term does not includeproperty with respect to which records arerequired to be maintained under 18 U.S.C.2257 (generally, films, videotapes, or othermatter that depict actual sexually explicitconduct and are produced in whole or inpart with materials that have been mailedor shipped in interstate or foreign com-merce, or are shipped or transported or areintended for shipment or transportation ininterstate or foreign commerce).

Section 199(d)(4)(A) provides that allmembers of an expanded affiliated group(EAG) are treated as a single corporationfor purposes of section 199. Under sec-tion 199(d)(4)(B), an EAG is an affiliatedgroup as defined in section 1504(a), deter-mined by substituting “more than 50 per-cent” for “at least 80 percent” each placeit appears and without regard to section1504(b)(2) and (4).

Qualified Film Produced by the Taxpayer

Under section 199(c)(4)(A)(i)(II), ataxpayer’s gross receipts qualify as DPGRif the receipts are derived from any lease,rental, license, sale, exchange, or otherdisposition of any qualified film (as de-

fined in section 199(c)(6)) produced bythe taxpayer. A film must be both a “qual-ified film” under section 199(c)(6) and“produced by the taxpayer” under section199(c)(4)(A)(i)(II) in order for the grossreceipts to qualify as DPGR. However, asdiscussed in the preamble to the proposedregulations published on June 7, 2007 (72FR 31478), the “by the taxpayer” compen-sation fraction in §1.199–3(k)(5) in T.D.9263 (71 FR 31268) may have resulted ina film that was produced entirely withinthe United States as not qualifying undersection 199(c)(6) if less than 50 percent ofthe total compensation relating to produc-tion was paid “by the taxpayer.”

This Treasury decision revises the“by the taxpayer” compensationfraction in §1.199–3(k)(5) in T.D. 9263(71 FR 31268) for determining thenot-less-than-50-percent-of-the-total-com-pensation requirement under§1.199–3(k)(1). Under the revisedfraction in §1.199–3(k)(5), the numeratorof the revised fraction is the compensationfor services performed in the UnitedStates and the denominator is the totalcompensation for services regardlessof where the production activities areperformed. The revised fractionessentially compares (in the numerator)the sum of the compensation for servicespaid by the taxpayer for servicesperformed in the United States and thecompensation for services paid by othersfor services performed in the UnitedStates to (in the denominator) the sum ofthe total compensation for services paidby the taxpayer for services and the totalcompensation for services paid by othersfor services regardless of location.

Under §1.199–3(k)(6), a film that is aqualified film under §1.199–3(k)(1) willbe treated as “produced by the taxpayer”for purposes of section 199(c)(4)(A)(i)(II)if the production activity performed by thetaxpayer is substantial in nature within themeaning of §1.199–3(g)(2). Thus, a qual-ified film will be treated as produced bythe taxpayer if the production of the qual-ified film by the taxpayer is substantial innature taking into account all of the factsand circumstances, including the relativevalue added by, and relative cost of, thetaxpayer’s production activity, the natureof the qualified film, and the nature of theproduction activity that the taxpayer per-forms.

The revised fraction in §1.199–3(k)(5)follows the statutory language in section199(c)(6) by referencing all compensationfor services related to the production asopposed to the more limited “by the tax-payer” compensation fraction in T.D. 9263(71 FR 31268). Because taxpayers mayhave difficulty obtaining information re-lated to the compensation paid by others,this Treasury decision provides a safe har-bor in §1.199–3(k)(7) that treats a film asa qualified film if not less than 50 percentof the total compensation for services paidby the taxpayer is compensation for ser-vices performed in the United States. Thesafe harbor further provides that a quali-fied film will be treated as produced by thetaxpayer if the taxpayer satisfies the safeharbor in §1.199–3(g)(3) with respect tothe qualified film, which requires that thedirect labor and overhead costs incurredby the taxpayer to produce the qualifiedfilm within the United States account for20 percent or more of the total costs of thefilm. Thus, a taxpayer will be treated ashaving produced a qualified film if, in con-nection with the qualified film, the directlabor and overhead of the taxpayer to pro-duce the qualified film within the UnitedStates account for 20 percent or more ofthe taxpayer’s CGS of the qualified film,or in a transaction without CGS (for exam-ple, a lease, rental, or license) account for20 percent or more of the taxpayer’s “un-adjusted depreciable basis” (as defined in§1.199–3(g)(3)(ii)) in the qualified film.

Expanded Affiliated Groups

As discussed in the preamble to theproposed regulations published on June7, 2007 (72 FR 31478), §1.199–7(e), Ex-ample 10, in T.D. 9263 (71 FR 31268)misapplies §1.1502–13 of the consoli-dated return regulations. Accordingly,§1.199–7(e), Example 10, has been re-vised to correctly apply the consolidatedreturn regulations. In addition, as alsodiscussed in the preamble to the proposedregulations published on June 7, 2007 (72FR 31478), the section 199 closing of thebooks method under §1.199–7(f)(1)(ii) inT.D. 9263 (71 FR 31268) could have cre-ated a larger section 199 deduction thanis warranted. Accordingly, this Treasurydecision removes the section 199 closingof the books method and revises the Ex-

April 21, 2008 793 2008–16 I.R.B.

ample in §1.199–7(g)(3) to apply the prorata allocation method.

Effective/Applicability Dates

Sections 1.199–3(k) and 1.199–7(e),Example 10, (f)(1), and (g)(3) are applica-ble to taxable years beginning on or afterMarch 7, 2008. A taxpayer may apply§§1.199–3(k) and 1.199–7(e), Example10, to taxable years beginning after De-cember 31, 2004, and before March 7,2008. However, for taxable years begin-ning before June 1, 2006, a taxpayer mayrely on §1.199–3(k) only if the taxpayerdoes not apply Notice 2005–14, 2005–1C.B. 498 (see §601.601(d)(2)(ii)(b)), orREG–105847–05, 2005–2 C.B. 987 (see§601.601(d)(2)(ii)(b)), to the taxable year.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to this regulation, and becausethe regulation does not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking preceding this regu-lation was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.


The principal author of these regula-tions is David H. McDonnell, Office of theAssociate Chief Counsel (Passthroughsand Special Industries), IRS. However,other personnel from the IRS and TreasuryDepartment participated in their develop-ment.

* * * * *





Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.199–0 is amended by:1. Revising the entries for

§1.199–3(k)(6) and (7).2. Adding new entries for

§§1.199–3(k)(7)(i) and (ii); (8), (9), and(10); and 1.199–8(i)(8) and (9).

3. Removing the entries for§1.199–7(f)(1)(i), (ii), and (iii).

The additions and revisions read as fol-lows:

§1.199–0 Table of contents.

* * * * *

§1.199–3 Domestic production grossreceipts.

* * * * *(k) * * *(6) Produced by the taxpayer.(7) Qualified film produced by the tax-

payer — safe harbor.(i) Safe harbor.(ii) Determination of 50 percent.(8) Production pursuant to a contract.(9) Exception.(10) Examples.

* * * * *

§1.199–8 Other rules.

* * * * *(i) * * *(8) Qualified film produced by the tax-

payer.(9) Expanded affiliated groups.

* * * * *Par. 3. Section 1.199–3 is amended by:1. Revising paragraphs (k)(1), (k)(4),

and (k)(5).2. Redesignating paragraph (k)(6) as

(k)(9).3. Redesignating paragraph (k)(7) as

(k)(10).4. Adding new paragaphs (k)(6), (k)(7),

and (k)(8).5. Revising Example 6 of newly redes-

ignated paragraph (k)(10).The revisions and additions read as fol-

lows:

§1.199–3 Domestic production grossreceipts.

* * * * *(k) Definition of qualified film—(1) In

general. The term qualified film meansany motion picture film or video tape un-der section 168(f)(3), or live or delayedtelevision programming (film), if not lessthan 50 percent of the total compensationrelating to the production of such film iscompensation for services performed inthe United States by actors, productionpersonnel, directors, and producers. Forpurposes of this paragraph (k), the termactors includes players, newscasters, orany other persons who are compensatedfor their performance or appearance in afilm. For purposes of this paragraph (k),the term production personnel includeswriters, choreographers and composerswho are compensated for providing ser-vices during the production of a film,as well as casting agents, camera opera-tors, set designers, lighting technicians,make-up artists, and other persons who arecompensated for providing services thatare directly related to the production ofthe film. Except as provided in paragraph(k)(2) of this section, the definition of aqualified film does not include tangiblepersonal property embodying the qualifiedfilm, such as DVDs or videocassettes.

* * * * *(4) Compensation for services. For

purposes of this paragraph (k), the termcompensation for services means all pay-ments for services performed by actors,production personnel, directors, and pro-ducers relating to the production of thefilm, including participations and resid-uals. Payments for services include allelements of compensation as provided forin §1.263A–1(e)(2)(i)(B) and (3)(ii)(D).Compensation for services is not limitedto W–2 wages and includes compensationpaid to independent contractors. In thecase of a taxpayer that uses the incomeforecast method of section 167(g) and cap-italizes participations and residuals intothe adjusted basis of the qualified film,the taxpayer must use the same estimateof participations and residuals in deter-mining compensation for services. In thecase of a taxpayer that excludes partici-pations and residuals from the adjustedbasis of the qualified film under section167(g)(7)(D)(i), the taxpayer must use

2008–16 I.R.B. 794 April 21, 2008

the amount expected to be paid as partic-ipations and residuals based on the totalforecasted income used in determining in-come forecast depreciation in determiningcompensation for services.

(5) Determination of 50 percent.The not-less-than-50-percent-of-the-to-tal-compensation requirement under para-graph (k)(1) of this section is calculatedusing a fraction. The numerator of thefraction is the compensation for servicesperformed in the United States and thedenominator is the total compensation forservices regardless of where the produc-tion activities are performed. A taxpayermay use any reasonable method that issatisfactory to the Secretary based on allof the facts and circumstances, includ-ing all historic information available, todetermine the compensation for servicesperformed in the United States and thetotal compensation for services regardlessof where the production activities are per-formed. Among the factors to be consid-ered in determining whether a taxpayer’smethod of allocating compensation is rea-sonable is whether the taxpayer uses thatmethod consistently from one taxable yearto another.

(6) Produced by the taxpayer. A qual-ified film will be treated as producedby the taxpayer for purposes of section199(c)(4)(A)(i)(II) if the production activ-ity performed by the taxpayer is substantialin nature within the meaning of paragraph(g)(2) of this section. The special rules ofparagraph (g)(4) of this section regardinga contract with an unrelated person andaggregation apply in determining whetherthe taxpayer’s production activity is sub-stantial in nature. Paragraphs (g)(2) and(4) of this section are applied by substi-tuting the term qualified film for QPP anddisregarding the requirement that the pro-duction activity must be within the UnitedStates. The production activity of the tax-payer must consist of more than the minoror immaterial combination or assembly oftwo or more components of a film. Forpurposes of paragraph (g)(2) of this sec-tion, the relative value added by affixingtrademarks or trade names as defined in§1.197–2(b)(10)(i) will be treated as zero.

(7) Qualified film produced by thetaxpayer — safe harbor. A film will betreated as a qualified film under paragraph(k)(1) of this section and produced by thetaxpayer under paragraph (k)(6) of this

section (qualified film produced by thetaxpayer) if the taxpayer meets the re-quirements of paragraphs (k)(7)(i) and (ii)of this section. A taxpayer that choosesto use this safe harbor must apply all theprovisions of this paragraph (k)(7).

(i) Safe harbor. A film will be treated asa qualified film produced by the taxpayerif not less than 50 percent of the total com-pensation for services paid by the taxpayeris compensation for services performed inthe United States and the taxpayer satis-fies the safe harbor in paragraph (g)(3) ofthis section. The special rules of paragraph(g)(4) of this section regarding a contractwith an unrelated person and aggregationapply in determining whether the taxpayersatisfies paragraph (g)(3) of this section.Paragraphs (g)(3) and (4) of this sectionare applied by substituting the term qual-ified film for QPP but not disregarding therequirement that the direct labor and over-head of the taxpayer to produce the quali-fied film must be within the United States.Paragraph (g)(3)(ii)(A) of this section in-cludes any election under section 181.

(ii) Determination of 50 percent.The not-less-than-50-percent-of-the-to-tal-compensation requirement under para-graph (k)(7)(i) of this section is calcu-lated using a fraction. The numerator ofthe fraction is the compensation for ser-vices paid by the taxpayer for servicesperformed in the United States and thedenominator is the total compensation forservices paid by the taxpayer regardlessof where the production activities are per-formed. For purposes of this paragraph(k)(7)(ii), the term paid by the taxpayerincludes amounts that are treated as paidby the taxpayer under paragraph (g)(4)of this section. A taxpayer may use anyreasonable method that is satisfactory tothe Secretary based on all of the facts andcircumstances, including all historic infor-mation available, to determine the com-pensation for services paid by the taxpayerfor services performed in the United Statesand the total compensation for servicespaid by the taxpayer regardless of wherethe production activities are performed.Among the factors to be considered indetermining whether a taxpayer’s methodof allocating compensation is reasonableis whether the taxpayer uses that methodconsistently from one taxable year to an-other.

(8) Production pursuant to a contract.With the exception of the rules applicableto an expanded affiliated group (EAG) un-der §1.199–7 and EAG partnerships under§1.199–3(i)(8), only one taxpayer mayclaim the deduction under §1.199–1(a)with respect to any activity related to theproduction of a qualified film performedin connection with the same qualified film.If one taxpayer performs a production ac-tivity pursuant to a contract with anotherparty, then only the taxpayer that has thebenefits and burdens of ownership of thequalified film under Federal income taxprinciples during the period in which theproduction activity occurs is treated asengaging in the production activity.

* * * * *(10) * * *Example 6. X creates a television program in

the United States that includes scenes from films li-censed by X from unrelated persons Y and Z. Assumethat Y and Z produced the films licensed by X. Thenot-less-than-50-percent-of-the-total-compensationrequirement under paragraph (k)(1) of this sectionis determined by reference to all compensation forservices paid in the production of the television pro-gram, including the films licensed by X from Y andZ, and is calculated using a fraction as described inparagraph (k)(5) of this section. The numerator of thefraction is the compensation for services performedin the United States and the denominator is the totalcompensation for services regardless of where theproduction activities are performed. However, forpurposes of calculating the denominator, in deter-mining the total compensation paid by Y and Z, Xneed only include the total compensation paid by Yand Z to actors, production personnel, directors, andproducers for the production of the scenes used by Xin creating its television program.

* * * * *Par. 4. Section 1.199–7 is amended by:1. Revising Example 10 of paragraph

(e).2. Revising paragraphs (f)(1) and

(g)(3).The revisions read as follows:

§1.199–7 Expanded affiliated groups.

* * * * *(e) * * *Example 10. (i) Facts. Corporation P owns all

of the stock of Corporations S and B. P, S, and B filea consolidated Federal income tax return on a calen-dar year basis. P, S, and B each uses the section 861method for allocating and apportioning their deduc-tions. In 2010, S MPGE QPP in the United States ata cost of $1,000. On November 30, 2010, S sells theQPP to B for $2,500. On February 28, 2011, P sells60% of the stock of B to X, an unrelated person. OnJune 30, 2011, B sells the QPP to U, another unre-lated person, for $3,000.

April 21, 2008 795 2008–16 I.R.B.

(ii) Consolidated group’s 2010 QPAI. Because Sand B are members of a consolidated group in 2010,pursuant to §1.199–7(d)(1) and §1.1502–13, neitherS’s $1,500 of gain on the sale of QPP to B nor S’s$2,500 gross receipts from the sale are taken into ac-count in 2010. Accordingly, neither S nor B has QPAIin 2010.

(iii) Consolidated group’s 2011 QPAI. B becomesa nonmember of the consolidated group at the end ofthe day on February 28, 2011, the date on which Psells 60% of the B stock to X. Under §1.199–7(d)(1)and §1.1502–13(d), S takes the intercompany trans-action into account immediately before B becomesa nonmember of the consolidated group. Pursuantto §1.1502–13(d)(1)(ii)(A)(1), because the QPP isowned by B, a nonmember of the consolidated groupimmediately after S’s gain is taken into account, B istreated as selling the QPP to a nonmember for $2,500,B’s adjusted basis in the property, immediately be-fore B becomes a nonmember of the consolidatedgroup. Accordingly, immediately before B becomesa nonmember of the consolidated group, S takes intoaccount $1,500 of QPAI (S’s $2,500 DPGR receivedfrom B - S’s $1,000 cost of MPGE the QPP).

(iv) B’s 2011 QPAI. Pursuant to§1.1502–13(d)(2)(i)(B), the attributes of B’scorresponding item, that is, its sale of the QPP toU, are determined as if the S division (but not theB division) were transferred by the P, S, and Bconsolidated group (treated as a single corporation)to an unrelated person. Thus, S’s activities in MPGEthe QPP before the intercompany sale of the QPP toB continue to affect the attributes of B’s sale of theQPP. As such, B is treated as having MPGE the QPP.Accordingly, upon its sale of the QPP, B has $500 ofQPAI (B’s $3,000 DPGR received from U minus B’s$2,500 cost of MPGE the QPP).

* * * * *(f) Allocation of income and loss by a

corporation that is a member of the ex-panded affiliated group for only a portionof the year—(1) In general. A corporationthat becomes or ceases to be a member ofan EAG during its taxable year must allo-cate its taxable income or loss, QPAI, andW–2 wages between the portion of the tax-able year that it is a member of the EAGand the portion of the taxable year that itis not a member of the EAG. This alloca-tion of items is made by using the pro rataallocation method described in this para-graph (f)(1). Under the pro rata allocationmethod, an equal portion of a corporation’staxable income or loss, QPAI, and W–2wages for the taxable year is assigned toeach day of the corporation’s taxable year.Those items assigned to those days that thecorporation was a member of the EAG arethen aggregated.

* * * * *(g) * * *

(3) Example. The following exampleillustrates the application of paragraphs (f)and (g) of this section:

Example. (i) Facts. Corporations X and Y, calen-dar year corporations, are members of the same EAGfor the entire 2010 taxable year. Corporation Z, also acalendar year corporation, is a member of the EAG ofwhich X and Y are members for the first half of 2010and not a member of any EAG for the second half of2010. During the 2010 taxable year, neither X, Y, norZ joins in the filing of a consolidated Federal incometax return. Assume that X, Y, and Z each has W–2wages in excess of the section 199(b) wage limita-tion for all relevant periods. In 2010, X has taxableincome of $2,000 and QPAI of $600, Y has a taxableloss of $400 and QPAI of ($200), and Z has taxableincome of $1,400 and QPAI of $2,400.

(ii) Analysis. Pursuant to the pro rata allocationmethod, $700 of Z’s 2010 taxable income and $1,200of Z’s 2010 QPAI are allocated to the first half of the2010 taxable year (the period in which Z is a memberof the EAG) and $700 of Z’s 2010 taxable income and$1,200 of Z’s 2010 QPAI are allocated to the secondhalf of the 2010 taxable year (the period in which Zis not a member of any EAG). Accordingly, in 2010,the EAG has taxable income of $2,300 (X’s $2,000 +Y’s ($400) + Z’s $700) and QPAI of $1,600 (X’s $600+ Y’s ($200) + Z’s $1,200). The EAG’s section 199deduction for 2010 is therefore $144 (9% of the lesserof the EAG’s $2,300 of taxable income or $1,600 ofQPAI). Pursuant to §1.199–7(c)(1), this $144 deduc-tion is allocated to X, Y, and Z in proportion to theirrespective QPAI. Accordingly, X is allocated $48 ofthe EAG’s section 199 deduction, Y is allocated $0 ofthe EAG’s section 199 deduction, and Z is allocated$96 of the EAG’s section 199 deduction. For the sec-ond half of 2010, Z has taxable income of $700 andQPAI of $1,200. Therefore, for the second half of2010, Z has a section 199 deduction of $63 (9% ofthe lesser of its $700 taxable income or $1,200 QPAIfor the second half of 2010). Accordingly, X’s 2010section 199 deduction is $48, Y’s 2010 section 199deduction is $0, and Z’s 2010 section 199 deductionis $159, the sum of the $96 section 199 deduction ofthe EAG allocated to Z for the first half of 2010 andZ’s $63 section 199 deduction for the second half of2010.

* * * * *Par. 5. Section 1.199–8 is amended by:1. Adding two sentences at the end of

paragraph (a).2. Adding new paragraphs (i)(8) and

(i)(9).The revisions and additions read as fol-

lows:

§1.199–8 Other rules.

(a) In general. * * * For purposes of§§1.199–1 through 1.199–9, use of termssuch as payment, paid, incurred, or paidor incurred is not intended to provide anyspecific rule based upon the use of oneterm versus another. In general, the useof the term payment, paid, incurred, or

paid or incurred is intended to convey theappropriate standard under the taxpayer’smethod of accounting.

* * * * *(i) * * *(8) Qualified film produced by the tax-

payer. Section 1.199–3(k) is applicableto taxable years beginning on or afterMarch 7, 2008. A taxpayer may apply§1.199–3(k) to taxable years beginning af-ter December 31, 2004, and before March7, 2008. However, for taxable years begin-ning before June 1, 2006, a taxpayer mayrely on §1.199–3(k) only if the taxpayerdoes not apply Notice 2005–14, 2005–1C.B. 498 (see §601.601(d)(2)(ii)(b) of thischapter), or REG–105847–05, 2005–2C.B. 987 (see §601.601(d)(2)(ii)(b) of thischapter), to the taxable year.

(9) Expanded affiliated groups. Section1.199–7(e), Example 10, (f)(1), and (g)(3)are applicable to taxable years beginningon or after March 7, 2008. A taxpayer mayapply §1.199–7(e), Example 10, to taxableyears beginning after December 31, 2004,and before March 7, 2008.





(Filed by the Office of the Federal Register on March 6, 2008,8:45 a.m., and published in the issue of the Federal Registerfor March 7, 2008, 73 F.R. 12268)

Section 2036.—TransfersWith Retained Life Estate26 CFR 20.2036–1: Transfers with retained life es-tate.(Also § 2038; 20.2038–1.)

Substitution power. This ruling pro-vides guidance regarding whether the cor-pus of an inter vivos trust is includiblein the grantor’s gross estate under section2036 or 2038 of the Code if the grantorretained the power, exercisable in a non-fiduciary capacity, to acquire property heldin the trust by substituting other propertyof equivalent value. The ruling providesthat, for estate tax purposes, the substitu-tion power will not, by itself, cause thevalue of the trust corpus to be includible

2008–16 I.R.B. 796 April 21, 2008

in the grantor’s gross estate, provided thetrustee has a fiduciary obligation (under lo-cal law) to ensure the grantor’s compliancewith the terms of this power by satisfyingitself that the properties acquired and sub-stituted by the grantor are in fact of equiv-alent value and further provided that thesubstitution power cannot be exercised ina manner that can shift benefits among thetrust beneficiaries.

Rev. Rul. 2008–22

ISSUE

Is the corpus of an inter vivos trust in-cludible in the grantor’s gross estate un-der § 2036 or 2038 of the Internal RevenueCode if the grantor retained the power, ex-ercisable in a nonfiduciary capacity, to ac-quire property held in the trust by substi-tuting other property of equivalent value?

FACTS

In Year 1, D, a United States citizen,established and funded Trust. Trust is anirrevocable inter vivos trust for the ben-efit of D’s descendants. T is the trusteeof Trust, and D is prohibited from servingas trustee under the terms of Trust. Thegoverning instrument provides that D hasthe power, exercisable at any time, to ac-quire any property held in Trust by substi-tuting other property of equivalent value.The power is exercisable by D in a non-fiduciary capacity, without the approval orconsent of any person acting in a fiduciarycapacity. To exercise the power of substi-tution, D must certify in writing that thesubstituted property and the trust propertyfor which it is substituted are of equiva-lent value. In addition, under local law, Thas a fiduciary obligation to ensure that theproperties being exchanged are of equiva-lent value. Under local law, if a trust hastwo or more beneficiaries, the trustee hasa duty to act impartially in investing andmanaging the trust assets, taking into ac-count any differing interests of the benefi-ciaries. Further, under local law and with-out restriction in the trust instrument, Thas the discretionary power to acquire, in-vest, reinvest, exchange, sell, convey, con-trol, divide, partition, and manage the trustproperty in accordance with the standardsprovided by law.

D dies in Year 2.

LAW AND ANALYSIS

Section 2036(a) provides that the valueof the gross estate shall include the valueof all property to the extent of any interesttherein of which the decedent has at anytime made a transfer (except in the caseof a bona fide sale for an adequate andfull consideration in money or money’sworth), by trust or otherwise, under whichthe decedent has retained for life or for anyperiod not ascertainable without referenceto the decedent’s death or for any periodthat does not in fact end before the dece-dent’s death, (1) the possession or enjoy-ment of, or the right to the income from,the property, or (2) the right, either aloneor in conjunction with any person, to desig-nate the persons who shall possess or enjoythe property or the income from the prop-erty.

Section 2038(a)(1) provides that thevalue of the gross estate includes the valueof all property to the extent of any interesttherein of which the decedent has at anytime made a transfer (except in the caseof a bona fide sale for an adequate andfull consideration in money or money’sworth), by trust or otherwise, where theenjoyment thereof was subject at the dateof the decedent’s death to any changethrough the exercise of a power (in what-ever capacity exercisable) by the decedentalone or by the decedent in conjunctionwith any other person to alter, amend,revoke, or terminate, or where any suchpower is relinquished during the 3-yearperiod ending on the date of the decedent’sdeath.

In Estate of Jordahl v. Commissioner,65 T.C. 92 (1975), acq. in result, 1977–2C.B. 1, the decedent created an inter vivostrust. Under the terms of the trust, thedecedent reserved the power to substituteother securities or property for those heldin trust, provided the substituted propertywas equal in value to the property replaced.After the decedent’s death, the Service ar-gued that the trust assets were includiblein the decedent’s gross estate under § 2038because the decedent’s power to substituteassets of equal value could be exercisedto alter the beneficial interests in the trust.The court determined, however, that be-cause the decedent was bound by fiduciarystandards and was therefore accountablein equity to the succeeding income ben-eficiary and remaindermen, the decedent

could not exercise the power to deplete thetrust or to shift trust benefits among thebeneficiaries. Accordingly, the court heldthat the substitution power was not a powerto alter, amend, or revoke the trust withinthe meaning of § 2038.

In general, a trustee has a fiduciary dutyto the trust and its beneficiaries. As a re-sult, the trustee is held to a high standard ofconduct with respect to the administrationof the trust. A trustee is under a duty tothe beneficiaries of the trust to administerthe trust solely in the interest of the benefi-ciaries. The trustee must act fairly, justly,honestly, in the utmost good faith, and withsound judgment and prudence. 90A C.J.S.Trusts § 323 (2007). The trustee is alsosubject to a duty of impartiality that re-quires the trustee to take into account theinterests of all the beneficiaries for whomthe trustee is acting. Restatement (Third)of Trusts §§ 183 and 232 (2007); 76 Am.Jur. 2d Trusts § 434 (2008). A trusteemust administer the trust solely in the inter-ests of the beneficiaries. Generally, a sale,encumbrance, or other transaction involv-ing the investment or management of trustproperty entered into by the trustee for thetrustee’s own personal account or which isotherwise affected by a conflict betweenthe trustee’s fiduciary and personal inter-ests may be voidable by a beneficiary af-fected by the transaction. Uniform TrustCode § 802 (2005). If a trust has two ormore beneficiaries, the trustee must act im-partially in investing, managing, and dis-tributing the trust property, giving due re-gard to the beneficiaries’ respective inter-ests. Uniform Trust Code § 803 (2005).See also, Sallee v. Fort Knox NationalBank, et. al., 286 F.3d 878, 891 (6th Cir.2002) (distinguishing between a duty ofgood faith and fair dealing, requiring par-ties to “deal fairly” with one another, andthe more onerous fiduciary duty that re-quires a party to place the interest of theother party before one’s own interests).

In situations where the grantor of a trustholds a nonfiduciary power to replace trustassets with assets of equivalent value, thetrustee has a duty to ensure that the valueof the assets being replaced is equivalentto the value of the assets being substi-tuted. If the trustee knows or has reasonto believe that the exercise of the substi-tution power does not satisfy the terms ofthe trust instrument because the assets be-ing substituted have a lesser value than the

April 21, 2008 797 2008–16 I.R.B.

trust assets being replaced, the trustee hasa fiduciary duty to prevent the exerciseof the power. See Restatement (Third) ofTrusts § 75 (2007) and Uniform Trust Code§§ 801 and 802 (2005).

In the instant case, unlike the situationpresented in Estate of Jordahl, the trust in-strument expressly prohibits D from serv-ing as trustee and states that D’s powerto substitute assets of equivalent value isheld in a nonfiduciary capacity. Thus, Dis not subject to the rigorous standards at-tendant to a power held in a fiduciary ca-pacity. However, under the terms of thetrust, the assets D transfers into the trustmust be equivalent in value to the assets Dreceives in exchange. In addition, T hasa fiduciary obligation to ensure that theassets exchanged are of equivalent value.Thus, D cannot exercise the power to sub-stitute assets in a manner that will reducethe value of the trust corpus or increase D’snet worth. Further, in view of T’s abil-ity to reinvest the assets and T’s duty ofimpartiality regarding the trust beneficia-ries, T must prevent any shifting of ben-efits between or among the beneficiariesthat could otherwise result from a substitu-tion of property by D. Under these circum-stances, D’s retained power will not cause

the value of the trust corpus to be includedin D’s gross estate under § 2036 or 2038.

HOLDING

A grantor’s retained power, exercis-able in a nonfiduciary capacity, to acquireproperty held in trust by substituting prop-erty of equivalent value will not, by itself,cause the value of the trust corpus to be in-cludible in the grantor’s gross estate under§ 2036 or 2038, provided the trustee has afiduciary obligation (under local law or thetrust instrument) to ensure the grantor’scompliance with the terms of this powerby satisfying itself that the properties ac-quired and substituted by the grantor arein fact of equivalent value, and furtherprovided that the substitution power can-not be exercised in a manner that can shiftbenefits among the trust beneficiaries. Asubstitution power cannot be exercised ina manner that can shift benefits if: (a) thetrustee has both the power (under locallaw or the trust instrument) to reinvest thetrust corpus and a duty of impartiality withrespect to the trust beneficiaries; or (b)the nature of the trust’s investments or thelevel of income produced by any or all ofthe trust’s investments does not impact the

respective interests of the beneficiaries,such as when the trust is administered as aunitrust (under local law or the trust instru-ment) or when distributions from the trustare limited to discretionary distributionsof principal and income.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Mayer Samuels of the Office of theAssociate Chief Counsel (Passthroughsand Special Industries). For further in-formation regarding this revenue ruling,contact Mr. Samuels at (202) 622–3090(not a toll-free call).

Section 2038.—RevocableTransfers26 CFR 20.2038–1: Revocable transfers.

Is the corpus of an inter vivos trust includible inthe grantor’s gross estate under section 2036 or 2038of the Internal Revenue Code if the grantor retainedthe power, exercisable in a nonfiduciary capacity, toacquire property held in the trust by substituting otherproperty of equivalent value. See Rev. Rul. 2008-22,page 796.

2008–16 I.R.B. 798 April 21, 2008

Part III. Administrative, Procedural, and MiscellaneousNonconventional Source FuelCredit, Section 45K InflationAdjustment Factor, andSection 45K Reference Price

Notice 2008–44

SECTION 1. PURPOSE

This notice publishes the nonconven-tional source fuel credit, inflation adjust-ment factor, and reference price under§ 45K of the Internal Revenue Code forcalendar year 2007. These are used to de-termine the credit allowable under § 45Kfor fuel produced from a nonconventionalsource. The calendar year 2007 infla-tion-adjusted credit applies to the sales ofbarrel-of-oil equivalent of qualified fuelssold by a taxpayer to an unrelated personduring the 2007 calendar year, the domes-tic production of which is attributable tothe taxpayer.

SECTION 2. BACKGROUND

Section 45K(a) provides for a creditfor producing fuel from a nonconventionalsource, measured in barrel-of-oil equiva-lent of qualified fuels, the production ofwhich is attributable to the taxpayer and issold by the taxpayer to an unrelated per-son during the tax year. The credit is equalto the product of $3.00 and the appropriateinflation adjustment factor.

Section 45K(b)(1) and (2) provides fora phase-out of the credit. The credit al-lowable under § 45K(a) must be reducedby an amount which bears the same ratioto the amount of the credit (determinedwithout regard to § 45K(b)(1)) as theamount by which the reference price forthe calendar year in which the sale occursexceeds $23.50 bears to $6.00. The $3.00in § 45K(a) and the $23.50 and $6.00 eachmust be adjusted by multiplying theseamounts by the appropriate inflation ad-justment factor.

Section 45K(c)(1), in part, defines theterm “qualified fuels” to include gas pro-duced from biomass and liquid, gaseous,or solid synthetic fuels produced from coal(including lignite), including such fuelswhen used as feedstocks.

Section 45K(d)(1) provides that thecredit applies only to sales of qualified

fuels the production of which is withinthe United States (within the meaning of§ 638(1)) or a possession of the UnitedStates (within the meaning of § 638(2)).

Section 45K(d)(2)(A) requires that theSecretary, not later than April 1 of each cal-endar year, determine and publish in theFederal Register the inflation adjustmentfactor and the reference price for the pre-ceding calendar year.

Section 45K(d)(2)(B) defines “inflationadjustment factor” for a calendar year asa fraction the numerator of which is theGNP implicit price deflator for the calen-dar year and the denominator of which isthe GNP implicit price deflator for calen-dar year 1979. The term “GNP implicitprice deflator” means the first revision ofthe implicit price deflator for the gross na-tional product as computed and publishedby the Department of Commerce.

Section 45K(d)(2)(C) defines “refer-ence price” to mean with respect to acalendar year the Secretary’s estimate ofthe annual average wellhead price per bar-rel for all domestic crude oil the price ofwhich is not subject to regulation by theUnited States.

Section 45K(d)(5) provides that theterm “barrel-of-oil equivalent” with re-spect to any fuel generally means thatamount of the fuel that has a Btu contentof 5.8 million.

Section 45K(g)(1) provides that in thecase of a facility for producing coke orcoke gas, which was placed in servicebefore January 1, 1993, or after June30, 1998, and before January 1, 2010,§ 45K(g) shall apply with respect to cokeand coke gas produced in such facilityand sold during the period beginning onthe later of January 1, 2006, or the datethat such facility is placed in service, andending on the date which is 4 years afterthe date such period began.

Section 45K(g)(2)(B) provides thatin determining the amount of credit al-lowable under § 45K solely by reasonof § 45K(g), § 45K(d)(2)(B) shall be ap-plied by substituting “2004” for “1979.”Accordingly, for purposes of § 45K(g),the inflation adjustment factor for a cal-endar year is a fraction the numerator ofwhich is the GNP implicit price deflatorfor the calendar year and the denominator

of which is the GNP implicit price deflatorfor calendar year 2004.

Section 45K(g)(2)(D) provides that thephase-out of the credit under § 45K(b)(1)does not apply in the case of facilities pro-ducing coke or coke gas.

SECTION 3. REFERENCE PRICE

The reference price for calendar year2007 is $66.52.

SECTION 4. INFLATIONADJUSTMENT AND CREDITAMOUNT

.01 Gas Produced from Biomass andLiquid, Gaseous, or Solid Synthetic FuelProduced from Coal.

In the case of gas produced frombiomass and liquid, gaseous, or solidsynthetic fuel produced from coal, theinflation adjustment factor for calendaryear 2007 is 2.4160. Because the calendaryear 2007 reference price exceeds $23.50multiplied by the inflation adjustmentfactor, the credit per barrel equivalent ofqualified fuel sold in calendar year 2007is reduced by $4.87, which is the amountthat bears the same ratio to the amount ofthe credit (determined without regard to§ 45K(b)(1)) as the amount by which thereference price for the calendar year 2007exceeds $23.50 (adjusted for inflation)bears to $6.00 (adjusted for inflation).

The phase-out amount is computed asfollows:

($3.00 x 2.4160) x [($66.52 - ($23.50 x2.4160)) / ($6.00 x 2.4160)] = $4.87.

The nonconventional source fuel creditunder § 45K(a) is $2.38 per barrel-of-oilequivalent of qualified fuels [($3.00 x2.4160) - $4.87].

.02 Facilities for Producing Coke orCoke Gas. In case of facilities producingcoke or coke gas, the inflation adjustmentfactor for calendar year 2007 is 1.0936.The nonconventional source fuel credit is$3.28 per barrel-of-oil equivalent ($3.00 x1.0936).

SECTION 5. DRAFTINGINFORMATION CONTACT

The principal author of this noticeis Jennifer Bernardini of the Office ofAssociate Chief Counsel (Passthroughs

April 21, 2008 799 2008–16 I.R.B.

and Special Industries). For further in-formation regarding this notice, contact

Ms. Bernardini at (202) 622–3110 (not atoll-free call).

2008–16 I.R.B. 800 April 21, 2008

Part IV. Items of General InterestNotice of ProposedRulemaking

Guidance Regarding ForeignBase Company Sales Income

REG–124590–07

AGENCY: Internal Revenue Service(IRS), Treasury Department.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations that provide guidancerelating to foreign base company salesincome, as defined in section 954(d), incases in which personal property sold bya controlled foreign corporation (CFC) ismanufactured, produced, or constructedpursuant to a contract manufacturing ar-rangement or by one or more branches ofthe CFC. These regulations, in general,will affect CFCs and their United Statesshareholders. Certain portions of theseproposed regulations restate changes to§1.954–3(a)(4) that were contained in for-mer proposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by May 28, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–124590–07),Internal Revenue Service, PO Box7604, Ben Franklin Station, Wash-ington, DC 20044 or send electron-ically, via the Federal eRulemakingPortal at www.regulations.gov (IRSREG–124590–07).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, Ethan Atticks, (202) 622–3840;concerning submissions of comments,Kelly Banks, (202) 622–0392 (not toll-freenumbers).


Background

A. Foreign Base Company Sales Income

Under section 951(a)(1)(A)(i), a UnitedStates shareholder of a CFC includes in

gross income its pro rata share of theCFC’s subpart F income for the CFC’staxable year which ends with or withinthe taxable year of the shareholder. Sec-tion 952(a)(2) defines the term “subpartF income” to mean, in part, “foreign basecompany income.” Section 954(a)(2) de-fines “foreign base company income”to include foreign base company salesincome (FBCSI) for the taxable year. Sec-tion 954(d)(1) defines FBCSI to meanincome derived by a CFC in connectionwith (1) the purchase of personal propertyfrom a related person and its sale to anyperson, (2) the sale of personal property toany person on behalf of a related person,(3) the purchase of personal property fromany person and its sale to a related person,or (4) the purchase of personal propertyfrom any person on behalf of a relatedperson, provided (in all of these cases)that the property both is manufactured,produced, grown or extracted outside ofthe CFC’s country of organization and issold for use, consumption or dispositionoutside of such country.

The Treasury regulations further defineFBCSI and the applicable exceptions fromFBCSI. These exceptions from FBCSI arecontained in §1.954–3(a)(2), which ad-dresses personal property manufactured,produced, constructed, grown, or extractedwithin the CFC’s country of organization(the same country manufacture exception),§1.954–3(a)(3), which addresses personalproperty sold for use, consumption ordisposition within the CFC’s country oforganization, and §1.954–3(a)(4) whichaddresses personal property manufac-tured, produced or constructed by the CFC(the manufacturing exception).

Section 1.954–3(a)(4)(i) provides thatFBCSI does not include income of a CFCderived in connection with the sale of per-sonal property manufactured, produced,or constructed by such corporation inwhole or in part from personal propertywhich it has purchased. It then statesgenerally that a foreign corporation isconsidered to have manufactured, pro-duced, or constructed personal propertywhich it sells if the property sold is ineffect not the property which it purchased.Specifically, §1.954–3(a)(4)(i) states thatpersonal property sold will be considered

as not being the property purchased if theprovisions of §1.954–3(a)(4)(ii) or (iii) aresatisfied.

Section 1.954–3(a)(4)(ii) and (iii) setforth two separate tests to determinewhether a CFC is considered to manufac-ture, produce, or construct personal prop-erty that it sells. First, §1.954–3(a)(4)(ii)sets forth a “substantial transformation”test, pursuant to which if personal prop-erty is substantially transformed prior tosale, the property sold will be treated ashaving been manufactured, produced, orconstructed by the selling corporation.Examples of substantial transformationprovided in the regulations include theconversion of wood pulp to paper, steelrods to screws and bolts, and tuna fish tocanned tuna. Second, §1.954–3(a)(4)(iii)sets forth a general “substantive test” anda safe harbor that apply when purchasedproperty is used by the CFC as a compo-nent part of personal property that is soldby the CFC. Under the substantive test, thesale of personal property will be treatedas the sale of a product manufactured bythe CFC rather than the sale of compo-nent parts if the operations conducted bythe CFC in connection with the propertyare substantial in nature and generallyconsidered to constitute the manufacture,production, or construction of the prop-erty. The assembly of automobiles fromcomponent parts is provided as an exampleof an activity considered to be substan-tial in nature and generally considered toconstitute the manufacture of a product.Under the safe harbor, without limitingthe application of the substantive test, theoperations of a selling corporation in con-nection with the use of purchased propertyas a component part of the personal prop-erty that is sold will be considered toconstitute the manufacture of a product ifin connection with such property conver-sion costs (direct labor and factory burden)of such corporation account for 20 percentor more of the total cost of goods sold.Section 1.954–3(a)(4)(iii) makes clearthat, in no event, however, will packaging,prepackaging, labeling, or minor assem-bly operations constitute the manufacture,production, or construction of propertyfor purposes of section 954(d)(1). Forpurposes of this preamble, satisfaction of

April 21, 2008 801 2008–16 I.R.B.

the requirements of §1.954–3(a)(4)(ii) or(iii) will be referred to as satisfaction ofthe “physical manufacturing test.”

B. The Branch Rule

In addition to the general FBCSI rulesof section 954(d)(1), section 954(d)(2)provides a special rule for purposes ofdetermining FBCSI if a CFC carries onactivities through a branch or similarestablishment outside its country of or-ganization and the carrying on of suchactivities has substantially the same effectas if such branch or similar establish-ment were a wholly owned subsidiarycorporation (the branch rule). Under thebranch rule, to the extent prescribed byregulations, the income attributable to thecarrying on of such activities is treated asincome derived by a wholly owned sub-sidiary of the CFC and constitutes FBCSIof the CFC. See section 954(d)(2). Sec-tion 1.954–3(b)(1)(i) (addressing sales orpurchase branches) and (ii) (addressingmanufacturing branches) provide rules onthe application of the branch rule. Thepurpose of the branch rule is to prevent aCFC from using a foreign branch to avoidthe application of the FBCSI rules. Ab-sent the branch rule, a CFC could engagein purchasing or manufacturing activi-ties with respect to personal property in ahigh-tax jurisdiction and selling activitieswith respect to the property in a low-taxjurisdiction without incurring FBCSI. Insuch a case, the sales income would notbe FBCSI to the CFC because the sameperson would be purchasing or manufac-turing the personal property and sellingthe personal property. The branch ruletherefore treats a sales, purchase, or man-ufacturing branch located outside of thecountry of organization of the CFC as aseparate corporation so as to create a re-lated party transaction between the branchand the remainder of the CFC for purposesof determining FBCSI.

With respect to manufacturingbranches, §1.954–3(b)(1)(ii)(a) providesthat if a CFC carries on manufacturing,producing, constructing, growing, or ex-tracting activities by or through a branchor similar establishment located outsideof its country of organization and the useof that branch or similar establishmentfor such activities with respect to per-sonal property purchased or sold by or

through the remainder of the CFC hassubstantially the same tax effect as if thatbranch or similar establishment were awholly owned subsidiary corporation ofsuch CFC, that branch or similar estab-lishment and the remainder of the CFCwill be treated as separate corporationsfor purposes of determining FBCSI ofsuch CFC. Section 1.954–3(b)(1)(ii)(b)provides that the use of a manufacturingbranch or similar establishment will beconsidered to have substantially the sametax effect as if it were a wholly ownedsubsidiary corporation of the CFC if thetax imposed on the income derived by theremainder of the CFC satisfies the test setforth in §1.954–3(b)(1)(ii)(b) (the manu-facturing branch tax rate disparity test).There is also a separate tax rate disparitytest which applies to sales or purchasebranches under §1.954–3(b)(1)(i)(b) (thesales branch tax rate disparity test).

For purposes of the manufacturingbranch tax rate disparity test, the incomeconsidered to be derived by the remainderof the CFC is determined first by applyingthe rules of §1.954–3(b)(2)(i) which treatthe CFC and the manufacturing branchas separate corporations, and then by de-termining the income of the CFC thatwould be FBCSI under section 954(d)(1)and §1.954–3(a)(1) if the CFC and thebranch were separate corporations (butwithout applying the exceptions containedin §1.954–3(a)(2), (3), and (4)).

Specifically, §1.954–3(b)(2)(i)(a) treatsthe remainder of the CFC and the manu-facturing branch as separate corporations.In addition, §1.954–3(b)(2)(i)(b) and (c)deem purchases or sales to be made “onbehalf of” a related person to take intoaccount that the remainder of the CFCand the branch are treated as separatecorporations. Section 1.954–3(b)(2)(i)(b)addresses sales and purchase branches bytreating selling or purchasing activitiesconducted through a branch or similarestablishment with respect to personalproperty as performed on behalf of theCFC if the CFC manufactures, produces,constructs, grows, extracts, purchases,or sells that same property. Section1.954–3(b)(2)(i)(c) provides a corollaryrule addressing manufacturing branches,pursuant to which the purchase or saleof personal property by the remainder ofthe CFC is treated as performed on behalfof a branch that manufactures, produces,

constructs, grows, or extracts that prop-erty. The general rule of §1.954–3(a)(1)is then applied to determine the incomethat would be FBCSI if the branch andthe remainder of the CFC were separatecorporations subject to the “on behalf of”related party transactions described above.

Section 1.954–3(b)(1)(ii)(b) providesthat the manufacturing branch tax ratedisparity test is satisfied if the income thatwould be FBCSI after applying these spe-cial rules is taxed in the year when earnedat an effective rate of tax that is less than90 percent of, and at least 5 percentagepoints less than, the hypothetical effectiverate of tax. The hypothetical effective rateof tax is the effective rate of tax whichwould apply to such income under thelaws of the country in which the manu-facturing branch is located, if, under thelaws of such country, the entire income ofthe CFC were considered derived by suchCFC from sources within such countryfrom doing business through a permanentestablishment therein, received in suchcountry, and allocable to such permanentestablishment, and the CFC were createdor organized under the laws of, and man-aged and controlled in, such country.

If the manufacturing branchtax rate disparity test is satisfied,§1.954–3(b)(1)(ii)(a) then treats thebranch and the remainder of the CFCas separate corporations and the specialrules of §1.954–3(b)(2)(ii) are applied forpurposes of determining FBCSI. Section1.954–3(b)(2)(ii)(a) through (c) provideseparate CFC and related party rules thatmirror §1.954–3(b)(2)(i)(a) through (c).Section 1.954–3(b)(2)(ii)(d) through (f)provide special rules to prevent doublecounting of FBCSI and to align treatmentof branches with the treatment of separateCFCs. In particular, §1.954–3(b)(2)(ii)(e)provides that income derived by a branchor similar establishment, or by the remain-der of the CFC, will not be FBCSI if theincome would not be so considered if itwere derived by a separate CFC underlike circumstances.

C. Legal Developments

In Rev. Rul. 75–7, 1975–1 C.B. 244,revoked by Rev. Rul. 97–48, 1997–2C.B. 89, the IRS considered a case inwhich a CFC purchased raw material fromrelated persons outside of its country of

2008–16 I.R.B. 802 April 21, 2008

organization, contracted with an unre-lated manufacturer located outside of itscountry of organization to process the rawmaterial into a finished product, and thensold the finished product to unrelated per-sons outside of its country of organization.Under the terms of the arrangement, thecontract manufacturer was paid a con-version fee. The raw material, work inprocess, and finished product remainedthe property of the CFC at all times. TheCFC alone had complete control over thetime and quantity of production as wellas complete quality control over the con-version process. The IRS ruled, underthese facts, that the performance of theoperations by the contract manufacturerwhereby the raw material was processedinto a finished good was considered tobe a performance by the CFC, and theCFC would therefore be treated as havingsubstantially transformed personal prop-erty. The ruling further concluded that,because the CFC conducted the manufac-turing activity outside of its country oforganization, it was considered to do sothrough a branch or similar establishment.Because the manufacturing branch tax ratedisparity test was not satisfied, however,the activities of the “branch” were nottreated as the activities of a separate CFCand the CFC was therefore entitled to themanufacturing exception from FBCSI.See §601.601(d)(2)(ii)(b).

In Ashland Oil, Inc. v. Commissioner,95 TC 348 (1990), the Tax Court held thatan unrelated manufacturing corporationin a contract manufacturing arrangementwith a CFC cannot be treated as a branchor similar establishment of the CFC. InVetco, Inc. v. Commissioner, 95 TC 579(1990), the Tax Court held that a whollyowned subsidiary of a CFC in a contractmanufacturing arrangement with the CFCalso cannot be treated as a branch or simi-lar establishment of the CFC.

In Rev. Rul. 97–48 the IRS revokedRev. Rul. 75–7. Rev. Rul. 97–48states that the IRS will follow AshlandOil, Inc. v. Commissioner and Vetco,Inc. v. Commissioner, and therefore con-firms that the IRS will not treat a separatecontract manufacturer as a branch for pur-poses of section 954(d)(2). In addition,Rev. Rul. 97–48 rules that the activitiesof a contract manufacturer cannot be at-tributed to a CFC for purposes of either

section 954(d)(1) or section 954(d)(2) todetermine whether the income of a CFC isFBCSI. However, the ruling does not ad-dress the circumstances under which theactivities of the CFC itself may qualify asmanufacturing when a contract manufac-turing or similar arrangement is in place.See §601.601(d)(2)(ii)(b).

D. Business Developments

Final regulations addressing FBCSIwere first published in 1964 (T.D. 6734,1964–1 C.B. 237 [29 FR 6392]). Sincethen, global economic expansion and glob-alization have led to significant changesin manufacturing. Many multinationalgroups have extensive manufacturing net-works that straddle geographic borders.These cross-border manufacturing net-works are created primarily to leverageexpertise and cost efficiencies. In addi-tion, the use of contract manufacturingarrangements has become a common wayof manufacturing products because of theflexibility and efficiencies it affords. Ac-cordingly, updated rules in this area areimportant to the continued competitive-ness of U.S. businesses operating abroad.


In response to the growing impor-tance of contract manufacturing and othermanufacturing arrangements, the Trea-sury Department and the IRS proposeto modernize the FBCSI regulations inlight of current business structures andpractices that are inadequately addressedby the current regulations. Specifically,the proposed regulations address: (1) theapplication of the manufacturing excep-tion where the physical manufacturingtest is not satisfied by the CFC but wherethe CFC, and/or a branch of the CFC, isotherwise involved in the manufacturingprocess; (2) the application of the branchrule to business structures involving theuse of one or more branches engaged inmanufacturing, producing, constructing,growing, or extracting activities; and (3)other miscellaneous branch rule issues.Certain portions of these proposed regula-tions restate changes that were previouslyproposed in REG–104537–97, 1998–1C.B. 892 [63 FR 14669] and withdrawnin REG–113909–98, 1999–2 C.B. 125 [64FR 37727].

A. Application of the manufacturingexception where the physicalmanufacturing test is not satisfiedby the CFC but the CFC is involved inthe manufacturing process — Substantialcontribution to manufacturing

Section 954(d)(1) includes, as FBCSI,income derived in connection with the pur-chase of personal property from a relatedperson and “its” sale to any person, and in-come derived in connection with the pur-chase of personal property from any per-son and “its” sale to a related person. Sometaxpayers argue that use of the word “its”implies that the property sold must be thesame property that is purchased for thesales income to be FBCSI. Accordingly,these taxpayers assert that where the per-sonal property purchased by the CFC ismanufactured such that the property pur-chased is not the same as the propertysold by the CFC, the property sold by theCFC is not the property purchased andtherefore the sale of such property doesnot generate FBCSI, even if the CFC it-self performs little or no part of the man-ufacture of that property. They further ar-gue that the manufacturing exception un-der §1.954–3(a)(4)(i) provides a safe har-bor but does not define the universe ofcases in which personal property sold bya CFC is considered to be different fromthe property purchased by the CFC forpurposes of determining FBCSI. In addi-tion, they argue that §1.954–3(a)(4)(i) sup-ports their view because it states, in part,that “[a] foreign corporation will be con-sidered, for purposes of this subparagraph,to have manufactured, produced, or con-structed personal property which it sells ifthe property sold is in effect not the prop-erty which it purchased.”

The Treasury Department and the IRSbelieve that the position taken by these tax-payers is contrary to existing law, and re-sults from an incorrect reading of section954(d)(1) and §1.954–3(a)(4)(i). Section954(d)(1) requires only a purchase of per-sonal property and the sale of that personalproperty by the CFC with no indication asto form. Moreover, section 954(d)(1)(A)limits FBCSI to income derived in connec-tion with the purchase (or sale) of personalproperty that is manufactured, produced,grown, or extracted outside of the CFC’scountry of organization, thereby indicatingthat section 954(d)(1) is concerned with

April 21, 2008 803 2008–16 I.R.B.

the segregation of purchasing or sellingand manufacturing into different jurisdic-tions, not merely with whether the prop-erty was manufactured.

Section 1.954–3(a)(4) provides theonly set of rules under which a changein form of personal property is consid-ered relevant for purposes of determiningFBCSI. The first sentence of Treas. Reg.§1.954–3(a)(4) sets forth the general rulethat “foreign base company sales incomedoes not include income of a CFC derivedin connection with the sale of personalproperty manufactured, produced, or con-structed by such corporation in whole orin part from personal property which ithas purchased.” The third sentence of thatparagraph explains that “the property soldwill be considered, for purposes of thissubparagraph, as not being the propertywhich is purchased if the provisions ofsubdivision (ii) or (iii) of this subparagraphare satisfied.” The plain language of theregulation, as well as the examples, clarifythat in order to satisfy §1.954–3(a)(4)(ii)or (iii) the relevant manufacturing ac-tivities must be performed by the CFCitself. See, for example, Electronic Arts,Inc. v. Commissioner, 118 TC 226, 265(2002) (stating that “petitioner’s focus oncertain language in section 1.954–3(a)(4),Income Tax Regs., overlooks the regu-lation’s requirement that various actionshave been done ‘by’ the corporation beingevaluated”). See also, Medchem v. Com-missioner, 116 TC 308 (2001).

Further, this regulation was issuedshortly after the statute became effective,and is consistent with the legislative his-tory, which contemplates that propertysold will be considered different from theproperty purchased only when the CFCitself manufactures that property. SeeS. Rep. No. 1881, 87th Cong., 2d Sess.(1962), 1962–3 C.B. 841, 949 (stating that“[i]n a case in which a controlled foreigncorporation purchases parts or materialswhich it then transforms or incorporatesinto a final product, income from thesale of the final product would not beforeign base company sales income ifthe corporation substantially transformsthe parts or materials, so that, in effect,the final product is not the propertypurchased.”)

The proposed regulations clarify thatfor purposes of determining FBCSI per-sonal property sold by a CFC will be

considered to be the property purchasedby the CFC regardless of whether it issold in the same form in which it was pur-chased, in a different form than the form inwhich it was purchased, or as a componentpart of a manufactured product, except asspecifically provided by the same coun-try manufacture exception contained in§1.954–3(a)(2) and the manufacturingexception contained in §1.954–3(a)(4).Therefore, the only time that the manu-facture of a product will affect whetherincome is FBCSI is when the manufac-ture of the product is performed by theCFC or performed in the country of or-ganization of the CFC. With respect tothe manufacturing exception contained in§1.954–3(a)(4), the proposed regulationsclarify that a CFC qualifies for the manu-facturing exception only if the CFC, actingthrough its employees, manufactured therelevant product within the meaning of§1.954–3(a)(4)(i). The proposed regula-tions also further provide rules to deter-mine whether the activities of a branch orsimilar establishment outside the countryin which the CFC is incorporated havesubstantially the same tax effect as if thebranch or similar establishment were awholly owned subsidiary corporation, andthus whether under section 954(d)(2) theincome attributable to the branch or simi-lar establishment constitutes FBCSI of theCFC.

The Treasury Department and the IRSrecognize, however, that due to businessconsiderations in the global marketplace,personal property may be manufacturedpursuant to a contract manufacturing ar-rangement under which the CFC engagesin activities related to the manufacture ofthe property (for example, oversight, di-rection and control over the contract man-ufacturer) but does not satisfy the physicalmanufacturing test. In certain of thesecases, the Treasury Department and theIRS believe that the CFC should qualifyfor the manufacturing exception to FBCSI.Accordingly, the proposed regulationsmodify §1.954–3(a)(4) to provide that aCFC that provides a “substantial contribu-tion” with respect to the manufacture, pro-duction, or construction of personal prop-erty, but that could not satisfy the physicalmanufacturing test, may have manufac-tured such property for purposes of themanufacturing exception. Specifically,proposed §1.954–3(a)(4)(i) provides that,

in addition to proposed §1.954–3(a)(4)(ii)and (iii), a taxpayer may qualify for themanufacturing exception by satisfying the“substantial contribution test” in proposed§1.954–3(a)(4)(iv). Pursuant to proposed§1.954–3(a)(4)(iv)(a), a CFC will sat-isfy the substantial contribution test withrespect to personal property only if thefacts and circumstances evidence that thecontrolled foreign corporation makes asubstantial contribution through the activ-ities of its employees to the manufactureof that property.

Factors to be considered in determiningwhether a CFC makes a substantial con-tribution to the manufacture of personalproperty include but are not limited to: (1)oversight and direction of the activities orprocess (including management of the riskof loss) pursuant to which the propertyis manufactured under the principles of§1.954–3(a)(4)(ii) or (iii); (2) performanceof activities that are considered in, but in-sufficient to satisfy the tests provided in§1.954–3(a)(4)(ii) and (iii); (3) control ofthe raw materials, work-in-process and fin-ished goods; (4) management of the manu-facturing profits; (5) material selection; (6)vendor selection; (7) control of logistics;(8) quality control; and (9) direction of thedevelopment, protection, and use of tradesecrets, technology, product design and de-sign specifications, and other intellectualproperty used in manufacturing the prod-uct.

In light of the addition of the new testcontained in proposed §1.954–3(a)(4)(iv),the interaction between several existingregulation sections and the new test isclarified. First, the existing manufacturingexceptions under §1.954–3(a)(4)(ii) and(iii) are modified to clarify that the applica-bility of the tests under §1.954–3(a)(4)(ii)and (iii) are restricted to cases in whichphysical transformation or physical as-sembly or conversion of component partsis conducted by the selling corporation.

Second, the definition of manufacturingfor purposes of the same country manufac-ture exception contained in §1.954–3(a)(2)is modified to exclude manufacturing asdefined under the substantial contributiontest, and to ensure that the modificationsto the existing manufacturing exceptionsunder §1.954–3(a)(4)(ii) and (iii) do notnarrow the same country manufactureexception. The Treasury Departmentand the IRS did not intend these regu-

2008–16 I.R.B. 804 April 21, 2008

lations to change the scope of the samecountry manufacture exception. Section1.954–3(a)(2) excludes manufacturing asdefined under the substantial contribu-tion test because a rule that expanded thedefinition of manufacturing to include§1.954–3(a)(4)(iv) activities for purposesof the same country manufacture excep-tion could prove difficult to administer.Such a rule could require an assessmentof activities other than physical manufac-turing conducted by an unrelated person.Modifying §1.954–3(a)(2) ensures that themodifications to the existing manufactur-ing exceptions under §1.954–3(a)(4)(ii)and (iii) do not narrow the same countrymanufacture exception by clarifying thatproperty manufactured in the country oforganization of the selling corporation willqualify for the same country manufactureexception regardless of whose employeesengage in manufacturing activities thatsatisfy the principles of §1.954–3(a)(4)(ii)or (iii).

Third, the proposed regulations modify§1.954–3(a)(6), which addresses the appli-cation of the manufacturing exception to aCFC’s distributive share of partnership in-come where the partnership manufacturesand sells personal property. The referenceto “the separate activities or property ofthe controlled foreign corporation or anyother person,” in §1.954–3(a)(6) was in-tended to clarify that the activities of an-other person could not be attributed to thepartnership for purposes of applying themanufacturing exception. Because theseproposed regulations clarify that no attri-bution is allowed for purposes of applyingthe manufacturing exception that languageis now unnecessary and is therefore re-moved. Section 1.954–3(a)(6) is also mod-ified consistent with the modifications to§1.954–3(a)(4) providing that a CFC mayonly qualify for the manufacturing excep-tion through the activities of its employees.

B. Application of the branch rule tobusiness structures involving the useof more than one branch engaged inmanufacturing

Proposed §1.954–3(b)(2)(ii)(c)(2) cre-ates a rebuttable presumption with respectto the application of the substantial contri-bution test where a CFC claims to satisfythe substantial contribution test with re-spect to the activities of a branch of that

CFC that satisfies §1.954–3(a)(4)(ii) or(iii). Under this rebuttable presumption,if a branch of a CFC satisfies the physicalmanufacturing test with respect to per-sonal property sold by the remainder ofthe CFC, the remainder of the CFC willbe presumed not to make a substantialcontribution to the manufacture of thatpersonal property unless the CFC can re-but that presumption to the satisfaction ofthe Commissioner.

The Treasury Department and the IRSbelieve that these rules are necessary asa backstop to the branch rule. In the ab-sence of the rebuttable presumption, a rulepermitting a CFC to qualify for the manu-facturing exception based upon its contri-bution to the manufacturing activities of abranch would prove difficult to administer.Such a rule could encourage a CFC to electclassification of its subsidiaries that en-gage in manufacturing activities as disre-garded entities, obfuscating the division ofmanufacturing labor and income betweenthe CFC and its branches. Of course, thepresumption may be rebutted and any ad-verse consequences alleviated by incorpo-rating the branch that satisfies the physicalmanufacturing test.

Although §1.954–3(b)(1)(i)(c) pro-vides a rule addressing the use ofmultiple sales or purchase branches,§1.954–3(b)(1)(ii) does not provide acorollary rule for the use of multiple manu-facturing branches. The Treasury Depart-ment and the IRS believe that the lack ofa specific rule addressing the use of morethan one manufacturing branch does notcurrently limit the general manufacturingbranch rule of §1.954–3(b)(1)(ii)(a) fromapplying to each manufacturing branch ofa CFC in a case where a CFC performsmanufacturing activities through morethan one branch or similar establishment.Rather, such an application is consistentwith the rules regarding multiple salesor purchase branches. Nonetheless, forclarity, the proposed regulations set forthrules addressing the use of multiple man-ufacturing branches.

The proposed regulations set forth tworules addressing the application of themanufacturing branch tax rate disparitytest to multiple manufacturing branches.

Proposed §1.954–3(b)(1)(ii)(c)(2)addresses situations in which multiplebranches each perform manufacturing ac-tivities with respect to separate items of

personal property that are then sold by theCFC. Consistent with the rule for multiplesales branches, the proposed regulationsrequire the separate application of themanufacturing branch tax rate disparitytest to each branch that is manufacturing aseparate item of personal property.

Proposed §1.954–3(b)(1)(ii)(c)(3)addresses situations in which multiplebranches, or one or more branches and theremainder of the CFC, perform manufac-turing activities with respect to the sameitem of personal property that is then soldby the CFC. When multiple branches, orone or more branches and the remainder ofthe CFC, perform manufacturing activitieswith respect to the same item of personalproperty, the manufacturing branch taxrate disparity test is applied by givingsatisfaction of the physical manufacturingtest precedence over other contributionsto manufacturing. Therefore, if only onebranch, or only the remainder of the CFC,satisfies the physical manufacturing testof §1.954–3(a)(4)(ii) or (iii), then the lo-cation of that branch or the remainderof the CFC will be the location of man-ufacturing of the personal property forpurposes of applying the manufacturingbranch tax rate disparity test. If more thanone branch, or one or more branches andthe remainder of the CFC, each satisfythe physical manufacturing test, then thebranch or the remainder of the CFC lo-cated or organized in the jurisdiction thatwould impose the lowest effective rate oftax will be the location of manufacturingof the personal property for purposes ofapplying the manufacturing branch taxrate disparity test.

If none of the branches nor the remain-der of the CFC satisfies the physical man-ufacturing test, but the CFC as a wholesatisfies the substantial contribution testcontained in proposed §1.954–3(a)(4)(iv),then the location of manufacturing of thepersonal property will be the location ofthe branch or the remainder of the CFCthat provides the predominant amount ofthe CFC’s substantial contribution to man-ufacturing. Whether any branch or the re-mainder of the CFC provides a predomi-nant amount of the CFC’s contribution tomanufacturing is determined by applyingthe facts and circumstances test providedin §1.954–3(a)(4)(iv) to weigh the contri-bution to manufacturing of each branch orthe remainder of the CFC. If a predominant

April 21, 2008 805 2008–16 I.R.B.

amount of the CFC’s contribution to manu-facturing is not provided by any one loca-tion, the location of manufacturing of thepersonal property for purposes of apply-ing the manufacturing branch tax rate dis-parity test will be that place (either the re-mainder of the CFC or one of its branches)where manufacturing activity is performedand which would impose the highest ef-fective rate of tax when applying either§1.954–3(b)(1)(i)(b) or (ii)(b).

Because the proposed regulations ad-dress cases in which two or more branches,or one or more branches and the remainderof the CFC, perform manufacturing activi-ties related to the manufacture of the sameitem of property, §1.954–3(b)(2)(ii)(a)is modified to clarify the application ofthe branch rule where manufacturingactivities are performed in more thanone location. In such cases, proposed§1.954–3(b)(2)(ii)(a) provides that, forpurposes of treating the location of salesor purchase income as a separate corpora-tion for purposes of determining whetherFBCSI is incurred, that separate corpo-ration will exclude any branch or the re-mainder of the CFC that would be treatedas a separate corporation, if the hypothet-ical rate imposed by the jurisdiction ofeach such branch or the remainder of theCFC were separately tested against theeffective rate of tax imposed on the salesor purchase income under the relevant taxrate disparity test.

C. Miscellaneous Branch Rule Issues

The Treasury Department and the IRSalso propose to amend certain other as-pects of §1.954–3(b) as follows:

1. Definition of a manufacturing branch

While §1.954–3(b)(1)(ii)(a) definesa manufacturing branch as a branch orsimilar establishment through which aCFC carries on manufacturing activi-ties, it does not explicitly require that§1.954–3(a)(4)(i) be satisfied by the CFCas a whole in order for the manufactur-ing branch rule to apply. The TreasuryDepartment and the IRS believe that amanufacturing branch only exists with re-spect to personal property sold by a CFCif the CFC (including any branch of thatCFC) has manufactured that property. Ac-cordingly, proposed §1.954–3(b)(1)(ii)(a)clarifies this point by providing that the

manufacturing branch rule applies onlywhere a CFC (including any branch of theCFC) satisfies the manufacturing require-ment under proposed §1.954–3(a)(4).

2. Modification of §1.954–3(b)(2)(ii)(e)

Section 1.954–3(b)(2)(ii)(e) providesthat income derived by a branch or sim-ilar establishment, or by the remainderof the CFC, will not be FBCSI if the in-come would not be so considered if itwere derived by a separate CFC under likecircumstances. For example, if a branchof a CFC purchases personal propertyfrom an unrelated person and sells theproperty to an unrelated person withoutany involvement by the remainder of theCFC, the branch rule will not apply tocreate a related party transaction betweenthe branch and the remainder of the CFC.Therefore the purchase and sale of thatpersonal property by the branch will notgenerate FBCSI.

The proposed regulations provide thatthe substantial contribution test generallyapplies to a CFC that sells personal prop-erty where another person (for example, asecond CFC) satisfies the physical manu-facturing test with respect to that property.However, a negative presumption applieswhere a CFC claims to satisfy the sub-stantial contribution test with respect toincome from the sale of personal propertywhere the physical manufacturing test issatisfied by a branch of that CFC. Theeffect of these rules is that, where a CFCseeks to rely on the substantial contribu-tion test with respect to the income fromthe sale of personal property manufactured(within the meaning of §1.954–3(a)(4)(ii)or (iii)) by one or more of its branches,but cannot rebut the negative presumptionto the satisfaction of the Commissioner,a branch or the remainder of a CFC mayhave FBCSI where a separate CFC wouldnot. Therefore, to integrate the rules re-garding the substantial contribution testand its application under the branch rule,proposed §1.954–3(b)(2)(ii)(e) exceptsfrom its general rule cases in which abranch satisfies the physical manufactur-ing test with respect to personal propertyand the remainder of the controlled foreigncorporation fails to rebut the presumptionthat it does not satisfy the substantial con-tribution test with respect to the activitiesof that manufacturing branch.

In addition, consistent with §1.954–3(b)(2)(ii)(f), §1.954–3(b)(2)(ii)(e) ismodified to clarify that it applies only forpurposes of paragraph (b) of §1.954–3(that is, the branch rule). This clarifiesthat in no event will the branch rule causeincome not to be FBCSI if that incomewould otherwise be FBCSI under section954(d)(1). For example, assume a CFCincorporated in Country Y purchasespersonal property from a related partyand has that property manufactured bya contract manufacturer in Country Z.If the CFC does not perform any otheractivity with respect to the manufactureof the property, and if the CFC sells themanufactured property through a branchlocated in Country Z for use, consumption,or disposition outside of Country Y, theincome from the sale of that propertyis FBCSI under section 954(d)(1). Ifthe branch located in Country Z werea separate CFC the income would notbe FBCSI because it would be sellingpersonal property manufactured in itscountry of organization, Country Z.However, because the income would beFBCSI to the CFC under section 954(d)(1),proposed §1.954–3(b)(2)(ii)(e) does notapply to create a different result.

3. Modification of §1.954–3(b)(2)(i)(b),(b)(2)(ii)(b) and (b)(4), Example 3

Commentators have noted that§1.954–3(b)(2)(i)(b) and (ii)(b) can beread to cause a branch that purchasesfrom unrelated persons and sells to unre-lated persons to have FBCSI even wherethe remainder of the CFC has no con-nection with the personal property thatis sold. Although §1.954–3(b)(2)(ii)(e)should prevent such a result, commen-tators note that a contrary reading ispossible because the sales branch rulesof §1.954–3(b)(2)(i)(b) and (ii)(b) apply,in part, with respect to personal prop-erty manufactured, produced, constructed,grown, or extracted by, or personal prop-erty purchased or sold by the “controlledforeign corporation” (as opposed to bythe “remainder” of the controlled foreigncorporation). For example, in a case inwhich a branch both manufactures andsells personal property, the branch couldbe considered to sell on behalf of the re-mainder of the CFC because the branch’smanufacturing activities would be consid-

2008–16 I.R.B. 806 April 21, 2008

ered to be manufacturing activities of theCFC, thereby triggering the application of§1.954–3(b)(2)(ii)(b). Further, commen-tators note that §1.954–3(b)(4), Example3 appears to support this reading becausein that example a branch of a corporationpurchases from a related person and sellsto an unrelated person, and the branch istreated as selling that property on behalfof the remainder of the CFC, even thoughthe remainder of the corporation does notmanufacture, purchase, or sell the personalproperty.

Section 1.954–3(b)(2)(i)(b) and (ii)(b)are intended to apply only to purchasing orselling by a branch with respect to personalproperty manufactured, purchased, or soldby “the remainder of” the CFC (includingany branch treated as the remainder of theCFC). For example, the branch rule couldapply in a case where personal property ismanufactured by the CFC in the countryof organization of the CFC and then soldby a branch of the CFC located outside ofthe country of organization of the CFC.However, the branch rule does not applywhere, for example, a branch of the CFCpurchases personal property from an unre-lated party and sells it to an unrelated partywithout any involvement by the remainderof the CFC. Accordingly, the proposedregulations amend §1.954–3(b)(2)(i)(b)and (ii)(b) by adding the words “remain-der of” before each place where the words“controlled foreign corporation” appear inthose paragraphs and by adding the words“(or by any branch treated as the remain-der of the CFC)” after each place wherethe words “controlled foreign corporation”appear in those paragraphs. Consistentwith this change, the proposed regula-tions revise the rationale for the result in§1.954–3(b)(4), Example 3 as describedbelow.

In §1.954–3(b)(4), Example 3, a branchof a second-tier CFC purchases finishedgoods from the first-tier CFC and sells 90percent of the product for use, consump-tion, or disposition outside of the countryin which the branch is located and thecountry of organization of the second-tierCFC. The remainder of the second-tierCFC does not engage in any manufactur-ing or selling activities. The sales branchtax rate disparity test is met in comparisonto the effective tax rate of the second-tierCFC (the first-tier CFC and second-tierCFC are organized in the same country).

The example concludes that since the salesbranch tax disparity test is met, the branchis treated as a separate CFC and is treatedas selling personal property on behalf ofthe second-tier CFC and therefore the 90percent of sales made for use, consump-tion, or disposition outside of the branch’scountry result in FBCSI.

The rationale of the example is incor-rect because the branch is not selling onbehalf of the second-tier CFC because theremainder of the second-tier CFC (not in-cluding the branch) does not manufacture,purchase, or sell the personal property.Therefore, §1.954–3(b)(2)(i)(b) and (ii)(b)do not apply. However, the result is correctbecause the branch, treated as a separatecorporation, is purchasing from a relatedperson, the first-tier CFC, organized out-side of the branch’s country and sellingto persons outside the branch’s countryand the branch is located in a jurisdic-tion that satisfies the sales branch tax ratedisparity test with respect to the incomefrom the sale of the personal property. Ac-cordingly, the proposed regulations revise§1.954–3(b)(4), Example 3 to provide thecorrect rationale for the result. In addition,the result in §1.954–3(b)(4), Example 3 isfurther revised to add two alternative fac-tual scenarios (purchase from an unrelatedparty, and manufacture within the mean-ing of proposed §1.954–3(a)(4)(iv) by theselling branch) to illustrate the point that,in general, a branch will not have FBCSIif a separate CFC would not have FBCSIunder like circumstances.

Proposed Effective/Applicability Date

These regulations will apply to taxableyears of CFCs beginning on or after thedate they are published as final regula-tions in the Federal Register, and for tax-able years of United States shareholders inwhich or with which such taxable years ofthe CFCs end.

Reliance on Proposed Regulations

Until these regulations are finalized,taxpayers may choose to apply these reg-ulations in their entirety to all open taxyears as if they were final regulations.

Request for Comments

The Treasury Department and theIRS request comments on all aspects of

these proposed regulations, includingcomments regarding the substantial con-tribution test, and the activities listed in§1.954–3(a)(4)(iv)(b). In particular, com-ments are requested on whether one ormore safe harbors should be added to thesubstantial contribution test. In draftingthe proposed regulations, the Treasury De-partment and the IRS considered a numberof approaches to a safe harbor but ulti-mately chose to request comments in thisregard because of difficulties in fashion-ing a safe harbor that would be flexibleenough to apply across various industriesand across a range of different types ofmanufacturing arrangements. Among thesafe harbors considered in drafting theproposed regulations were: (1) a list ofmandatory activities; (2) a cost based test;(3) a compensation based test; (4) a valuebased test; (5) a tax rate disparity basedtest; and (6) a percentage based test com-paring the compensation paid to employ-ees of the CFC for performing activitiesrelated to the manufacturing process vs.the total cost for all activities related to themanufacturing process (that is, includingcosts paid to a contract manufacturer butexcluding the cost of raw materials andmarketing intangibles). In addition, theTreasury Department and the IRS requestcomments as to whether the requirement,under the manufacturing exception fromforeign base company sales income, thatthe activities of the CFC be performed byits employees, should permit commercialarrangements where individuals perform-ing services for the CFC, while not onits payroll, are nevertheless controlled byemployees of the CFC.

Comments are also requested onwhether it would be appropriate to addan anti-abuse rule similar to the foreignbase company services substantial assis-tance test announced in Notice 2007–13to prevent a CFC from qualifying for themanufacturing exception based on the ap-plication of the substantial contributiontest in cases in which substantially all ofthe direct or indirect contributions to themanufacture of personal property providedcollectively by the CFC and any relatedUnited States person is provided by one ormore related United States persons. Sucha rule might provide, for example, thatwhere (1) the United States parent of aCFC provides 45 percent of the manufac-turing contribution, (2) the CFC provides 5

April 21, 2008 807 2008–16 I.R.B.

percent of the manufacturing contribution,and (3) an unrelated contract manufacturerprovides 50 percent of the manufacturingcontribution to the personal property, theCFC does not make a substantial contri-bution to the manufacture of that propertybecause a related United States personprovides 80 percent or more of the contri-bution to the manufacture of the property(90 percent in this case, 45/50) providedcollectively by the CFC and any relatedUnited States person. Such a rule wasconsidered but ultimately not included inthe proposed regulations and commentsare requested on whether or not such a ruleshould be added to the final regulations.See §601.601(d)(2)(ii)(b).

In addition, comments are requested onthe multiple manufacturing branch rules.First, comments are requested on whetherthe negative presumption rule concerningcases in which the selling branch or theremainder of the CFC performs activitiesdescribed in proposed §1.954–3(a)(4)(iv)is more appropriate than an alternative rulethat would deny the use of the test con-tained in proposed §1.954–3(a)(4)(iv) incases in which a branch of the CFC man-ufactures the property within the meaningof proposed §1.954–3(a)(4)(ii) or (iii).Second, comments are requested on theconsequences of and possible alternativesto proposed §1.954–3(b)(1)(ii)(c)(3)(e),which provides that if a predominantamount of the CFC’s substantial contribu-tion is not provided by any one location,the location of manufacturing of the per-sonal property will be considered to be thatlocation (either the remainder of the CFCor one of its branches) which imposes thehighest effective rate of tax that would beimposed on the sales income, among thoselocations where manufacturing activityrelated to the generation of that incomeis performed. The Treasury Departmentand the IRS considered a rule that wouldallow taxpayers to alternatively use themean effective rate of tax among the lo-cations where manufacturing activity isperformed, so long as that effective rateof tax was within a set number of percent-age points of the highest effective tax ratethat would be imposed by any jurisdictionin which a manufacturing branch or theremainder of the CFC was located or orga-nized. However, the Treasury Departmentand the IRS were concerned about thecomplexity of such a rule. The Treasury

Department and the IRS request commentson whether this or other alternatives to thehighest rate test would be appropriate. Fi-nally, comments are requested on whetherany modifications to §1.954–3(b)(1)(i)(b)and (b)(1)(ii)(b) should be adopted tomake the rules concerning the comparisonof effective rates of tax easier to apply.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regu-lations and because the proposed regula-tion does not impose a collection of in-formation on small entities, the Regula-tory Flexibility Act (5 U.S.C. Ch. 6) doesnot apply. Pursuant to section 7805(f) ofthe Internal Revenue Code, this notice ofproposed rulemaking was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The Treasury Department and the IRS re-quest comments on the clarity of the pro-posed rules and how they can be made eas-ier to understand. All comments will beavailable for public inspection and copy-ing. A public hearing will be scheduledif requested in writing by any person thattimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.


The principal author of these regula-tions is Ethan Atticks, Office of AssociateChief Counsel (International). However,other personnel from the Treasury Depart-ment and the IRS participated in their de-velopment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:


Paragraph 1. The authority citation for26 CFR part 1 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.954–3 is amended by:1. Adding a new sentence after the first

sentence of paragraph (a)(1)(i), and by re-vising the second sentence of Example 1 inparagraph (a)(1)(iii), and the first sentenceof Example 2 in paragraph (a)(1)(iii).

2. Revising the third sentence of para-graph (a)(2).

3. Revising paragraph (a)(4)(i), and thefirst sentences of paragraphs (a)(4)(ii) and(iii), and by adding paragraph (a)(4)(iv).

4. Revising the text of paragraph(a)(6)(i).

5. Adding a new sentence to the end ofparagraph (b)(1)(ii)(a).

6. Redesignating the text of paragraph(b)(1)(ii)(c) as paragraph (b)(1)(ii)(c)(1),and adding a paragraph heading to newlydesignated paragraph (b)(1)(ii)(c).

7. Adding paragraphs (b)(1)(ii)(c)(2),and (c)(3).

8. Revising paragraph (b)(2)(i)(b).9. Adding a new sentence to the end of

paragraph (b)(2)(ii)(a), and revising para-graph (b)(2)(ii)(b).

10. Redesignating paragraph(b)(2)(ii)(c) as paragraph (b)(2)(ii)(c)(1),revising the paragraph heading of para-graph (b)(2)(ii)(c), adding paragraph(b)(2)(ii)(c)(2), and revising paragraph(b)(2)(ii)(e).

11. Revising Example 3 in paragraph(b)(4).

12. Adding paragraph (d).The additions and revisions read as fol-

lows:

§1.954–3 Foreign Base Company SalesIncome.

(a) * * *(1) In general—(i) General rules.

* * * For purposes of the precedingsentence, except as provided in paragraphs(a)(2) and (a)(4) of this section, personalproperty sold by a controlled foreigncorporation will be considered to be the

2008–16 I.R.B. 808 April 21, 2008

same property that was purchased by thecontrolled foreign corporation regardlessof whether the personal property is sold inthe same form in which it was purchased,in a different form than the form in whichit was purchased, or as a component partof a manufactured product. * * *

* * * * *Example 1. * * * Corporation A purchases from

M Corporation, a related person, articles manufac-tured in the United States and sells the articles to P,not a related person, for delivery and use in foreigncountry Y. * * *

Example 2. Corporation A in Example 1 also pur-chases from P, not a related person, articles manufac-tured in country Y and sells the articles to foreign cor-poration B, a related person, for use in foreign countryZ. * * *

* * * * *(2) * * * The principles set forth in para-

graphs (a)(4)(i), (a)(4)(ii), and (a)(4)(iii)of this section apply under this paragraph(a)(2) in determining what constitutesmanufacture, production, or constructionof personal property, excluding, in the caseof manufacture, production, or construc-tion by a person other than the controlledforeign corporation, the requirement setforth in paragraph (a)(4)(i) of this sectionthat the provisions of paragraphs (a)(4)(ii)and (a)(4)(iii) of this section may onlybe satisfied through the activities of thatperson’s employees. * * *

* * * * *(4) Property manufactured, produced,

or constructed by the controlled foreigncorporation—(i)—In general. Foreignbase company sales income does notinclude income of a controlled foreigncorporation derived in connection withthe sale of personal property manufac-tured, produced, or constructed by suchcorporation in whole or in part from per-sonal property which it has purchased. Acontrolled foreign corporation will havemanufactured, produced, or constructedpersonal property which the corporationsells only if such corporation satisfiesthe provisions of paragraphs (a)(4)(ii),(a)(4)(iii), or (a)(4)(iv) of this sectionthrough the activities of its employeeswith respect to such property. A con-trolled foreign corporation will not betreated as having manufactured, produced,or constructed personal property whichthe corporation sells merely because theproperty is sold in a different form than theform in which it was purchased. For rules

of apportionment in determining foreignbase company sales income derived fromthe sale of personal property purchasedand used as a component part of propertywhich is not manufactured, produced, orconstructed, see paragraph (a)(5) of thissection.

(ii) * * * If personal property purchasedby a foreign corporation is substantiallytransformed by such foreign corpora-tion prior to sale, the property sold bythe selling corporation is manufactured,produced, or constructed by such sellingcorporation. * * *

(iii) * * * If purchased property is usedas a component part of personal propertywhich is sold, the sale of the property willbe treated as the sale of a manufacturedproduct, rather than the sale of componentparts, if the assembly or conversion of thecomponent parts into the final product bythe selling corporation involves activitiesthat are substantial in nature and gener-ally considered to constitute the manufac-ture, production, or construction of prop-erty. * * *

(iv) Substantial contribution to manu-facturing of personal property—(a)—Ingeneral. This paragraph (a)(4)(iv) appliesonly if a controlled foreign corporationdoes not satisfy paragraph (a)(4)(ii) or(a)(4)(iii) of this section, but the personalproperty purchased by a controlled foreigncorporation would be considered to bemanufactured, produced, or constructedprior to sale (under the principles of para-graphs (a)(4)(ii) or (iii) of this section) bythe controlled foreign corporation if themanufacturing, producing, and construct-ing activities undertaken with respect tothat property prior to sale were under-taken by the controlled foreign corporationthrough the activities of its employees.If this paragraph (a)(4)(iv) applies, thepersonal property sold by the controlledforeign corporation is manufactured, pro-duced, or constructed by such controlledforeign corporation only if the facts andcircumstances evidence that the controlledforeign corporation makes a substantialcontribution through the activities of itsemployees to the manufacture, production,or construction of the personal propertysold. The determination of whether acontrolled foreign corporation makes asubstantial contribution through the activ-ities of its employees to the manufacture,production, or construction of the personal

property sold will involve, but will notnecessarily be limited to, considerationof the activities set forth in paragraph(a)(4)(iv)(b) of this section. The weightgiven to any activity (whether or not setforth) will vary with the facts and circum-stances of the particular business. Thepresence or absence of any activity, or ofa particular number of activities, is notdeterminative. Further, the fact that otherpersons make contributions to the man-ufacture, production, or construction ofpersonal property prior to sale does notnecessarily prevent the controlled foreigncorporation from making a substantialcontribution to the manufacture, construc-tion, or production of that property throughthe activities of its employees.

(b) Activities. Activities of a con-trolled foreign corporation’s employeesto be considered in determining whethera controlled foreign corporation makes asubstantial contribution through the activ-ities of its employees to the manufacture,construction, or production of personalproperty include but are not limited to—

(1) Oversight and direction of the activ-ities or process (including management ofthe risk of loss) pursuant to which the prop-erty is manufactured, produced, or con-structed under the principles of paragraphs(a)(4)(ii) or (iii) of this section;

(2) Performance of activities that areconsidered in but that are insufficient tosatisfy the tests provided in paragraphs(a)(4)(ii) and (a)(4)(iii) of this section;

(3) Control of the raw materials, work-in-process and finished goods;

(4) Management of the manufacturingprofits;

(5) Material selection;(6) Vendor selection;(7) Control of logistics;(8) Quality control; and(9) Direction of the development, pro-

tection, and use of trade secrets, technol-ogy, product design and design specifica-tions, and other intellectual property usedin manufacturing the product.

(c) The rules of this paragraph (a)(4)(iv)are illustrated by the following examples:

Example 1. No substantial contribution to man-ufacturing. (i) Facts. FS, a controlled foreign cor-poration, purchases raw materials from a related per-son. The raw materials are then manufactured (un-der the principles of paragraph (a)(4)(iii) of this sec-tion) into Product X by CM, an unrelated corporationthat performs the physical conversion outside of FS’scountry of organization, pursuant to a contract man-

April 21, 2008 809 2008–16 I.R.B.

ufacturing arrangement. Product X is then sold byFS for use outside of FS’s country of organization.At all times, FS retains control of the raw material,work-in-process, and finished goods, as well as theintangibles used in the conversion process. FS retainsthe right to oversee and direct the physical conversionof Product X by CM but does not regularly exercise,through its employees, its powers of oversight or di-rection.

(ii) Result. FS does not satisfy paragraph(a)(4)(ii) or (a)(4)(iii) of this section because FSdoes not, through the activities of its employees,substantially transform, convert or assemble personalproperty into Product X. However, Product X wasmanufactured (by CM), and therefore this paragraph(a)(4)(iv) applies. FS does not satisfy the test underthis paragraph (a)(4)(iv) because it does not make asubstantial contribution through the activities of itsemployees to the manufacture of Product X. Merecontractual ownership of materials and intellectualproperty and contractual rights to exercise powers ofdirection and control (without the exercise of thosepowers) are not sufficient to satisfy this paragraph(a)(4)(iv). Therefore, FS is not considered to havemanufactured Product X under paragraph (a)(4)(i) ofthis section.

Example 2. Substantial contribution to manufac-turing, unrelated manufacturer. (i) Facts. Assumethe same facts as in Example 1, except for the follow-ing. FS, through its employees, is engaged in productdesign and quality control. Employees of FS regu-larly exercise the right to oversee and direct the ac-tivities of CM in the manufacture of Product X.

(ii) Result. FS does not satisfy paragraph(a)(4)(ii) or (a)(4)(iii) of this section with respect toProduct X because FS does not, through the activitiesof its employees, substantially transform, convert orassemble personal property into Product X. However,Product X was manufactured (by CM), and thereforethis paragraph (a)(4)(iv) applies. FS satisfies the testunder this paragraph (a)(4)(iv) because it makes asubstantial contribution through the activities of itsemployees to the manufacture of Product X. There-fore FS is considered to have manufactured ProductX. The analysis and conclusion in this Example 2would be the same if CM were a corporation that wasrelated to FS.

Example 3. Employees of another person. (i)Facts. FS, a controlled foreign corporation organizedin Country M, purchases raw materials from a relatedperson. The raw materials are then manufactured (un-der the principles of paragraph (a)(4)(iii) of this sec-tion) into Product X by CM, an unrelated contractmanufacturer located in Country C. CM uses employ-ees of another corporation to operate its manufactur-ing plant and convert the raw materials into ProductX. Apart from the physical conversion of the raw ma-terials into Product X, employees of FS perform all ofthe other activities with respect to the manufacture ofProduct X (for example, oversight and direction ofthe manufacturing process, control of raw materials,control of logistics, vendor selection, quality control).FS sells Product X for use, consumption or disposi-tion outside Country M.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(iii) of this sec-

tion with respect to Product X. Therefore, this para-graph (a)(4)(iv) applies. FS satisfies the test underthis paragraph (a)(4)(iv) because it makes a substan-tial contribution through the activities of its employ-ees to the manufacture of Product X. Therefore, FS isconsidered to have manufactured Product X. If CM’smanufacturing plant were located in Country M, thetest in paragraph (a)(2) of this section could be sat-isfied even if CM did not manufacture Product Xthrough the activities of its employees.

Example 4. Automated manufacturing. (i) Facts.FS, a controlled foreign corporation, purchases rawmaterials from a related person. The raw materi-als are then manufactured (under the principles ofparagraph (a)(4)(ii) of this section) into Product Xby CM, an unrelated corporation located outside ofFS’s country of organization, pursuant to a contractmanufacturing arrangement. Product X is then soldby FS to related and unrelated persons for use outsideof FS’s country of organization. Under the contractmanufacturing arrangement, CM is responsible forthe physical transformation of the raw materials intoProduct X. At all times, FS retains ownership of theraw material, work-in-process, and finished goods.FS retains the right to oversee and direct the physicalconversion of Product X by CM but does not regu-larly exercise, through its employees, its powers ofoversight or direction. FS is the owner of sophisti-cated software and network systems that remotelyand automatically (without human involvement) takeorders, route them to CM, order raw materials, andperform quality control. FS has a small numberof computer technicians who monitor the softwareand network systems to ensure that they are runningsmoothly and to apply any necessary patches or fixes.The software and network systems were developedby employees of DP, the U.S. corporate parent of FS,pursuant to a cost sharing agreement between DP andFS. DP employees regularly supervise the computertechnicians, evaluate the results of the automatedmanufacturing business, and make ongoing opera-tional decisions, including with regard to acceptableperformance of the manufacturing process, stoppagesof that process, and product and process redesignand updates to meet the needs of the business and itscustomers. DP employees develop and provide to FSall of the upgrades to the software and network sys-tems. DP also has employees who control the otheraspects of the manufacturing process such as productdesign, vendor and material selection, managementand retention of the manufacturing profits, and theselection of CM.

(ii) Result. FS does not satisfy paragraph(a)(4)(ii) or (a)(4)(iii) of this section with respect toProduct X because FS does not, through the activitiesof its employees, substantially transform, convert orassemble personal property into Product X. If themanufacturing activities undertaken with respect toProduct X between the time the raw materials werepurchased and the time Product X was sold wereundertaken by FS through the activities of its em-ployees, FS would have satisfied the manufacturingexception contained in paragraph (a)(4)(iii) of thissection with respect to Product X. Therefore, thisparagraph (a)(4)(iv) applies. FS does not satisfythe test under this paragraph (a)(4)(iv) because itdoes not make a substantial contribution throughthe activities of its employees to the manufacture ofProduct X. Mere contractual ownership of materials

and intellectual property together with contractualrights to exercise powers of direction and controland a small number of technical employees are notsufficient to satisfy this paragraph (a)(4)(iv). FS’sprimary contribution to the manufacture of Product Xis the provision of the software and network systemsto CM. Substantial operational responsibilities anddecision making are exercised by DP employees whodirect the activities of the FS employees. Therefore,FS is not considered to have manufactured ProductX.

* * * * *(6) * * * (i) * * * To determine the ex-

tent to which a controlled foreign corpo-ration’s distributive share of any item ofgross income of a partnership would havebeen foreign base company sales income ifreceived by it directly, under §1.952–1(g),the property sold will be considered to bemanufactured, produced or constructed bythe controlled foreign corporation, withinthe meaning of paragraph (a)(4) of this sec-tion, only if the manufacturing exceptionof paragraph (a)(4) of this section wouldhave applied to exclude the income fromforeign base company sales income if thecontrolled foreign corporation had earnedthe income directly, determined by takinginto account the activities of the employeesof, and property owned by, the partnership.

* * * * *(b) * * *(1) * * *(ii) * * *(a) * * *The provisions of this para-

graph (b)(1)(ii)(a) will not apply unless thecontrolled foreign corporation (includingany branches or similar establishments ofsuch controlled foreign corporation) man-ufactures, produces, or constructs suchpersonal property within the meaning ofparagraph (a)(4)(i) of this section.

* * * * *(c) Use of more than one branch—(1)

Use of one or more sales or purchasebranches in addition to a manufacturingbranch. * * *

(2) Use of more than one branch tomanufacture, produce, construct, grow, orextract separate items of personal prop-erty. If a controlled foreign corporationcarries on manufacturing, producing, con-structing, growing, or extracting activi-ties with respect to separate items of per-sonal property by or through more thanone branch or similar establishment lo-cated outside the country under the laws

2008–16 I.R.B. 810 April 21, 2008

of which such corporation is created or or-ganized, then paragraphs (b)(2)(ii)(b) and(c) of this section will be applied sepa-rately to each such branch or similar estab-lishment (by treating such branch or sim-ilar establishment as if it were the onlybranch or similar establishment of the con-trolled foreign corporation and as if anyother branches or similar establishmentswere separate corporations) in determiningwhether the use of such branch or similarestablishment has substantially the sametax effect as if such branch or similar estab-lishment were a wholly owned subsidiarycorporation of the controlled foreign cor-poration. The application of this paragraph(b)(1)(ii)(c)(2) is illustrated by the follow-ing example:

Example. Multiple branches that satisfy para-graph (a)(4)(ii) or (a)(4)(iii) of this section. (i) Facts.FS is a controlled foreign corporation organized inCountry M. FS operates two branches, Branch A andBranch B located in Country A and Country B, re-spectively. Branch A and Branch B each manufactureseparate items of personal property (Product X andProduct Y respectively) within the meaning of para-graph (a)(4)(ii) or (iii) of this section. Raw materialsused in the manufacture of Product X and Product Yare purchased by FS from an unrelated person. FS en-gages in activities in Country M to sell Product X andProduct Y to a related person for use, disposition orconsumption outside of Country M. Employees of FSlocated in Country M perform only sales functions.The effective rate imposed on the income from thesales of Product X and Product Y is 10%. CountryA imposes an effective rate of tax on sales income of20%. Country B imposes an effective rate of tax onsales income of 12%.

(ii) Result. Pursuant to this paragraph(b)(1)(ii)(c)(2), paragraph (b)(1)(ii)(b) of this sectionis separately applied to Branch A and Branch Bwith respect to the sales income of FS attributable toProduct X (manufactured by Branch A) and ProductY (manufactured by Branch B). Because the effec-tive rate of tax on FS’s sales income from the saleof Product X in Country M (10%) is less than 90%of, and at least 5 percentage points less than, theeffective rate of tax that would apply to such incomein the country in which Branch A is located (20%),the use of Branch A has substantially the same taxeffect as if Branch A were a wholly owned subsidiarycorporation of FS. Because the effective rate of taxon FS’s sales income from the sale of Product Yin Country M (10%) is not less than 90% of, andat least 5 percentage points less than, the effectiverate of tax that would apply to such income in thecountry in which Branch B is located (12%), the useof Branch B does not have substantially the same taxeffect as if Branch B were a wholly owned subsidiarycorporation of FS. Consequently, only Branch Ais treated as a separate corporation apart from theremainder of FS for purposes of determining foreignbase company sales income.

(3) Use of more than one manufactur-ing branch, or one or more manufactur-

ing branches and the remainder of thecontrolled foreign corporation, to man-ufacture, produce, construct, grow, orextract the same item of personal prop-erty—(a)—In general. This paragraph(b)(1)(ii)(c)(3) applies to determine thelocation of manufacturing, producing,constructing, growing or extracting of per-sonal property for purposes of applyingparagraphs (b)(1)(i)(b) or (ii)(b) of thissection where more than one branch ofa controlled foreign corporation, or oneor more branches of a controlled foreigncorporation and the remainder of the con-trolled foreign corporation, each engagein manufacturing, producing, construct-ing, growing or extracting activities withrespect to the same item of personal prop-erty which is then sold by the controlledforeign corporation.

(b) Physical manufacture, production,or construction in one or more locations.If only one branch or only the remainderof a controlled foreign corporation satis-fies either paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to an itemof personal property, then that branch orthe remainder of the controlled foreigncorporation will be the location of man-ufacturing, producing, or constructing ofthat property for purposes of applyingparagraph (b)(1)(i)(b) or (ii)(b) of thissection to the income from the sale of thatproperty. See §1.954–3(b)(1)(ii)(c)(3)(f)Example 1. If more than one branch, orone or more branches and the remainderof the controlled foreign corporation, eachindependently satisfy either paragraph(a)(4)(ii) or (a)(4)(iii) of this section withrespect to an item of property, then thelocation of manufacturing, producing,or constructing of that property for pur-poses of applying paragraph (b)(1)(i)(b)or (ii)(b) of this section will be that branchor the remainder of the controlled for-eign corporation that satisfies paragraph(a)(4)(ii) or (a)(4)(iii) of this section andthat is located or organized in the jurisdic-tion that would, after applying paragraph(b)(1)(ii)(b) of this section to such branchor paragraph (b)(1)(i)(b) of this sectionto the remainder of the controlled foreigncorporation, impose the lowest effectiverate of tax on the income allocated to suchbranch or the remainder of the controlledforeign corporation under such paragraph(that is, either paragraph (b)(1)(ii)(b) or(b)(1)(i)(b) of this section), if, under the

laws of such country, the entire incomeof the controlled foreign corporation wereconsidered derived by such corporationfrom sources within such country fromdoing business through a permanent estab-lishment therein, received in such country,and allocable to such permanent establish-ment, and the corporation were createdor organized under the laws of, and man-aged and controlled in, such country. See§1.954–3(b)(1)(ii)(c)(3)(f) Example 2.

(c) Predominant contribution. If noneof the branches nor the remainder ofa controlled foreign corporation satisfyparagraph (a)(4)(ii) or (a)(4)(iii) of thissection with respect to an item of personalproperty, but the controlled foreign cor-poration as a whole makes a substantialcontribution to the manufacture, pro-duction, or construction of that propertywithin the meaning of paragraph (a)(4)(iv)of this section, then for purposes of apply-ing paragraph (b)(1)(i)(b) or (ii)(b) or thissection, the branch or the remainder of thecontrolled foreign corporation that makesthe predominant amount of the controlledforeign corporation’s substantial contribu-tion with respect to the manufacture, pro-duction, or construction of that propertywill be the location of manufacturing, pro-ducing, or constructing with respect to thatproperty. See §1.954–3(b)(1)(ii)(c)(3)(f)Example 3. Whether any branch or theremainder of the controlled foreign cor-poration provides a predominant amountof the controlled foreign corporation’ssubstantial contribution is determined byweighing each branch’s or the remainderof the controlled foreign corporation’srelative contribution to the manufactureof the item of property as determined byapplying the facts and circumstances testprovided in paragraph (a)(4)(iv) of thissection. If multiple branches are locatedin a single jurisdiction, then the activitiesof those branches will be aggregated forpurposes of determining the branch or theremainder of the controlled foreign corpo-ration that makes the predominant amountof the controlled foreign corporation’ssubstantial contribution with respect to themanufacture, production, or constructionof an item of property. For purposes ofthis paragraph (b)(1)(ii)(c)(3)(c), a branchor the remainder of the controlled foreigncorporation makes a predominant amountof the controlled foreign corporation’ssubstantial contribution with respect to the

April 21, 2008 811 2008–16 I.R.B.

manufacture, production, or constructionof an item of personal property only if itmakes a significantly greater contributionto the manufacture, production, or con-struction of that property than any otherbranch or the remainder of the controlledforeign corporation.

(d) Location of activity. The locationof any activity with respect to the manu-facture, production, or construction of anitem of personal property is where the con-trolled foreign corporation makes a contri-bution through its employees to such ac-tivity. For example, the location of anyactivities concerning intangible property isnot determined based on the formal assign-ment of intangible property, but on whereemployees of the controlled foreign corpo-ration develop, protect, and direct the useof the intangible.

(e) Where no branch or the remain-der of the controlled foreign corporationprovides a predominant contribution. Ifneither a branch nor the remainder of acontrolled foreign corporation indepen-dently satisfies paragraph (a)(4)(ii) or (iii)of this section and neither a branch nor theremainder of the controlled foreign cor-poration provides a predominant amountof the controlled foreign corporation’scontribution to the manufacture of an itemof personal property, but the controlledforeign corporation as a whole makes asubstantial contribution to the manufac-ture of that property within the meaningof paragraph (a)(4)(iv) of this section,then for purposes of applying paragraph(b)(1)(i)(b) or (ii)(b) of this section, thelocation of manufacturing of that propertywill be that branch or remainder of the con-trolled foreign corporation that providesa contribution to the manufacture of theproperty and that is located or organized inthe jurisdiction that would, after applyingparagraph (b)(1)(ii)(b) of this section tosuch branch or (b)(1)(i)(b) of this sectionto such remainder of the controlled foreigncorporation, impose the highest effectiverate of tax on the income allocated to suchbranch or such remainder of the controlledforeign corporation under that paragraph,if, under the laws of such country, theentire income of the controlled foreigncorporation were considered derived bysuch corporation from sources within suchcountry from doing business through apermanent establishment therein, receivedin such country, and allocable to such per-

manent establishment, and the corporationwere created or organized under the lawsof, and managed and controlled in, suchcountry. See §1.954–3(b)(1)(ii)(c)(3)(f)Example 4.

(f) Examples. The following examplesillustrate the application of this paragraph(b)(1)(ii)(c)(3):

Example 1. Multiple branches that contribute tothe manufacture of a single product, only one branchthat satisfies paragraph (a)(4)(ii) or (a)(4)(iii) of thissection. (i) Facts. FS is a controlled foreign cor-poration organized in Country M. FS operates threebranches, Branch A, Branch B, and Branch C, locatedrespectively in Country A, Country B, and CountryC. Branch A, Branch B, and Branch C each performsdifferent manufacturing activities with respect to themanufacture of Product X. Branch A, through the ac-tivities of its employees, designs Product X. BranchB, through the activities of its employees, providesquality control and oversight. Branch C, throughthe activities of its employees, manufactures Prod-uct X (within the meaning of paragraph (a)(4)(iii) ofthis section) using the designs of Branch A and un-der the oversight of the quality control personnel ofBranch B. The activities of Branch A and Branch B donot satisfy either paragraph (a)(4)(ii) or (a)(4)(iii) ofthis section. Employees of FS located in Country Mpurchase the raw materials used in the manufactureof Product X from a related person and control thework-in-process and finished goods throughout themanufacturing process. Employees of FS located inCountry M also manage the risk of loss from the man-ufacture of Product X and the manufacturing profitsfrom the sales of Product X. Further, employees ofFS located in Country M control logistics, select ven-dors and raw materials, and oversee the coordinationbetween the branches. Employees of FS located inCountry M sell Product X to unrelated persons foruse, consumption or disposition outside of CountryM. The sales income from the sale of Product X istaxed in Country M at an effective rate of tax of 10%.Country C imposes an effective rate of tax of 20% onsales income.

(ii) Result. Because only the activities of BranchC satisfy paragraph (a)(4)(ii) or (a)(4)(iii) of thissection, paragraph (b)(1)(ii)(b) of this section isapplied by considering only the effective rate oftax that would apply in Country C. The effectiverates of tax in Country A and Country B are notconsidered, because Branch A and Branch B do notsatisfy either paragraph (a)(4)(ii) or (a)(4)(iii) of thissection. Because the effective rate of tax on the salesincome (10%) is less than 90% of, and at least 5percentage points less than, the effective rate of taxthat would apply to such income in the country inwhich Branch C is located (20%), the use of BranchC has substantially the same tax effect as if Branch Cwere a wholly owned subsidiary corporation of FS.Therefore sales of Product X by the remainder of FSare treated as sales on behalf of Branch C. Pursuantto paragraph (b)(2)(ii)(c)(2) of this section, FS willonly qualify for the manufacturing exception underparagraph (a)(4)(iv) of this section if FS successfullyrebuts, to the satisfaction of the Commissioner, thepresumption that FS does not provide a substantialcontribution to the manufacture of Product X. Forthis purpose, the activities of FS include the activities

of Branch A or Branch B if either of those brancheswould not be treated as a separate corporation underparagraph (b)(1)(ii)(b) of this section, if that para-graph were applied to each of Branch A and BranchB.

Example 2. Multiple branches satisfy paragraph(a)(4)(ii) or (a)(4)(iii) of this section with respect tothe same product sold by the controlled foreign cor-poration. (i) Facts. Assume the same facts as inExample 1, except for the following. In addition tothe design of Product X, Branch A also manufac-tures (within the meaning of paragraph (a)(4)(ii) ofthis section) a part of Product X. Branch C then com-bines that part with other parts to complete Product X.The activities of Branch C are sufficient to qualify asmanufacturing under paragraph (a)(4)(iii) of this sec-tion with respect to Product X. Country A imposes aneffective rate of tax of 12% on sales income.

(ii) Result. Because the activities of Branch Aand Branch C satisfy the requirements of paragraph(a)(4)(ii) and (iii) of this section respectively, para-graph (b)(1)(ii)(b) of this section is applied by com-paring the effective rate of tax imposed on the incomefrom the sales of Product X against the lowest ef-fective rate of tax that would apply to the sales in-come in either Country A or Country C if paragraph(b)(1)(ii)(b) of this section were applied separately toBranch A and Branch C. The effective rate of tax inCountry B is not considered because Branch B doesnot satisfy either paragraph (a)(4)(ii) or (a)(4)(iii) ofthis section. Because the effective rate of tax on thesales income of FS from the sale of Product X (10%)is not less than 90% of, and at least 5 percentagepoints less than, the effective rate of tax that wouldapply to such income in the country in which BranchA is located (12%), neither Branch A nor Branch C istreated as a separate corporation and sales of ProductX by the remainder of the controlled foreign corpora-tion are not treated as made on behalf of any branch.

Example 3. Predominant contribution by em-ployees located in the country of organization of thecontrolled foreign corporation, traveling employees,paragraph (a)(4)(iii) of this section satisfied by anunrelated contract manufacturer. (i) Facts. FS, acontrolled foreign corporation organized in CountryM, purchases raw materials from a related person.The raw materials are then manufactured (under theprinciples of paragraph (a)(4)(iii) of this section) intoProduct X by CM, an unrelated corporation locatedin Country C that performs the physical conversionpursuant to a contract manufacturing arrangement.Employees of FS located in Country M sell Prod-uct X to unrelated persons for use, consumption ordisposition outside of Country M. Employees ofFS located in Country M engage in design, testing,quality control and oversight with respect to the man-ufacture of Product X. Employees of FS located inCountry M also direct the use of intellectual propertyused in the manufacture of Product X from CountryM. At all times, employees of FS located in CountryM control the raw material, work-in-process and fin-ished goods. Employees of FS located in Country Malso control logistics, select vendors, and manage therisk of loss from the manufacture of Product X andthe manufacturing profits from Product X. Qualitycontrol and oversight of the manufacturing processis conducted by employees of FS who are employedin Country M but who regularly travel to Country C.Branch A, located in Country A, is the only branch

2008–16 I.R.B. 812 April 21, 2008

of FS. Design work with respect to Product X con-ducted by Branch A is supplemental to the bulk ofthe design work, which is done by employees ofFS located in Country M. FS as a whole (includingBranch A) provides a substantial contribution to themanufacture of Product X within the meaning ofparagraph (a)(4)(iv) of this section.

(ii) Result. FS qualifies for the exception to for-eign base company sales income contained in para-graph (a)(4) of this section with respect to incomefrom the sale of Product X because FS satisfies thetest contained in paragraph (a)(4)(iv) of this sectionby providing a substantial contribution through theactivities of its employees to the manufacture of Prod-uct X. The fact that employees of FS travel to the lo-cation of CM to perform some of the activities consid-ered in determining whether a controlled foreign cor-poration makes a substantial contribution through theactivities of its employees to the manufacturing of anitem of personal property does not prevent activitiesof such employees while located in Country M frombeing considered in determining the applicability ofparagraph (a)(4)(iv) of this section to FS. In addition,paragraph (b) of this section does not apply to treat abranch of FS as having substantially the same tax ef-fect as if the branch were a wholly owned subsidiarycorporation, because FS, as opposed to Branch A,provides the predominant contribution with respect toProduct X.

Example 4. Multiple branches perform manu-facturing activities, no branch makes a predominantcontribution, paragraph (a)(4)(iii) of this section issatisfied by an unrelated contract manufacturer. (i)Facts. FS, a controlled foreign corporation organizedin Country M, purchases raw materials from a relatedperson. The raw materials are then manufactured (un-der the principles of paragraph (a)(4)(iii) of this sec-tion) into Product X by CM, an unrelated corpora-tion located in Country C that performs the physi-cal conversion pursuant to a contract manufacturingarrangement. Employees of FS located in CountryM sell Product X to unrelated persons for use, con-sumption or disposition outside of Country M. FShas two branches, Branch A and Branch B, located inCountry A and Country B respectively. FS (includingBranch A and Branch B) makes a substantial contri-bution within the meaning of paragraph (a)(4)(iv) ofthis section with respect to the manufacture of Prod-uct X. Branch A, through the activities of its employ-ees, designs Product X. Branch B, through the activ-ities of its employees, provides quality control andoversight of the manufacturing process. At all times,FS controls the raw materials, work-in-process andthe finished Product X through employees located inCountry M. FS also manages the risk of loss relatedto the manufacture of Product X and the manufac-turing profits from the sales of Product X throughemployees located in Country M. Further, employ-ees of FS located in Country M control logistics, se-lect vendors, and oversee the coordination betweenthe branches. Country M imposes an effective rateof tax on sales income of 10%. Country A imposesan effective rate of tax on sales income of 20% andCountry B imposes an effective rate of tax on salesincome of 24%.

(ii) Result. Based on the facts, neither the re-mainder of FS (through activities of its employees inCountry M), nor Branch A, nor Branch B, provide apredominant amount of the controlled foreign corpo-

ration’s substantial contribution to the manufacture ofProduct X. FS, Branch A, and Branch B each providea contribution through the activities of their employ-ees to the manufacture of Product X. Accordingly,paragraph (b)(1)(ii)(b) of this section is applied bycomparing the effective rate of tax imposed on theincome from the sales of Product X against the ef-fective rate of tax that would apply to the sales in-come in Branch B, which is located in the jurisdic-tion that would impose the highest effective rate oftax on the sales income (24%). Because the effectiverate of tax imposed on the sales income by Country M(10%) is less than 90% of, and at least 5 percentagepoints less than, the effective rate of tax that wouldapply to such income in Country B (24%) the remain-der of FS is treated as selling on behalf of Branch B.Further, for purposes of determining whether the re-mainder of FS qualifies for any exception from for-eign base company sales income, applying paragraph(b)(2)(ii)(a) of this section, the remainder of FS in-cludes any branch of FS that would not, after the ap-plication of paragraph (b)(1)(ii)(b) of this section tosuch branch, be treated as a separate corporation. Inthis case, the effective rate of tax imposed on the salesincome by Country M (10%) is less than 90% of, andat least 5 percentage points less than, the effective rateof tax that would apply to such income in Country A(20%). Therefore, for purposes of determining for-eign base company sales income, the remainder of FSdoes not include the activities of Branch A. The re-mainder of FS must therefore independently qualifyfor the manufacturing exception contained in para-graph (a)(4) of this section or income from the saleof Product X will be foreign base company sales in-come.

Example 5. Multiple branches contribute to themanufacture of a single product, one branch sells theproduct, the remainder of the controlled foreign cor-poration does not participate. (i) Facts. FS is a con-trolled foreign corporation organized in Country M,a country that imposes a 0% effective rate of tax onsales income. FS operates two branches, Branch Aand Branch B, located respectively in Country A, acountry that imposes a 30% effective rate of tax onincome, and Country B, a country that imposes a 0%effective rate of tax on income. Branch A and BranchB each perform different activities with respect tothe manufacture of Product X. Branch A, through theactivities of a large number of its employees work-ing at a state of the art facility, expends significanttime and resources to design a sophisticated prod-uct, Product X. Branch B, through the activities ofits employees, purchases raw materials from a relatedperson and contracts with CM, an unrelated corpo-ration located in Country C, to manufacture ProductX. The raw materials are then manufactured (underthe principles of paragraph (a)(4)(iii) of this section)into Product X by CM. Branch A, through the activ-ities of its employees, directs the use of intellectualproperty it developed, including product designs, toprovide quality control and oversight to CM with re-spect to the manufacture of Product X. Branch B con-trols the raw materials, work in process, and the fin-ished Product X. Branch B manages the risk of losswith respect to Product X throughout the manufac-turing process. Branch B also controls logistics andselects vendors in connection with Product X. BranchB then sells Product X to unrelated persons for use,consumption or disposition outside of Country M. FS

(including Branch A and Branch B) provides a sub-stantial contribution within the meaning of paragraph(a)(4)(iv) of this section with respect to the manufac-ture of Product X. FS does not provide a contributionto the manufacture of Product X through employeeslocated in Country M.

(ii) Result. Based on the facts, neither Branch Anor Branch B provides the predominant amount ofFS’s contribution to the manufacture of Product X.Further, Branch A and Branch B each provide a con-tribution through the activities of its employees to themanufacture of Product X. Accordingly, pursuant toparagraph (b)(2)(ii)(c)(3)(e), Branch A is treated asthe location of manufacturing for purposes of apply-ing paragraph (b)(1)(ii)(b) of this section. Therefore,the effective rate of tax imposed on the income fromthe sales of Product X is compared against the ef-fective rate of tax that would apply to that incomeif it were earned in Country A, which would imposethe highest effective rate of tax on the sales income(30%). Because the effective rate of tax in Country Bwith respect to the sales income (0%) is less than 90%of, and at least 5 percentage points less than, the ef-fective rate of tax that would apply to such income inCountry A (30%), Branch B, treated as the remain-der of FS pursuant to paragraph (b)(1)(ii)(c) of thissection, is treated as selling on behalf of Branch A.Further, for purposes of determining whether the re-mainder of FS qualifies for any exception from for-eign base company sales income, Branch B, treatedas the remainder of FS, includes any branch or re-mainder of FS that would not, after the application ofparagraph (b)(1)(ii)(b) of this section to such branchor (b)(1)(i)(b) of this section to such remainder of FS,be treated as a separate corporation. In this case, theeffective rate of tax (0%) is less than 90% of, and atleast 5 percentage points less than, the effective rateof tax that would apply to such income in Country A(30%), but not country M (0%). Therefore, for pur-poses of determining foreign base company sales in-come, Branch B, treated as the remainder of FS, doesnot include the activities of Branch A, but does in-clude the activities of the remainder of FS located inCountry M. However, since the remainder of FS inCountry M does not perform any activities related tothe manufacture of Product X, the inclusion of theremainder of FS does not qualify Branch B for anyexception from foreign base company sales income.Branch B, treated as the remainder of FS, must there-fore independently qualify for the manufacturing ex-ception from foreign base company sales income con-tained in paragraph (a)(4) of this section or the in-come from the sale of Product X will be foreign basecompany sales income.

Example 6. Multiple branches contribute to themanufacture of a single product, the selling branch islocated in the higher tax jurisdiction, the remainderof the controlled foreign corporation does not partici-pate. (i) Facts. Assume the same facts as in Example5 except that Branch B rather than Branch A is lo-cated in the jurisdiction that would impose the highereffective rate of tax on income from the sales of Prod-uct X.

(ii) Result. Based on the facts, neither BranchA nor Branch B provides the predominant amountof FS’s contribution to the manufacture of ProductX. Since Branch B is located in the jurisdiction thatwould impose the higher effective rate of tax on in-come from the sale of Product X, Branch B is consid-

April 21, 2008 813 2008–16 I.R.B.

ered to be the location of manufacturing of Product Xfor purposes of applying paragraph (b) of this section.Because all of the income from the sale of Product Xis already taxed in Country B, the use of Branch Bis not treated as having substantially the same tax ef-fect as if Branch B were a wholly owned subsidiarycorporation of FS, and therefore Branch B and the re-mainder of FS are not treated as separate corporationsunder paragraph (b)(1)(ii)(a) of this section for pur-poses of determining foreign base company sales in-come.

(2) * * *(i) * * *(b) Activities treated as performed on

behalf of the remainder of corporation.With respect to purchasing or selling activ-ities performed by or through the branch orsimilar establishment, such purchasing orselling activities will—

(1) With respect to personal propertymanufactured, produced, constructed,grown, or extracted by the remainder ofthe controlled foreign corporation (or anybranch treated as the remainder of thecontrolled foreign corporation); or

(2) With respect to personal prop-erty (other than property described inparagraph (b)(2)(i)(b)(1) of this section)purchased or sold, or purchased and sold,by the remainder of the controlled foreigncorporation (or any branch treated as theremainder of the controlled foreign corpo-ration), be treated as performed on behalfof the remainder of the controlled foreigncorporation.

(ii) * * *(a) Treatment as separate corporations.

* * * For purposes of applying the rules ofthis paragraph (b)(2)(ii), a branch or sim-ilar establishment of a controlled foreigncorporation treated as a separate corpora-tion purchasing or selling on behalf of theremainder of the controlled foreign corpo-ration under paragraph (b)(2)(ii)(b) of thissection, or the remainder of the controlledforeign corporation treated as a separatecorporation purchasing or selling on be-half of a branch or similar establishmentof the controlled foreign corporation un-der paragraph (b)(2)(ii)(c) of this section,will exclude any other branch or similar es-tablishment or remainder of the controlledforeign corporation that would be treatedas a separate corporation (apart from thebranch or similar establishment of a con-trolled foreign corporation that is treatedas a separate purchasing or selling cor-poration under paragraph (b)(2)(ii)(b) ofthis section or the remainder of the con-

trolled foreign corporation that is treatedas a separate purchasing or selling corpo-ration under paragraph (b)(2)(ii)(c) of thissection) if the effective rate of tax imposedon the income of the purchasing or sell-ing branch or similar establishment, or pur-chasing or selling remainder of the con-trolled foreign corporation, were tested un-der the principles of §1.954–3(b)(1)(i)(b)or (ii)(b) of this section against the effec-tive rate of tax that would apply to such in-come if it were earned in the jurisdiction ofsuch other branch or similar establishmentor the remainder of the controlled foreigncorporation.

(b) Activities treated as performed onbehalf of the remainder of corporation.With respect to purchasing or selling activ-ities performed by or through the branch orsimilar establishment, such purchasing orselling activities will—

(1) With respect to personal propertymanufactured, produced, constructed,grown, or extracted by the remainder ofthe controlled foreign corporation (or anybranch treated as the remainder of thecontrolled foreign corporation); or

(2) With respect to personal prop-erty (other than property described inparagraph (b)(2)(ii)(b)(1) of this section)purchased or sold, or purchased and sold,by the remainder of the controlled foreigncorporation (or any branch treated as theremainder of the controlled foreign corpo-ration), be treated as performed on behalfof the remainder of the controlled foreigncorporation.

(c) Treatment of the use of a manu-facturing branch by a controlled foreigncorporation—(1) Activities treated as per-formed on behalf of branch. * * *

(2) Presumption where a controlledforeign corporation claims to satisfy thesubstantial contribution test and its ownbranch satisfies the physical manufac-turing test. If a branch or similar estab-lishment is considered to manufacture,produce, or construct an item of personalproperty under paragraph (a)(4)(ii) or(a)(4)(iii) of this section, the remainderof the controlled foreign corporation (orany branch treated as the remainder ofthe controlled foreign corporation) will bepresumed not to manufacture, produce,or construct that same item of personalproperty under paragraph (a)(4)(iv) ofthis section (even if it would have other-wise satisfied paragraph (a)(4)(iv) of this

section with respect to such property).However, if a controlled foreign corpo-ration demonstrates, to the satisfactionof the Commissioner, that the remainderof the controlled foreign corporation (orany branch treated as the remainder ofthe controlled foreign corporation) makesa substantial contribution to the manu-facture of that item of personal propertywithin the meaning of paragraph (a)(4)(iv)of this section, then the remainder of thecontrolled foreign corporation (or anybranch treated as the remainder of thecontrolled foreign corporation), if treatedas a separate corporation apart from itsmanufacturing branch under paragraph(b)(2)(ii)(a) of this section, will be consid-ered to manufacture, produce, or constructthat item of personal property under para-graph (a)(4)(iv) of this section. The ap-plication of this paragraph (b)(2)(ii)(c)(2)may be illustrated by the following exam-ples:

Example 1. Manufacturing branch, paragraph(b)(1)(ii)(b) satisfied. (i) Facts. FS, a controlled for-eign corporation organized in Country M, a countrythat imposes a 0% effective rate of tax on sales in-come, purchases raw materials from a related person.FS has one branch, Branch A, organized in Coun-try A, a country that imposes a 30% effective rate oftax on sales income. The raw materials are manu-factured (within the meaning of paragraph (a)(4)(iii)of this section) into Product X by Branch A. FS sellsProduct X for use, consumption, or disposition out-side of Country M. Absent the application of para-graph (b)(2)(ii)(c)(2) of this section, the remainder ofFS would also be considered a manufacturer of Prod-uct X under paragraph (a)(4)(iv) of this section. FSproves to the satisfaction of the Commissioner thatthe remainder of FS makes a substantial contributionto the manufacture of Product X.

(ii) Result. Since the effective rate of tax (0%)imposed on the sales income is less than 90% of,and at least 5 percentage points less than, the effec-tive rate of tax that would apply to such income inthe jurisdiction of Branch A (30%), the remainder ofFS is treated as a separate corporation selling on be-half of Branch A. The remainder of FS (not includ-ing Branch A) does not satisfy paragraph (a)(4)(ii)or (a)(4)(iii) of this section with respect to ProductX. If the manufacturing activities undertaken with re-spect to Product X between the time the raw materi-als were purchased and the time Product X was soldwere undertaken by the remainder of FS (not includ-ing Branch A) through the activities of its employees,the remainder of FS would have satisfied the manu-facturing exception contained in paragraph (a)(4)(iii)of this section with respect to Product X. Therefore,paragraph (a)(4)(iv) of this section applies. BecauseFS has successfully rebutted the presumption of para-graph (b)(2)(ii)(c)(2) of this section by proving to thesatisfaction of the Commissioner that the remainderof FS makes a substantial contribution to the man-ufacture (within the meaning of paragraph (a)(4)(iv)of this section) of Product X, it qualifies for the ex-

2008–16 I.R.B. 814 April 21, 2008

ception in paragraph (a)(4)(iv) of this section with re-spect to Product X. Therefore income from the sale ofProduct X, when treated as sold by the remainder ofFS on behalf of Branch A, is not determined to be for-eign base company sales income.

Example 2. Manufacturing branch, paragraph(b)(1)(ii)(b) is not satisfied. (i) Facts. Assume thesame facts as in Example 1, except that Branch A islocated in Country B, a country that imposes a 3%rate of tax on sales income.

(ii) Result. Paragraph (b)(1)(ii)(b) of this sectionis not satisfied, because the effective rate of tax im-posed on the sales income in Country M (0%) is notless than 90% of, and at least 5 percentage points lessthan, the effective rate of tax that would apply to suchincome in the jurisdiction of Branch A (3%). There-fore, Branch A is not treated as a separate corporationfor purposes of determining foreign base companysales income. FS qualifies for the manufacturing ex-ception in paragraph (a)(4) of this section because FS(including Branch A) satisfies paragraph (a)(4)(iii) ofthis section with respect to income from the sales ofProduct X.

* * * * *(e) Comparison with ordinary treat-

ment. With the exception of cases inwhich a controlled foreign corporationseeks to rely on paragraph (a)(4)(iv) ofthis section and is unsuccessful in rebut-ting the presumption created by paragraph(b)(2)(ii)(c)(2) of this section, income de-rived by a branch or similar establishment,or by the remainder of the controlled for-eign corporation, will not be determinedto be foreign base company sales incomeunder paragraph (b) of this section if theincome would not be so considered if itwere derived by a separate controlled for-eign corporation under like circumstances.

* * * * *(4) * * *Example 3. (i) Facts. Corporation E, a controlled

foreign corporation incorporated under the laws offoreign Country X, is a wholly owned subsidiary ofCorporation D, also a controlled foreign corporationincorporated under the laws of Country X. Corpo-ration E maintains Branch B in foreign Country Y.Both corporations use the calendar year as the taxableyear. In 1964, Corporation E’s sole activity, carriedon through Branch B, consists of the purchase of ar-ticles manufactured in Country X by Corporation D,a related person, and the sale of the articles throughBranch B to unrelated persons. One hundred percentof the articles sold through Branch B are sold for useoutside Country X and 90 percent are also sold for useoutside of Country Y. The income of Corporation Ederived by Branch B from such transactions is taxedto Corporation E by Country X only at the time Cor-poration E distributes such income to Corporation Dand is then taxed on the basis of what the tax (a 40 per-cent effective rate) would have been if the income hadbeen derived in 1964 by Corporation E from sourceswithin Country X from doing business through a per-manent establishment therein. Country Y levies anincome tax at an effective rate of 50 percent on in-

come derived from sources within such country, butthe income of Branch B for 1964 is effectively taxedby Country Y at a 5 percent rate since under the lawsof such country, only 10 percent of Branch B’s in-come is derived from sources within such country.Corporation E makes no distributions to CorporationD in 1964.

(ii) Result. In determining foreign base companysales income of Corporation E for 1964, Branch Bis treated as a separate wholly owned subsidiary cor-poration of Corporation E, the 5 percent rate of taxbeing less than 90 percent of, and at least 5 percent-age points less than the 40 percent rate. Income de-rived by Branch B, treated as a separate corpora-tion, from the purchase from a related person (Cor-poration D), of personal property manufactured out-side of Country Y and sold for use, disposition, orconsumption outside of Country Y constitutes for-eign base company sales income. If, instead, Cor-poration D were unrelated to Corporation E, none ofthe income would be foreign base company sales in-come because Corporation E would be purchasingfrom and selling to unrelated persons and if Branch Bwere treated as a separate corporation it would like-wise be purchasing from and selling to unrelated per-sons. Alternatively, if Corporation D were related toCorporation E, but Branch B manufactured the arti-cles prior to sale under the principles of paragraph(a)(4)(iv) of this section in conjunction with the man-ufacture of the articles (within the meaning of para-graph (a)(4)(ii) or (a)(4)(iii) of this section) by an un-related contract manufacturer, then the income wouldnot be foreign base company sales income becauseBranch B, treated as a separate corporation, wouldqualify for the manufacturing exception under para-graph (a)(4)(i) of this section.

* * * * *(d) Effective/applicability date. The

second sentence of paragraph (a)(1)(i), thesecond sentence of paragraph (a)(1)(iii)Example 1, the first sentence of para-graph (a)(1)(iii) Example 2, the thirdsentence of paragraph (a)(2), paragraph(a)(4)(i), the first sentence of paragraph(a)(4)(ii), the first sentence of paragraph(a)(4)(iii), paragraph (a)(4)(iv), paragraph(a)(6)(i), the last sentence of paragraph(b)(1)(ii)(a), paragraph (b)(1)(ii)(c)(2),paragraph (b)(1)(ii)(c)(3), paragraph(b)(2)(i)(b), the last sentence of para-graph (b)(2)(ii)(a), paragraph (b)(2)(ii)(b),paragraph (b)(2)(ii)(c)(2), paragraph(b)(2)(ii)(e), and paragraph (b)(4) Ex-ample 3 shall apply to taxable years ofcontrolled foreign corporations beginningon or after the date these rules are pub-lished as final regulations in the FederalRegister, and for taxable years of UnitedStates shareholders in which or with whichsuch taxable years of the controlled for-eign corporations end.


(Filed by the Office of the Federal Register on February 27,2008, 8:45 a.m., and published in the issue of the FederalRegister for February 28, 2008, 73 F.R. 10716)

Notice of ProposedRulemaking

Multiemployer Plan FundingGuidance

REG–151135–07

AGENCY: Internal Revenue Service(IRS), Treasury

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations under section 432 of theInternal Revenue Code (Code). These pro-posed regulations provide additional rulesfor certain multiemployer defined benefitplans that are in effect on July 16, 2006.These proposed regulations affect spon-sors and administrators of, and participantsin multiemployer plans that are in eitherendangered or critical status. These regu-lations are necessary to implement the newrules set forth in section 432 that are effec-tive for plan years beginning after 2007.The proposed regulations reflect changesmade by the Pension Protection Act of2006.

DATES: Written or electronic commentsand requests for public hearing must bereceived by June 16, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–151135–07), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–151135–07),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC 20224, or sent elec-tronically via the Federal eRulemak-ing Portal at www.regulations.gov (IRSREG–151135–07).

April 21, 2008 815 2008–16 I.R.B.

FOR FURTHER INFORMATIONCONTACT: Concerning the reg-ulations, Bruce Perlin, (202)622–6090; concerning submissionsand requests for a public hearing,[email protected] orat (202) 622–7180 (not toll-free numbers).


Paperwork Reduction Act

The collection of information containedin this notice of proposed rulemaking hasbeen submitted to the Office of Manage-ment and Budget for review in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)). Comments on thecollection of information should be sent tothe Office of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington, DC20503, with copies to the Internal Rev-enue Service, Attn: IRS Reports Clear-ance Officer, SE:W:CAR:MP:T:T:SP,Washington, DC 20224. Comments onthe collection of information should bereceived by May 19, 2008.

Comments are specifically requestedconcerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether theinformation will have practical utility;

The accuracy of the estimated burdenassociated with the collection of informa-tion;

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with thecollection of information may be mini-mized, including through the applicationof automated collection techniques orother forms of information technology;and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of service to provide information.

The collection of information in thisregulation is in §1.432(b)–1(d) and (e).This information is required in order fora qualified multiemployer defined benefit

plan’s enrolled actuary to provide a timelycertification of the plan’s funding status.In addition, if it is certified that a plan isor will be in critical or endangered status,the plan sponsor is required to notify theDepartment of Labor, the Pension BenefitGuaranty Corporation, the bargaining par-ties, participants, and beneficiaries of thestatus designation. For plans in critical sta-tus, the plan sponsor is required to includein the notice an explanation of the possibil-ity that adjustable benefits may be reducedat a later date and that certain benefits arerestricted as of the date the notice is sent.The annual certification by the enrolled ac-tuary for the plan will be used to providean accurate determination and certificationof the plan’s funded status and to providenotice to the required parties of the statusdesignation. The collection of informationis mandatory. The likely respondents aremultiemployer plan sponsors and enrolledactuaries.

Estimated total annual reporting bur-den: 1,200 hours.

Estimated average annual burden hoursper respondent: 0.75 hours.

Estimated number of respondents:1,600.

Estimated annual frequency of re-sponses: occasional.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

Background

This document contains proposed In-come Tax Regulations (26 CFR part 1)under section 432, as added to the Inter-nal Revenue Code by the Pension Protec-tion Act of 2006 (PPA ’06), Public Law109–280, 120 Stat 780.

Section 412 contains minimum fund-ing rules that generally apply to pension

plans. Section 431 sets forth the fund-ing rules that apply specifically to multi-employer defined benefit plans. Section432 sets forth additional rules that apply tomultiemployer plans in effect on July 16,2006, that are in endangered or critical sta-tus1.

Section 432 generally provides for a de-termination by the enrolled actuary for amultiemployer plan as to whether the planis in endangered status or in critical sta-tus for a plan year. In the first year thatthe actuary certifies that the plan is in en-dangered status, section 432(a)(1) requiresthat the plan sponsor adopt a funding im-provement plan. The funding improve-ment plan must meet the requirements ofsection 432(c) and the plan must apply therules of section 432(d) during the periodthat begins when the plan is certified tobe in endangered status and ends whenthe plan is no longer in that status. Inthe first year that the actuary certifies thatthe plan is in critical status, section 432(a)(2) requires that the plan sponsor adopta rehabilitation plan. The rehabilitationplan must meet the requirements of section432(e) and the plan must apply the rules ofsection 432(f) during the period that beginswhen the plan is certified to be in criticalstatus and ends when the plan is no longerin that status. In addition, section 432(f)(2)requires that the plan suspend certain ac-tions as described more fully in this pre-amble.

Section 432(b)(3)(A) requires an actu-arial certification of whether or not a mul-tiemployer plan is in endangered status,and whether or not a multiemployer planis or will be in critical status, for eachplan year. This certification must be com-pleted by the 90th day of the plan yearand must be provided to the Secretary ofthe Treasury and to the plan sponsor. Ifthe certification is with respect to a planyear that is within the plan’s funding im-provement period or rehabilitation periodarising from a prior certification of endan-gered or critical status, the actuary mustalso certify whether or not the plan is mak-ing scheduled progress in meeting the re-quirements of its funding improvement orrehabilitation plan. Failure of the plan’sactuary to certify the status of the plan is

1 Section 302 and section 304 of the Employee Retirement Income Security Act of 1974, as amended (ERISA) sets forth funding rules that are parallel to those in section 412 and section 431of the Code. Section 305 of ERISA sets forth additional rules for multiemployer plans that are parallel to those in section 432 of the Code. Under section 101 of Reorganization Plan No. 4of 1978 (43 FR 47713) and section 302 of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these proposed regulations for purposes ofERISA, as well as the Code. Thus, these Treasury Department regulations issued under section 432 of the Code apply as well for purposes of ERISA section 305.

2008–16 I.R.B. 816 April 21, 2008

treated as a failure to file the annual reportunder section 502(c)(2) of the EmployeeRetirement Income Security Act of 1974(ERISA). Thus, a penalty of up to $1,100per day applies.

Under section 432(b)(1), a multiem-ployer plan is in endangered status if theplan is not in critical status and, as of thebeginning of the plan year, (1) the plan’sfunded percentage for the plan year isless than 80 percent, or (2) the plan hasan accumulated funding deficiency forthe plan year or is projected to have anaccumulated funding deficiency in any ofthe six succeeding plan years (taking intoaccount amortization extensions undersection 431(d)). Under section 432(i), aplan’s funded percentage is the percentagedetermined by dividing the value of theplan’s assets by the accrued liability of theplan.

Under section 432(b)(2), a multiem-ployer plan is in critical status for a planyear if it meets any of four specified tests.Under section 432(b)(2)(A), a plan is incritical status if, as of the beginning of theplan year: (1) the funded percentage ofthe plan is less than 65 percent and (2) thesum of (A) the market value of plan assets,plus (B) the present value of reasonablyanticipated employer contributions for thecurrent plan year and each of the six suc-ceeding plan years is less than the presentvalue of all nonforfeitable benefits pro-jected to be payable under the plan duringthe current plan year and each of the sixsucceeding plan years (plus administrativeexpenses). For this purpose, employercontributions are determined assumingthat the terms of all collective bargainingagreements pursuant to which the plan ismaintained for the current plan year con-tinue in effect for succeeding plan years.

Under section 432(b)(2)(B), a plan isin critical status if the plan has an accu-mulated funding deficiency for the currentplan year or is projected to have an accu-mulated funding deficiency for any of thethree succeeding plan years. For purposesof this test, the determination of accumu-lated funding deficiency is made not tak-ing into account any amortization exten-sion under section 431(d). In addition, ifa plan has a funded percentage of 65 per-cent or less, the three-year period for pro-jecting whether the plan will have an accu-mulated funding deficiency is extended tofour years.

Under section 432(b)(2)(C), a plan isin critical status for the plan year if (1)the plan’s normal cost for the current planyear, plus interest for the current plan yearon the amount of unfunded benefit liabil-ities under the plan as of the last day ofthe preceding year, exceeds the presentvalue of the reasonably anticipated em-ployer and employee contributions for thecurrent plan year, (2) the present valueof nonforfeitable benefits of inactive par-ticipants is greater than the present valueof nonforfeitable benefits of active partic-ipants, and (3) the plan has an accumu-lated funding deficiency for the currentplan year, or is projected to have an ac-cumulated funding deficiency for any ofthe four succeeding plan years (not tak-ing into account amortization period ex-tensions under section 431(d)).

Under section 432(b)(2)(D), a plan is incritical status for a plan year if the sum of(A) the market value of plan assets, and (B)the present value of the reasonably antic-ipated employer contributions for the cur-rent plan year and each of the four succeed-ing plan years is less than the present valueof all benefits projected to be payable un-der the plan during the current plan yearand each of the four succeeding plan years(plus administrative expenses). For thispurpose, employer contributions are deter-mined assuming that the terms of all col-lective bargaining agreements pursuant towhich the plan is maintained for the cur-rent plan year continue in effect for suc-ceeding plan years.

In making the determinations and pro-jections applicable under the endangeredand critical status rules, the plan actuarymust make projections for the current andsucceeding plan years of the current valueof the assets of the plan and the presentvalue of all liabilities to participants andbeneficiaries under the plan for the currentplan year as of the beginning of such year.The actuary’s projections must be basedon reasonable actuarial estimates, assump-tions, and methods that offer the actuary’sbest estimate of anticipated experience un-der the plan. An exception to this rule ap-plies in the case of projected industry ac-tivity. Any projection of activity in the in-dustry or industries covered by the plan,including future covered employment andcontribution levels, must be based on in-formation provided by the plan sponsor,and the plan sponsor must act reasonably

and in good faith. The projected presentvalue of liabilities as of the beginning ofthe year must be based on either the mostrecent actuarial statement required with re-spect to the most recently filed annual re-port or the actuarial valuation for the pre-ceding plan year.

Under section 432(b)(3)(B)(ii), any ac-tuarial projection of plan assets must as-sume (1) reasonably anticipated employercontributions for the current and succeed-ing plan years, assuming that the terms ofone or more collective bargaining agree-ments pursuant to which the plan is main-tained for the current plan year continue ineffect for the succeeding plan years, or (2)that employer contributions for the mostrecent plan year will continue indefinitely,but only if the plan actuary determinesthat there have been no significant demo-graphic changes that would make contin-ued application of such terms unreason-able.

The first year that an actuary certifiesthat a plan is in endangered or critical sta-tus establishes a timetable for a numberof actions. Under section 432(b)(3)(D),within 30 days after the date of certifica-tion, the plan sponsor must notify the par-ticipants and beneficiaries, the bargainingparties, the PBGC and the Secretary of La-bor of the plan’s endangered or critical sta-tus. If it is certified that a plan is or willbe in critical status, the plan sponsor mustinclude in the notice an explanation of thepossibility that (1) adjustable benefits (asdefined in section 432(e)(8)) may be re-duced and (2) such reductions may ap-ply to participants and beneficiaries whosebenefit commencement date is on or afterthe date such notice is provided for the firstplan year in which the plan is in critical sta-tus.

If a plan is certified to be in critical sta-tus, the plan must take certain actions afternotifying the plan participants of the criti-cal status. Specifically, section 432(f)(2)restricts the payment of benefits that arein excess of a single life annuity (plusany social security supplement) effectiveon the date the notice is sent. Section432(f)(2)(B) provides that this restrictiondoes not apply to amounts that may be im-mediately distributed without the consentof the employee under section 411(a)(11)and to any makeup payment in the caseof a retroactive annuity starting date or asimilar payment of benefits owed with re-

April 21, 2008 817 2008–16 I.R.B.

spect to a prior period. In addition, theplan sponsor must refrain from making anypayment for the purchase of an irrevocablecommitment from an insurer to pay bene-fits.

Sections 432(c)(1) and 432(e)(1) pro-vide that in the first year that a plan is cer-tified to be in endangered or critical sta-tus, the plan sponsor must adopt a fund-ing improvement plan (in the case of a planthat is in endangered status) or a rehabili-tation plan (in the case of a plan that is incritical status). The deadline for adoptionof the funding improvement plan or reha-bilitation plan is 240 days after the dead-line for the certification. Accordingly, ifthe actuarial certification is made after the90-day deadline, the amount of time foradopting the funding improvement plan orrehabilitation plan is shortened.

Section 432(c)(3) defines a funding im-provement plan as a plan which consistsof the actions, including options or a rangeof options, to be proposed to the bargain-ing parties, formulated to provide, basedon reasonably anticipated experience andreasonable actuarial assumptions, for theattainment by the plan of certain require-ments. Those requirements are based ona statutorily specified improvement in theplan’s funding percentage from the per-centage that applied on the first day of thefunding improvement period. The first dayof the funding improvement period is de-fined in section 432(c)(4) as the first dayof the first plan year beginning after theearlier of (1) the second anniversary of thedate of the adoption of the funding im-provement plan or (2) the expiration of thecollective bargaining agreements in effecton the due date for the actuarial certifica-tion of endangered status for the initial en-dangered year and covering, as of such duedate, at least 75 percent of the active par-ticipants in such multiemployer plan.

Section 432(d)(1) sets forth rules thatapply after the certification of endan-gered status and before the first day ofthe funding improvement period. Afterthe adoption of the funding improve-ment plan, section 432(d)(2) prohibits anyamendments that are inconsistent with thefunding improvement plan. In addition,section 432(d)(2) provides special rulesfor acceptance of collective bargainingagreements and plan amendments that in-crease benefits.

A rehabilitation plan is a plan whichconsists of the actions, including optionsor a range of options, to be proposed tothe bargaining parties, formulated to pro-vide, based on reasonably anticipated ex-perience and reasonable actuarial assump-tions, for the attainment by the plan ofcertain requirements. Generally, the reha-bilitation plan should enable the plan toemerge from critical status by the end ofa 10-year period that begins after the ear-lier of (1) the second anniversary of thedate of the adoption of the rehabilitationplan or (2) the expiration of the collectivebargaining agreements in effect on the duedate for the actuarial certification of crit-ical status for the initial critical year andcovering, as of such due date, at least 75percent of the active participants in suchmultiemployer plan. For this purpose aplan emerges from critical status when theplan actuary certifies that the plan is notprojected to have an accumulated fund-ing deficiency for the plan year or any ofthe nine succeeding plan years, withoutregard to the use of the shortfall methodand taking into account amortization pe-riod extensions under section 431(d). Asan alternative, if the plan sponsor deter-mines that, based on reasonable actuarialassumptions and upon exhaustion of allreasonable measures, the plan cannot rea-sonably be expected to emerge from crit-ical status by the end of the 10-year pe-riod, the requirements for a rehabilitationplan are that the plan include reasonablemeasures to emerge from critical status ata later time or to forestall possible insol-vency (within the meaning of section 4245of ERISA).

Section 432(e)(8) allows a rehabili-tation plan for a plan that is in criticalstatus to provide for a reduction of certain“adjustable” benefits that would other-wise be protected by section 411(d)(6).These adjustable benefits include earlyretirement benefits and retirement-typesubsidies within the meaning of sec-tion 411(d)(6)(B)(i). Under section432(e)(8)(A)(ii), no reduction will applyto a participant whose benefit commence-ment date is before the date the noticeunder section 432(b)(3)(D) for the initialcritical year is provided. Under section432(e)(8)(B), except with respect to cer-tain benefit increases described in section432(e)(8)(A)(iv)(III), a plan is not permit-ted to reduce the level of a participant’s ac-

crued benefit payable at normal retirementage. Furthermore, section 432(e)(8)(C)prohibits any reduction until 30 days afterplan participants and beneficiaries, em-ployers and employee organizations arenotified of the reduction.

In years after the initial critical year orinitial endangered year, sections 432(c)(6)and 432(e)(3)(B) provide that the plansponsor must annually update the fundingimprovement or rehabilitation plan. Thisincludes updating the schedule of contri-bution rates. Updates are required to befiled with the plan’s annual report.

Section 432(f)(4) sets forth rules thatapply after the certification of critical sta-tus and before the first day of the rehabil-itation period. After the adoption of therehabilitation plan, section 432(f)(1) pro-hibits any amendments that are inconsis-tent with the rehabilitation plan.

Section 432(h) provides rules for thetreatment of employees who participate inthe plan even though they are not coveredby a collective bargaining agreement.

Section 432(i) provides a number ofdefinitions that apply for purposes of sec-tion 432. For example, under section432(i)(8), the actuary’s determination withrespect to a plan’s normal cost, actuarialaccrued liability, and improvements in aplan’s funded percentage must be based onthe unit credit funding method (whetheror not that method is used for the plan’sactuarial valuation).

Section 432 is effective for plan yearsbeginning on or after January 1, 2008. Sec-tion 212(e)(2) of PPA ’06 provides a spe-cial rule permitting a plan to provide thenotice described in section 432(b)(3)(D)on an early basis. Specifically, if the planactuary certifies that the plan is reason-ably expected to be in critical status forthe first plan year beginning after 2007, theplan is permitted to provide the notice de-scribed in section 432(b)(3)(D) at any timebetween the enactment of PPA ’06 and thedate the notice is otherwise required to beprovided.


Overview

These regulations provide guidancewith respect to certain of the provisionsof section 432. Specifically, these reg-ulations provide guidance regarding the

2008–16 I.R.B. 818 April 21, 2008

determination of when a plan is in en-dangered status or critical status and theassociated notices. These regulations donot provide guidance with respect to allissues relating to a multiemployer planthat is in endangered or critical status. Forexample, no guidance is provided on theparameters for the adoption of a fundingimprovement plan or rehabilitation plan.Guidance with respect to additional issueswill be included in a second set of regu-lations that are expected to be issued thisyear.

§1.432(a)–1 General rules relating tosection 432

Section 1.432(a)–1 provides generalrules relating to section 432, includingdefinitions of certain terms used for pur-poses of section 432 and the special rulesthat apply to participants in multiemployerplans who are not participating pursuantto a collective bargaining agreement.

The regulations provide that effectiveon the date that a notice of critical sta-tus for the initial critical year is sent tothe plan participants, the plan must notpay any benefit in excess of the monthlyamount paid under a single life annuity(plus any social security supplement) andis not permitted to purchase an irrevocablecommitment from an insurer to pay bene-fits. The restriction does not apply to thesmall-dollar cash-outs allowed under sec-tion 411(a)(11) nor to the make-up pay-ments under a retroactive annuity startingdate.

The regulations provide that if the no-tice described in section 432(b)(3)(D) hasbeen sent and the restrictions provided un-der section 432(f)(2) have been applied,and it is later determined that the restric-tions should not have been applied, thenthe plan must correct any benefit paymentsthat were restricted in error. The regula-tions provide two examples of situationsrequiring this correction, each of which in-volves an actuary certifying that the plan isreasonably expected to be in critical statusfor the first plan year beginning after 2007,followed by an early notification of criti-cal status that is made to employees underthe rules of section 212(e)(2) of PPA ’06.In one example of a plan taking actionsthat require correction, the plan restrictsbenefits before the first plan year begin-ning after 2007 (the effective date of sec-

tion 432). In the second such example, theplan is not in critical status for the first planyear beginning after 2007 (even though theenrolled actuary for the plan had certifiedthat it is reasonably expected that the planwill be in critical status with respect to thatyear).

The regulations incorporate a numberof definitions listed in section 432(i) alongwith other definitions that are located insections 432(c) and (e). The regulationsdo not include the broad provision un-der section 432(i)(8) to use the unit creditfunding method for purposes of the plan’s“normal cost, actuarial accrued liability,and improvements in a plan’s funded per-centage.” Instead, consistent with the in-tended scope of section 432(i)(8), the reg-ulations require the use of this fundingmethod solely for purposes of determin-ing a plan’s funded percentage and the sec-tion 432(b)(2)(C)(i) comparison of contri-butions with the sum of the plan’s nor-mal cost and interest on the amount of un-funded liability. Thus, the determinationof whether a plan is projected to have anaccumulated funding deficiency in the de-termination of a plan’s status under section432 is based on the plan’s actual fundingmethod, rather than the unit credit fund-ing method. The regulations substitutethe term “initial endangered year” for thestatutory term “initial determination year.”

In addition, the regulations provideguidance for plans that change their statusin subsequent years. For example, a planthat is in critical status may emerge fromthat status and later reenter critical status.In such a circumstance, the year of reentryinto critical status is treated as the initialcritical year. Similarly, a plan that is in en-dangered status may have a status changeand at a later date reenter endangered sta-tus. In such a circumstance, the year ofreentry into endangered status is treated asthe initial endangered year.

§1.432(b)–1 Determination of status andadoption of a plan

The regulations provide rules for thedetermination of whether a plan is in en-dangered status or critical status withinthe meaning of section 432(b)(1) and (2).These rules reflect the different ways aplan can be in endangered status under sec-tion 432(b)(1)(A) or (B) and in critical sta-tus under section 432(b)(2)(A), (B), (C),

or (D). The regulations also provide that aplan is in critical status for a plan year ifit was in critical status in the immediatelypreceding year and the plan does not meetthe emergence from critical status rule ofsection 432(e)(4)(B). Thus, a plan that wasin critical status for the prior year will re-main in critical status if the enrolled ac-tuary for the plan certifies that the plan isprojected to have an accumulated fundingdeficiency for the plan year or any of the9 succeeding plan years, without regard tothe use of the shortfall funding method, buttaking into account any extensions of theamortization periods under section 431(d).

The regulations provide limited guid-ance on the actuarial projections that areused for purposes of the certification ofstatus by the enrolled actuary for the plan.The projections must generally be basedon reasonable actuarial assumptions andmethods that, as under section 431(c)(3),offer the actuary’s best estimate of an-ticipated experience under the plan. Theactuarial projection of future contribu-tions and assets must assume either thatthe terms of the one or more collectivebargaining agreements pursuant to whichthe plan is maintained for the current planyear continue in effect for succeeding planyears, or that the dollar amount of em-ployer contributions for the most recentplan year will continue indefinitely. If theactuarial projections assume the continuedmaintenance of the collective bargainingagreements, the plan sponsor must providea projection of activity in the industry, in-cluding future covered employment, to theplan actuary, and the actuary is permittedto rely on those projections. In makingthese projections, the plan sponsor mustact reasonably and in good faith. The alter-native assumption that the dollar amountof contributions remains unchanged intothe future is only available if the enrolledactuary for the plan determines there havebeen no significant demographic changesthat would make such assumption un-reasonable. In addition, the regulationsprovide that the alternative assumption isnot available for purposes of determiningwhether the plan is in critical status underthe tests in section 432(b)(2)(A) and (D).

The projected present value of liabili-ties as of the beginning of such year is de-termined based on the most recent infor-mation reported on the most recent of ei-ther the actuarial statement required un-

April 21, 2008 819 2008–16 I.R.B.

der section 103(d) of ERISA that has beenfiled with respect to the most recent year,or the actuarial valuation for the precedingplan year.

The regulations provide that, for pur-poses of section 432, if the plan receivedan extension of any amortization periodunder section 412(e), the extension istreated the same as an extension undersection 431(d). Thus, such an extension istaken into account in determining endan-gered status under section 432(b)(1)(B)and emergence from critical status undersection 432(e)(4)(B). In contrast, suchan extension is not taken into account indetermining whether a plan has or willhave an accumulated funding deficiencyfor purposes of determining critical statusunder section 432(b)(2)(B) and (C).

The regulations describe the content ofthe annual certification required under sec-tion 432(b)(3) that must be sent to theplan sponsor and the IRS. The annual cer-tification must be provided regardless ofwhether the plan is in endangered or crit-ical status. If the plan is certified to bein endangered or critical status, then thecertification must identify the plan, theplan sponsor, and the enrolled actuary whosigns the certification; provide contact in-formation for the plan sponsor and actuary;state whether or not the plan is in endan-gered or critical status for the plan year;and, if the certification is for a year otherthan the initial endangered year or the ini-tial critical year, whether the plan is mak-ing the scheduled progress described in theplan’s funding improvement plan or reha-bilitation plan. The regulations also pro-vide an IRS address to which the certifica-tion is to be mailed.

The regulations also provide that thecontent of the annual certification and theIRS address to which it is mailed maybe added to or modified in guidance ofgeneral applicability to be published inthe Internal Revenue Bulletin. Such ad-ditional information may include, for in-stance, which endangered status or criti-cal status standard(s) applies to the plan;supporting information for the classifica-tion; a description of the actuarial assump-tions used in making the certification; anda projection of the plan’s funded percent-

age for future years. The guidance mayalso require additional supporting infor-mation for certifications made prior to theissuance of the guidance.

The regulations provide guidanceon the notice required under section432(b)(3)(D).2 In particular the regula-tions require that, in the case of a planthat is in critical status and which providesfor benefits that would be restricted un-der section 432(f)(2), the notice for theinitial critical year must tell participantsabout the restriction. A plan sponsor thatsends the model notice provided by theSecretary of Labor pursuant to section432(b)(3)(D)(iii) satisfies this require-ment.

If a section 432(b)(3)(D) notice forsuch a plan was sent prior to the dead-line in that section and the notice didnot contain the disclosure regarding theimmediate restriction on benefits undersection 432(f)(2), then the regulationsprovide that the notice does not satisfythe requirements for notice under section432(b)(3)(D). Accordingly, the restrictionsunder section 432(f)(2) do not apply as aresult of the issuance of such a notice andthe plan will not be treated as having is-sued the notice for purposes of the section432(e)(8)(A)(ii) restriction on reducingadjustable benefits for participants whosebenefit commencement dates are prior tothe issuance of that notice. However, ifadditional notice that includes all of theinformation required under the regulationsis provided prior to the required date fornotice for the initial critical year undersection 432(b)(3)(D) (that is, 30 days af-ter the certification for the plan year),then the notice requirements of section432(b)(3)(D) are satisfied as of the dateof the later notice. In such a case, if theearlier notice contained the informationdescribed in section 432(b)(3)(D)(ii), thenthe date of that earlier notice will apply forpurposes of the section 432(e)(8)(A)(ii)restriction.

The regulations reflect the rules of sec-tion 212(e)(2) of PPA under which a plansponsor is permitted to send an early no-tice to plan participants. This early notice,which applies solely to the first plan yearbeginning after 2007, is only available if

the plan actuary certifies to the plan spon-sor that the plan is reasonably expected tobe in critical status for that initial plan year.This preliminary certification that the planis reasonably expected to be in critical sta-tus is different from the annual certifica-tion that the plan actuary must make; ac-cordingly, the plan actuary must still cer-tify whether the plan is in critical or endan-gered status (or in neither critical nor en-dangered status) for that plan year by thenormal 90-day deadline for the certifica-tion.

Proposed legislation

As of the date of the issuance of theseproposed regulations, bills have been in-troduced in the House of Representativesand the Senate that would exclude fromthe section 432(f)(2) limitation on acceler-ated benefits a distribution with an annuitystarting date that is before the date that thenotice under section 432(b)(3)(D) is pro-vided.3 Section 1.432(a)–1(a)(3)(iii)(C)has been reserved in order to accommo-date any enacted changes.

Effective/Applicability Dates

These regulations apply to plan yearsending after March 18, 2008, but only withrespect to plan years that begin on or afterJanuary 1, 2008. These regulations do notaddress the sunset provision provided byPPA ’06 section 221(c).

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations. Itis hereby certified that the collection of in-formation imposed by these proposed reg-ulations will not have a significant eco-nomic impact on a substantial number ofsmall entities. Accordingly, a regulatoryflexibility analysis is not required. The es-timated burden imposed by the collectionof information contained in these proposed

2 Under section 432(b)(3)(D)(ii), the Secretary of Labor is to prescribe a model notice that a multiemployer plan may use to satisfy this notice requirement.

3 See H.R. 3361 (August 3, 2007) and S. 1974 (August 2, 2007) at sections 3(b)(1)(E) and 3(b)(2)(E)(ii). However, S. 1974, as amended and passed by the Senate on December 19, 2007, didnot include this provision.

2008–16 I.R.B. 820 April 21, 2008

regulations is 0.75 hours per respondent.Moreover, most of this burden is attribut-able to the requirement for a qualified mul-tiemployer defined benefit plan’s enrolledactuary to provide a timely certification ofthe plan’s funding status. In addition, if aplan is certified that it is or will be in criti-cal or endangered status, the plan sponsoris required to notify the Department of La-bor, the Pension Benefit Guaranty Corpo-ration, the bargaining parties, participants,and beneficiaries of the status designation.For plans in critical status, the plan spon-sor is required to include an explanation ofthe possibility that adjustable benefits maybe reduced and that certain benefits are re-stricted as of the date the notice is sent.Pursuant to section 7805(f) of the InternalRevenue Code, this regulations has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (one signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The IRS and the Treasury Depart-ment request comments on the clarity ofthe proposed rules and how they may bemade easier to understand. All commentswill be available for public inspection andcopying. A public hearing will be sched-uled if requested in writing by any personwho timely submits written comments. Ifa public hearing is scheduled, notice of thedate, time, and place of the public hearingwill be published in the Federal Register.


The principal author of this regulationis Bruce Perlin, Office of Division Coun-sel/Associate Chief Counsel (Tax Exemptand Government Entities). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:


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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.432(a)–1 is added to

read as follows:

§1.432(a)–1 General rules relating tosection 432.

(a) In general—(1) Overview. This sec-tion provides rules relating to multiem-ployer plans (within the meaning of sec-tion 414(f)) that are in endangered status orcritical status under section 432. Section432 and this section only apply to multi-employer plans that are in effect on July16, 2006. Paragraph (b) of this sectionsets forth definitions of terms that applyfor purposes of section 432. Paragraph(c) of this section sets forth special rulesfor plans described in section 404(c) andfor the treatment of nonbargained partici-pation.

(2) Plans in endangered status—(i)Plan sponsor must adopt funding improve-ment plan. If a plan is in endangeredstatus, the plan sponsor must adopt andimplement a funding improvement planthat satisfies the requirements of section432(c).

(ii) Restrictions applicable to plans inendangered status. If a plan is in endan-gered status, the plan and plan sponsormust satisfy the requirements of section432(d)(1) during the funding plan adoptionperiod specified in section 432(c)(8).

(iii) Restrictions applicable after theadoption of funding improvement plan. Inthe case of a plan that is in endangeredstatus after adoption of the funding im-provement plan, the plan and the plansponsor must satisfy the requirements ofsection 432(d)(2) until the end of the fund-ing improvement period.

(3) Plans in critical status—(i) Plansponsor must adopt rehabilitation plan. Ifa plan is in critical status, the plan sponsormust adopt and implement a rehabilitationplan that satisfies the requirements of sec-tion 432(e).

(ii) Restrictions applicable to plans incritical status. If a plan is in critical sta-tus, the plan and the plan sponsor must sat-isfy the requirements of section 432(f)(4)during the rehabilitation plan adoption pe-riod as defined in section 432(e)(5). Theplan must also apply the restrictions on sin-gle sum and other accelerated benefits setforth in paragraph (a)(3)(iii) of this section.

(iii) Restrictions on single sums andother accelerated benefits—(A) In gen-eral. A plan in critical status is requiredto provide that, effective on the date thenotice of certification of the plan’s criti-cal status for the initial critical year under§1.432(b)–1(e) is sent, no payment in ex-cess of the monthly amount payable un-der a single life annuity (plus any socialsecurity supplements described in the lastsentence of section 411(a)(9)), and no pay-ment for the purchase of an irrevocablecommitment from an insurer to pay ben-efits, may be made except as provided insection 432(f)(2). A plan amendment thatprovides for these restrictions does not vi-olate section 411(d)(6).

(B) Exceptions. Pursuant to section432(f)(2)(B), the restrictions under thisparagraph (a)(3)(iii) do not apply to abenefit which under section 411(a)(11)may be immediately distributed withoutthe consent of the participant or to anymakeup payment in the case of a retroac-tive annuity starting date or any similarpayment of benefits owed with respect toa prior period.

(C) [Reserved.](D) Correction of erroneous re-

strictions. If the notice described in§1.432(b)–1(e) has been sent and the re-strictions provided under this paragraph(a)(3)(iii) have been applied, and it is laterdetermined that the restrictions shouldnot have been applied, then the plan mustcorrect any benefit payments that wererestricted in error. Thus, for example,if pursuant to section 212(e)(2) of thePension Protection Act of 2006, PublicLaw 109–280, 120 Stat. 780 the enrolledactuary for the plan certified that it wasreasonably expected that the plan wouldbe in critical status with respect to the firstplan year beginning after 2007, and thenotice described in §1.432(b)–1(e)(3)(i)was sent, but the plan is not later certifiedto be in critical status for that plan year,then the plan must correct any benefit pay-ments that were restricted after the notice

April 21, 2008 821 2008–16 I.R.B.

was sent. Similarly, if the enrolled actuaryfor the plan certified that it was reason-ably expected that the plan would be incritical status with respect to the first planyear beginning after 2007, and the no-tice described in §1.432(b)–1(e)(3)(i) wassent before the first day of that plan year,the restriction on benefits under section432(f)(2) first applies beginning on thefirst day of the first plan year beginningafter 2007. If the plan restricts benefitsbefore that date, then the plan must correctany improperly restricted benefits.

(iv) Restrictions applicable after theadoption of rehabilitation plan. In thecase of a plan that is in critical status afterthe adoption of the rehabilitation plan, theplan and the plan sponsor must satisfy therequirements of section 432(f)(1) until theend of the rehabilitation period.

(b) Definitions. The following defini-tions apply for purposes of section 432 andthe regulations:

(1) Accumulated funding deficiency.The term accumulated funding deficiencyhas the same meaning as the term accu-mulated funding deficiency under section431(a).

(2) Active participant. The term activeparticipant means a participant who is incovered service under the plan.

(3) Bargaining party. Except as pro-vided in paragraph (c)(1) of this section,the term bargaining party means an em-ployer who has an obligation to contributeunder the plan and an employee organiza-tion which, for purposes of collective bar-gaining, represents plan participants em-ployed by an employer which has an obli-gation to contribute under the plan.

(4) Benefit commencement date. Theterm benefit commencement date meansthe annuity starting date (or in the case ofa retroactive annuity starting date, the dateon which benefit payments begin).

(5) Critical status. A multiemployerplan is in critical status if the plan meetsone of the tests set forth in §1.432(b)–1(c).

(6) Endangered status. A plan is inendangered status if the plan meets one ofthe tests set forth in §1.432(b)–1(b).

(7) Funded percentage. The termfunded percentage means a fraction (ex-pressed as a percentage) the numeratorof which is the actuarial value of theplan’s assets as determined under section431(c)(2) and the denominator of whichis the accrued liability of the plan, de-

termined using the actuarial assumptionsdescribed in section 431(c)(3) and the unitcredit funding method.

(8) Funding improvement period for en-dangered or seriously endangered plans.The term funding improvement periodmeans the period that begins on the firstday of the first plan year beginning afterthe earlier of the second anniversary ofthe date of the adoption of the fundingimprovement plan, or the expiration of thecollective bargaining agreements that arein effect on the due date for the actuarialcertification of endangered status for theinitial endangered year and which cover,as of such due date, at least 75 percentof the active participants in the plan. Thefunding improvement period ends on thelast day of the 10th year (15 years forseriously endangered plans, except as pro-vided in section 432(c)(5)) after it beginsor, if earlier, the date of the change instatus described in section 432(c)(4)(C).

(9) Funding plan adoption period. Theterm funding plan adoption period meansthe period that begins on the date of theactuarial certification for the initial endan-gered year and ends on the day before thefirst day of the funding improvement pe-riod.

(10) Inactive participant. The term in-active participant means —

(i) A participant who is not an activeparticipant,

(ii) A beneficiary under the plan, or(iii) An alternate payee under the plan.(11) Initial critical year. The term ini-

tial critical year means the first year forwhich the enrolled actuary for the plan hascertified that the plan is or will be in crit-ical status. If a plan is in critical status inone year, emerges from critical status in asubsequent year and then returns to criticalstatus, the year of reentry into critical sta-tus is treated as the initial critical year withrespect to subsequent years.

(12) Initial endangered year. The terminitial endangered year means the first yearfor which the enrolled actuary for the planhas certified that the plan is in endangeredstatus. If a plan is in endangered status inone year, changes from endangered statusin a subsequent year and then returns to en-dangered status, the year of reentry into en-dangered status is treated as the initial en-dangered year with respect to subsequentyears.

(13) Nonbargained participant. Theterm nonbargained participant means aparticipant in the plan whose participa-tion is other than pursuant to a collectivebargaining agreement within the meaningof section 7701(a)(46). A participant willnot be treated as a nonbargained partic-ipant merely because the participant isno longer covered by the collective bar-gaining agreement solely as a result ofretirement or severance from employment.

(14) Obligation to contribute. Theterm obligation to contribute means anobligation to contribute arising under oneor more collective bargaining (or related)agreements or as a result of a duty underapplicable labor-management relationslaw.

(15) Plan sponsor. Except as providedin paragraph (c)(1) of this section, the termplan sponsor means the association, com-mittee, joint board of trustees, or other sim-ilar group of representatives of the partieswho establish or maintain the plan.

(16) Rehabilitation period. The termrehabilitation period means the period thatbegins on the first day of the first plan yearbeginning after the earlier of the secondanniversary of the date of the adoption ofthe rehabilitation plan, or the expiration ofthe collective bargaining agreements thatare in effect on the due date for the actu-arial certification of critical status for theinitial critical year and which cover, as ofsuch due date, at least 75 percent of the ac-tive participants in the plan. The rehabil-itation period ends on the last day of the10th year after it begins or, if earlier, theplan year preceding the plan year in whichthe plan has emerged from critical status asdescribed in section 432(e)(4)(B).

(17) Rehabilitation plan adoption pe-riod. The term rehabilitation plan adop-tion period means the period that begins onthe date of the actuarial certification for theinitial critical year and ends on the day be-fore the first day of the rehabilitation pe-riod.

(18) Seriously endangered status. Aplan is in seriously endangered status ifthe plan is in endangered status and is de-scribed in both §1.432(b)–1(b)(2) and (3).

(c) Special rules—(1) Plan described insection 404(c). In the case of a plan de-scribed in section 404(c), or a continuationof such a plan, the association of employ-ers that is the employer settlor of the plan istreated as a bargaining party and is treated

2008–16 I.R.B. 822 April 21, 2008

as the plan sponsor for purposes of section432.

(2) Plans covering both bargained andnonbargained participants. In the caseof an employer that contributes to a planwith respect to both employees who arecovered by one or more collective bargain-ing agreements and employees who arenonbargained participants, if the plan is inendangered status or critical status, ben-efits of and contributions for the nonbar-gained participants (including surchargeson those contributions) are determined asif those nonbargained participants werecovered under the employer’s collectivebargaining agreement in effect when theplan entered endangered or critical statusthat is the first to expire.

(3) Plans covering nonbargained par-ticipants only. In the case of an employerthat contributes to a multiemployer planonly with respect to employees who arenot covered by a collective bargainingagreement, section 432 and the regulationsthereunder are applied as if the employerwere the bargaining party, and its partic-ipation agreement with the plan were acollective bargaining agreement with aterm ending on the first day of the planyear beginning after the employer is pro-vided the schedules described in sections432(c) and (e).

(d) Effective/applicability date. Theseregulations apply to plan years ending afterMarch 18, 2008, but only with respect toplan years that begin on or after January 1,2008.

Par. 3. Section 1.432(b)–1 is added toread as follows:

§1.432(b)–1 Determination of status andadoption of a plan.

(a) In general. This section providesrules relating to multiemployer plans(within the meaning of section 414(f))that are in endangered status or criticalstatus under section 432. Section 432 andthis section only apply to multiemployerplans that are in effect on July 16, 2006.Paragraph (b) of this section sets forth thefactors for determining whether a plan isin endangered status. Paragraph (c) ofthis section sets forth the factors for deter-mining whether a plan is in critical status.Paragraph (d) sets forth the requirementsfor the annual certification by the plan’senrolled actuary. Paragraph (e) of this sec-

tion describes the notice to employees thatis required for plans that are in endangeredor critical status.

(b) Determination of endangered sta-tus—(1) In general. A plan is in endan-gered status for a plan year if, as deter-mined by the enrolled actuary for the plan,the plan is not in critical status for the planyear and if, as of the beginning of the planyear, the plan is described either in para-graph (b)(2) of this section or paragraph(b)(3) of this section. The enrolled actu-ary’s determination of whether a plan is inendangered status is made under the rulesof paragraph (d)(5) of this section.

(2) Endangered status based on fund-ing percentage. A plan is described inthis paragraph (b)(2) for a plan year ifthe plan’s funded percentage for such planyear is less than 80 percent.

(3) Endangered status based on projec-tion of funding deficiency. A plan is de-scribed in this paragraph (b)(3) for a planyear if the plan has an accumulated fund-ing deficiency for such plan year (or is pro-jected to have such an accumulated fund-ing deficiency for any of the 6 succeedingplan years), taking into account any exten-sion of amortization periods under section431(d).

(c) Critical Status—(1) In general. Amultiemployer plan is in critical statusfor a plan year if, as determined by theenrolled actuary for the plan, the plan isdescribed in one or more of paragraphs(c)(2) through (c)(6) of this section as ofthe beginning of the plan year. The en-rolled actuary’s determination of criticalstatus must be made in accordance with therules of paragraph (d)(5) of this section.Notwithstanding paragraph (d)(5)(iii) ofthis section, for purposes of applying thecritical status tests described in paragraphs(c)(2) and (c)(5) of this section, the actuarymust assume that the terms of all collectivebargaining agreements pursuant to whichthe plan is maintained for the current planyear continue in effect for succeeding planyears.

(2) Critical status based on 6-yearprojection of benefit payments. A planis described in this paragraph (c)(2) ifthe funded percentage of the plan is lessthan 65 percent, and the present value ofall nonforfeitable benefits projected to bepayable under the plan during the currentplan year and each of the 6 succeedingplan years (plus administrative expenses

for such plan years) is greater than the sumof—

(i) The fair market value of plan assets,plus

(ii) The present value of the reasonablyanticipated employer contributions for thecurrent plan year and the 6 succeeding planyears.

(3) Critical status based on short termfunding deficiency. A plan is described inthis paragraph (c)(3) if—

(i) The plan has an accumulated fund-ing deficiency for the current plan year, nottaking into account any extension of amor-tization periods under section 431(d), or

(ii) The plan is projected to have an ac-cumulated funding deficiency for any ofthe 3 succeeding plan years (4 succeedingplan years if the funded percentage of theplan is 65 percent or less), not taking intoaccount any extension of amortization pe-riods under section 431(d).

(4) Critical status based on contribu-tions less than normal cost plus interest.A plan is described in this paragraph (c)(4)if—

(i) The present value of the reasonablyanticipated employer and employee contri-butions for the current plan year is less thanthe sum of—

(A) The plan’s normal cost (determinedunder the unit credit funding method), and

(B) Interest (determined at the rate usedfor determining costs under the plan) onthe excess if any of—

(1) The accrued liability of the plan (de-termined using the actuarial assumptionsdescribed in section 431(c)(3) and the unitcredit funding method) over

(2) The actuarial value of assets deter-mined under section 431(c)(2),

(ii) The present value, as of the begin-ning of the current plan year, of nonfor-feitable benefits of inactive participants isgreater than the present value of nonfor-feitable benefits of active participants, and

(iii) The plan has an accumulated fund-ing deficiency for the current plan year (oris projected to have such a deficiency forany of the 4 succeeding plan years), nottaking into account any extension of amor-tization periods under section 431(d).

(5) Critical status based on 4-year pro-jection of benefit payments. A plan isdescribed in this paragraph (c)(5) if thepresent value of all benefits projected tobe payable under the plan during the cur-rent plan year or any of the 4 succeeding

April 21, 2008 823 2008–16 I.R.B.

plan years (plus administrative expensesfor such plan years) is greater than the sumof—

(i) The fair market value of plan assets,plus

(ii) The present value of the reasonablyanticipated employer contributions for thecurrent plan year and each of the 4 suc-ceeding plan years.

(6) Critical status based on failure tomeet emergence criteria. A plan is de-scribed in this paragraph (c)(6) if—

(i) The plan was in critical status for theimmediately preceding plan year, and

(ii) The enrolled actuary for the planhas certified that the plan is projected tohave an accumulated funding deficiencyfor the plan year or any of the 9 succeedingplan years, without regard to the use of theshortfall funding method but taking intoaccount any extensions of the amortizationperiods under section 431(d).

(d) Annual certification by the plan’senrolled actuary—(1) In general. Not laterthan the 90th day of each plan year of amultiemployer plan, the enrolled actuaryfor the plan must certify to the Secretaryof the Treasury and to the plan sponsor—

(i) Whether or not the plan is in endan-gered status for such plan year;

(ii) Whether or not the plan is or will bein critical status for such plan year, and

(iii) In the case of a plan which is in afunding improvement or rehabilitation pe-riod, whether or not the plan is making thescheduled progress in meeting the require-ments of its funding improvement or reha-bilitation plan.

(2) Transmittal of certification—(i)Transmittal to the plan sponsor. Thecertification of plan status described inparagraph (d)(1) must be submitted tothe plan sponsor at the address stated bythe plan sponsor on their Annual Report(Form 5500) or such other address as theplan sponsor may designate in writing forreceipt of this certification.

(ii) Transmittal to the Secretary of theTreasury. Except as provided in guidanceof general applicability to be publishedin the Internal Revenue Bulletin, the an-nual certification of plan status describedin paragraph (d)(1) must be transmitted tothe Secretary of the Treasury by mailingthe certification to:

Internal Revenue ServiceEmployee Plans Compliance UnitGroup 7602 (SE:TEGE:EP)Room 1700 — 17th Floor230 S. Dearborn StreetChicago, IL 60604

(3) Content of annual certification—(i)In general. The annual certification mustcontain the information described in thisparagraph (d)(3). The Secretary may addto or otherwise modify the requirements inthis paragraph (d)(3) in guidance of gen-eral applicability to be published in the In-ternal Revenue Bulletin.

(ii) Plan identification. The annual cer-tification must include the name of theplan; the plan number; the name, address,and telephone number of the plan sponsor;and the plan year for which the certifica-tion is being made.

(iii) Enrolled actuary identification.The annual certification must include thename, address and telephone number ofthe enrolled actuary signing the certifica-tion; the actuary’s enrollment identifica-tion number; the actuary’s signature, andthe date of the signature.

(iv) Information on plan status. The an-nual certification must state whether theplan is in endangered status (which in-cludes seriously endangered status); criti-cal status, or neither endangered nor criti-cal status.

(v) Information on scheduled progress.If the annual certification is made with re-spect to a plan year that is within the plan’sfunding improvement period or rehabilita-tion period arising from a prior certifica-tion of endangered or critical status, theactuary must also certify whether or notthe plan is making scheduled progress inmeeting the requirements of its fundingimprovement or rehabilitation plan.

(4) Penalty for failure to secure timelyactuarial certification. A failure of aplan’s actuary to certify the plan’s statusunder this paragraph (d) by the date spec-ified in paragraph (d)(1) of this sectionis treated as a failure or refusal by theplan administrator to file the annual reportrequired to be filed with the Secretary ofLabor under section 101(b)(4) of the Em-ployee Retirement Income Security Act of1974.

(5) Actuarial projections of assets andliabilities—(i) In general. In making thedeterminations and projections under sec-

tion 432(b) and this section, the enrolledactuary for the plan must make projec-tions required for the current and succeed-ing plan years of the current value of theassets of the plan and the present valueof all liabilities to participants and ben-eficiaries under the plan for the currentplan year as of the beginning of such year.These projections must be based on rea-sonable actuarial estimates, assumptions,and methods in accordance with section431(c)(3) and that offer the actuary’s bestestimate of anticipated experience underthe plan. Notwithstanding the previoussentence, the actuary is permitted to relyon the plan sponsor’s projection of activ-ity in the industry provided under para-graph (d)(5)(iii) of this section. The pro-jected present value of liabilities as of thebeginning of such year must be determinedbased on the most recent information re-ported on the most recent of either—

(A) The actuarial statement requiredunder section 103(d) of the EmployeeRetirement Income Security Act of 1974that has been filed with respect to the mostrecent year, or

(B) The actuarial valuation for the pre-ceding plan year.

(ii) Determinations of future contribu-tions. Any actuarial projection of plan as-sets shall assume either—

(A) Reasonably anticipated employercontributions for the current and succeed-ing plan years, assuming that the termsof the one or more collective bargainingagreements pursuant to which the plan ismaintained for the current plan year con-tinue in effect for succeeding plan years,or

(B) That employer contributions for themost recent plan year will continue indef-initely, but only if the enrolled actuary forthe plan determines there have been no sig-nificant demographic changes that wouldmake such assumption unreasonable.

(iii) Projected industry activity. Theplan sponsor shall provide any necessaryprojection of activity in the industry, in-cluding future covered employment, to theplan actuary. For this purpose, the plansponsor must act reasonably and in goodfaith.

(6) Treatment of amortization exten-sions under section 412(e). For purposesof section 432, if the plan received an ex-tension of any amortization period undersection 412(e), the extension is treated the

2008–16 I.R.B. 824 April 21, 2008

same as an extension under section 431(d).Thus, such an extension is not taken intoaccount in determining whether a plan hasor will have an accumulated funding de-ficiency under paragraph (c)(3) and (c)(4)of this section, but it is taken into accountin determining whether a plan has or willhave an accumulated funding deficiencyunder paragraph (b)(3) of this section.

(e) Notice of endangered or critical sta-tus—(1) In general. In any case in whichthe enrolled actuary for the plan certifiesthat a multiemployer plan is or will bein endangered or critical status for a planyear, the plan sponsor must, not later than30 days after the date of the certification,provide notification of the endangered orcritical status to the participants and ben-eficiaries, the bargaining parties, the Pen-sion Benefit Guaranty Corporation, andthe Secretary of Labor.

(2) Plans in critical status. If it is certi-fied that a multiemployer plan is or will bein critical status for a plan year, the plansponsor must include in the notice an ex-planation of the possibility that adjustablebenefits (as defined in section 432(e)(8))may be reduced, and such reductions mayapply to participants and beneficiarieswhose benefit commencement date is onor after the date such notice is provided forthe first plan year in which the plan is incritical status. If the plan provides benefitsthat are restricted under section 432(f)(2),the notice must also include an explana-tion that the plan cannot pay single sumsand similar benefits described in section432(f)(2) that are greater than the monthlyamount due under a single life annuity. Aplan sponsor that sends the model noticeissued by the Secretary of Labor pursuantto section 432(b)(3)(D)(iii) satisfies thisrequirement.

(3) Transition rules—(i) Early noticepermitted. If, after August 17, 2006, theenrolled actuary for the plan certifies thata plan is reasonably expected to be in crit-ical status with respect to the first planyear beginning after 2007, then the no-tice described in this paragraph (e) may beprovided before the date the actuary cer-tifies the plan is in critical status for thatplan year. The ability to provide early no-tice does not extend the otherwise applica-ble deadline for providing the notice underparagraph (e)(1) of this section.

(ii) Reformation of prior notice. If no-tice has been provided prior to the date re-

quired under paragraph (e)(1) of this sec-tion, but the notice did not include all of theinformation described in paragraph (e)(2)of this section, then that notice will notsatisfy the requirements for notice undersection 432(b)(3)(D). Accordingly, the re-strictions under section 432(f)(2) will notapply as a result of the issuance of such anotice. However, if prior to the date noticeis required to be provided under paragraph(e)(1) of this section additional notice isprovided that includes all of the informa-tion required under paragraph (e)(2) of thissection, then the notice requirements ofsection 432(b)(3)(D) are satisfied as of thedate of that additional notice and the re-strictions of section 432(f)(2) will applybeginning on that date. In such a case, thedate of the earlier notice will still apply forpurposes of section 432(e)(8)(A)(ii) pro-vided that the earlier notice included allof the information required under section432(b)(3)(D)(ii).

(f) Effective/applicability date. Theseregulations apply to plan years ending afterMarch 18, 2008, but only with respect toplan years that begin on or after January 1,2008.



Reduction of Foreign TaxCredit Limitation CategoriesUnder Section 904(d);Correction

Announcement 2008–30


ACTION: Final and temporary regula-tions; Correction

SUMMARY: This document contains cor-rections to final and temporary regulations(T.D. 9368, 2008–6 I.R.B. 382) that werepublished in the Federal Register on Fri-day, December 21, 2007 (72 FR 72582)regarding the reduction of the number ofseparate foreign tax credit limitation cate-gories under section 904(d) of the Internal

Revenue Code. These regulations affecttaxpayers claiming foreign tax credits andprovide guidance needed to comply withthe statutory changes made by the Ameri-can Jobs Creation Act of 2004 (AJCA).

DATES: The correction is effective March21, 2008.

FOR FURTHER INFORMATIONCONTACT: Jeffrey L. Parry, (202)622–3850 (not a toll-free number).


Background

The final and temporary regulations(T.D. 9368) that are the subject of thecorrection are under section 904 of theInternal Revenue Code.

Need for Correction

As published, final and temporary regu-lations (T.D. 9368) contain errors that mayprove to be misleading and are in need ofclarification.

Correction of Publication

Accordingly, the publication of thefinal and temporary regulations (T.D.9368), which were the subject of FR Doc.E7–24782, is corrected as follows:

1. On page 72585, column 1, in thepreamble, under the paragraph heading“V. Post-1986 Undistributed Earningsand Post-1986 Foreign Income Taxes ofa Foreign Corporation as of the End ofthe Corporation’s Last Pre-2007 TaxableYear”, second line of the first paragraphof the column, the language “described insection 959(c)(1)(A),” is corrected to read“described in section 959(c)(1) and (2),”.

2. On page 72586, column 3, in thepreamble, under the paragraph head-ing “VI. Separate Limitation Losses andOverall Foreign Losses”, first line ofthe second paragraph of the column, thelanguage “Section 1.904–12T(h)(4) pro-vides that” is corrected to read “Section1.904(f)–12T(h)(4) provides that”.

3. On page 72586, column 3, in thepreamble, under the paragraph head-ing “VI. Separate Limitation Losses andOverall Foreign Losses”, first line ofthe third paragraph of the column, the

April 21, 2008 825 2008–16 I.R.B.

language “Section 1.904–12T(h)(5) pro-vides that” is corrected to read “Section1.904(f)–12T(h)(5) provides that”.

4. On page 72586, column 3, in thepreamble, under the paragraph head-ing “VI. Separate Limitation Losses andOverall Foreign Losses”, sixth line ofthe third paragraph of the column, thelanguage “rules of § 1.904–12T(g)(1)and (2)” is corrected to read “rules of§ 1.904(f)–12T(g)(1) and (2)”.

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).


Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code


The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) wasin part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-

tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on April 21, 2008,and would end on the date the court firstdetermines that the organization is not de-scribed in section 170(c)(2) as more partic-ularly set forth in section 7428(c)(1). Forindividual contributors, the maximum de-duction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that were thebasis for revocation.

Educate the Children FoundationLong Beach, CA

CFIDS Walk-A-Thon CommitteeHicksville, NY

Open Doors, Inc.Duluth, GA

Amalgamated Credit CounselorsLauderhill, FL

Carter Lake CharitableUrbandale, IA

Christian Credit Counselors, Inc.Las Vegas, NV

In Time Youth GroupOntario, OR

Young Lions FoundationSausalito, CA

Charity Connections, Ltd.Pittsford, NY

North-Tartan Area Girls BasketballBooster ClubOakdale, MN

Stock Transfer Rules:Carryover of Earnings andTaxes



ACTION: Correction to final regulations.

SUMMARY: This document contains acorrection to final regulations (T.D. 9273,2006–2 C.B. 394) that were published inthe Federal Register on Tuesday, August8, 2006 (71 FR 44887) addressing thecarryover of certain tax attributes, suchas earnings and profits and foreign in-come tax accounts, when two corporations

combine in a corporate reorganizationor liquidation that is described in bothsections 367(b) and 381 of the InternalRevenue Code.

DATES: This correction is effective March18, 2008.

FOR FURTHER INFORMATIONCONTACT: Jeffrey L. Parry at (202)622–3050 (not a toll-free number).


Background

The final regulations (T.D. 9273) thatare the subject of this correction are un-der section 367(b) of the Internal RevenueCode.

Need for Correction

As published, final regulations (T.D.9273) contain errors that may prove to bemisleading and are in need of clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR part 1 is cor-rected by making the following correctingamendment:



Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.367(b)–6 is amended

by revising paragraph (a)(1) to read as fol-lows:

§ 1.367(b)–6 Effective dates andcoordination rules.

(a) Effective date. (1) In general.Except as otherwise provided in thisparagraph (a)(1), §§ 1.367(b)–1 through1.367(b)–5, and this section, apply tosection 367(b) exchanges that occur onor after February 23, 2000. The rules of§§ 1.367(b)–3 and 1.367(b)–4, as they ap-ply to reorganizations described in section368(a)(1)(A) (including reorganizationsdescribed in section 368(a)(2)(D) or (E))involving a foreign acquiring or foreignacquired corporation, apply only to trans-fers occurring on or after January 23, 2006.Section 1.367(b)–4(b)(1)(ii) applies to all

2008–16 I.R.B. 826 April 21, 2008

triangular reorganizations and reorgani-zations described in section 368(a)(1)(G)and (a)(2)(D) occurring on or after Jan-uary 23, 2006, although taxpayers mayapply § 1.367(b)–4(b)(1)(ii) to triangularB reorganizations occurring on or afterFebruary 23, 2000, in a taxable year thatis not closed by the period of limitations ifdone consistently with respect to all suchtriangular B reorganizations. The secondsentence of paragraph (a) in § 1.367(b)–4shall apply to section 304(a)(1) transac-tions occurring on or after February 23,2006; however, taxpayers may rely on thissentence for all section 304(a)(1) trans-actions occurring in open taxable years.Section 1.367(b)–1(c)(2)(v), (c)(3)(ii)(A),(c)(4)(iv), (c)(4)(v), 1.367(b)–2(j)(1)(i),(l), and 1.367(b)–3(e) and (f), apply to sec-tion 367(b) exchanges that occur on or af-ter November 6, 2006. For guidance withrespect to § 1.367(b)–1(c)(3)(ii)(A) and(c)(4)(iv) and (v) and § 1.367(b)–2(j)(1)(i)for exchanges that occur before November6, 2006, see 26 CFR part 1 revised as ofApril 1, 2006.

* * * * *

LaNita Van Dyke,Branch Chief,

Publications and Regulations Branch,Legal Processing Division,



Reduction of Foreign TaxCredit Limitation CategoriesUnder Section 904(d); HearingCancellation



ACTION: Cancellation of notice of publichearing on proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: This document cancels apublic hearing on proposed regulations(REG–114126–07, 2008–6 I.R.B. 410)that provide guidance relating to the re-duction of the number of separate foreigntax credit limitation categories undersection 904(d) of the Internal RevenueCode. Changes to the applicable law weremade by the American Jobs Creation Actof 2004 reducing the number of section904(d) separate categories from eight totwo, effective for taxable years beginningafter December 31, 2006.

DATES: The public hearing, originallyscheduled for April 22, 2008 at 10 a.m. iscancelled.

FOR FURTHER INFORMATIONCONTACT: Funmi Taylor of the Publica-tions and Regulations Branch, Legal Pro-cessing Division, Associate Chief Counsel(Procedure and Administration) at (202)622–3628 (not a toll-free number).

SUPPLEMENTARY INFORMATION: Anotice of proposed rulemaking by cross-reference to temporary regulations and anotice of public hearing that appeared inthe Federal Register on Friday, December21, 2007 (72 FR 72645) announced that apublic hearing was scheduled for April 22,2008, at 10 a.m. in the IRS Auditorium,Internal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC. Thesubject of the public hearing is under thesection 904 of the Internal Revenue Code.

The public comment period for theseregulations expired on March 20, 2008.The notice of proposed rulemaking bycross reference to temporary regulationsand notice of public hearing instructedthose interested in testifying at the publichearing to submit a request to speak and anoutline of the topics to be addressed. Asof Tuesday, March 25, 2008, no one hasrequested to speak. Therefore, the publichearing scheduled for April 22, 2008, iscancelled.

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,



April 21, 2008 827 2008–16 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe 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 the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.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—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2008–16 I.R.B. i April 21, 2008

Numerical Finding List1

Bulletins 2008–1 through 2008–16

Announcements:

2008-1, 2008-1 I.R.B. 246

2008-2, 2008-3 I.R.B. 307

2008-3, 2008-2 I.R.B. 269

2008-4, 2008-2 I.R.B. 269

2008-5, 2008-4 I.R.B. 333

2008-6, 2008-5 I.R.B. 378

2008-7, 2008-5 I.R.B. 379

2008-8, 2008-6 I.R.B. 403

2008-9, 2008-7 I.R.B. 444

2008-10, 2008-7 I.R.B. 445

2008-11, 2008-7 I.R.B. 445

2008-12, 2008-7 I.R.B. 446

2008-13, 2008-8 I.R.B. 480

2008-14, 2008-8 I.R.B. 481

2008-15, 2008-9 I.R.B. 511

2008-16, 2008-9 I.R.B. 511

2008-17, 2008-9 I.R.B. 512

2008-18, 2008-12 I.R.B. 667

2008-19, 2008-11 I.R.B. 624

2008-20, 2008-11 I.R.B. 625

2008-21, 2008-13 I.R.B. 691

2008-22, 2008-13 I.R.B. 692

2008-23, 2008-14 I.R.B. 731

2008-24, 2008-13 I.R.B. 692

2008-25, 2008-14 I.R.B. 732

2008-26, 2008-13 I.R.B. 693

2008-27, 2008-15 I.R.B. 751

2008-28, 2008-14 I.R.B. 733

2008-29, 2008-15 I.R.B. 786

2008-30, 2008-16 I.R.B. 825

2008-31, 2008-15 I.R.B. 787

2008-32, 2008-16 I.R.B. 826

2008-33, 2008-16 I.R.B. 826

2008-36, 2008-16 I.R.B. 827

Notices:

2008-1, 2008-2 I.R.B. 251

2008-2, 2008-2 I.R.B. 252

2008-3, 2008-2 I.R.B. 253

2008-4, 2008-2 I.R.B. 253

2008-5, 2008-2 I.R.B. 256

2008-6, 2008-3 I.R.B. 275

2008-7, 2008-3 I.R.B. 276

2008-8, 2008-3 I.R.B. 276

2008-9, 2008-3 I.R.B. 277

2008-10, 2008-3 I.R.B. 277

2008-11, 2008-3 I.R.B. 279

2008-12, 2008-3 I.R.B. 280

2008-13, 2008-3 I.R.B. 282

2008-14, 2008-4 I.R.B. 310

2008-15, 2008-4 I.R.B. 313

Notices— Continued:

2008-16, 2008-4 I.R.B. 315

2008-17, 2008-4 I.R.B. 316

2008-18, 2008-5 I.R.B. 363

2008-19, 2008-5 I.R.B. 366

2008-20, 2008-6 I.R.B. 406

2008-21, 2008-7 I.R.B. 431

2008-22, 2008-8 I.R.B. 465

2008-23, 2008-7 I.R.B. 433

2008-24, 2008-8 I.R.B. 466

2008-25, 2008-9 I.R.B. 484

2008-26, 2008-9 I.R.B. 487

2008-27, 2008-10 I.R.B. 543

2008-28, 2008-10 I.R.B. 546

2008-29, 2008-12 I.R.B. 637

2008-30, 2008-12 I.R.B. 638

2008-31, 2008-11 I.R.B. 592

2008-32, 2008-11 I.R.B. 593

2008-33, 2008-12 I.R.B. 642

2008-34, 2008-12 I.R.B. 645

2008-35, 2008-12 I.R.B. 647

2008-36, 2008-12 I.R.B. 650

2008-37, 2008-12 I.R.B. 654

2008-38, 2008-13 I.R.B. 683

2008-39, 2008-13 I.R.B. 684

2008-40, 2008-14 I.R.B. 725

2008-41, 2008-15 I.R.B. 742

2008-42, 2008-15 I.R.B. 747

2008-43, 2008-15 I.R.B. 748

2008-44, 2008-16 I.R.B. 799

Proposed Regulations:

REG-147290-05, 2008-10 I.R.B. 576

REG-153589-06, 2008-14 I.R.B. 730

REG-104713-07, 2008-6 I.R.B. 409

REG-104946-07, 2008-11 I.R.B. 596

REG-111583-07, 2008-4 I.R.B. 319

REG-114126-07, 2008-6 I.R.B. 410

REG-124590-07, 2008-16 I.R.B. 801

REG-127391-07, 2008-13 I.R.B. 689

REG-136701-07, 2008-11 I.R.B. 616

REG-137573-07, 2008-15 I.R.B. 750

REG-139236-07, 2008-9 I.R.B. 491

REG-141399-07, 2008-8 I.R.B. 470

REG-147832-07, 2008-8 I.R.B. 472

REG-149475-07, 2008-9 I.R.B. 510

REG-151135-07, 2008-16 I.R.B. 815

Revenue Procedures:

2008-1, 2008-1 I.R.B. 1

2008-2, 2008-1 I.R.B. 90

2008-3, 2008-1 I.R.B. 110

2008-4, 2008-1 I.R.B. 121

2008-5, 2008-1 I.R.B. 164

2008-6, 2008-1 I.R.B. 192

2008-7, 2008-1 I.R.B. 229

Revenue Procedures— Continued:

2008-8, 2008-1 I.R.B. 233

2008-9, 2008-2 I.R.B. 258

2008-10, 2008-3 I.R.B. 290

2008-11, 2008-3 I.R.B. 301

2008-12, 2008-5 I.R.B. 368

2008-13, 2008-6 I.R.B. 407

2008-14, 2008-7 I.R.B. 435

2008-15, 2008-9 I.R.B. 489

2008-16, 2008-10 I.R.B. 547

2008-17, 2008-10 I.R.B. 549

2008-18, 2008-10 I.R.B. 573

2008-19, 2008-11 I.R.B. 594

2008-21, 2008-12 I.R.B. 657

2008-22, 2008-12 I.R.B. 658

2008-23, 2008-12 I.R.B. 664

2008-24, 2008-13 I.R.B. 684

2008-25, 2008-13 I.R.B. 686

Revenue Rulings:

2008-1, 2008-2 I.R.B. 248

2008-2, 2008-2 I.R.B. 247

2008-3, 2008-2 I.R.B. 249

2008-4, 2008-3 I.R.B. 272

2008-5, 2008-3 I.R.B. 271

2008-6, 2008-3 I.R.B. 271

2008-7, 2008-7 I.R.B. 419

2008-8, 2008-5 I.R.B. 340

2008-9, 2008-5 I.R.B. 342

2008-10, 2008-13 I.R.B. 676

2008-11, 2008-10 I.R.B. 541

2008-12, 2008-10 I.R.B. 520

2008-13, 2008-10 I.R.B. 518

2008-14, 2008-11 I.R.B. 578

2008-15, 2008-12 I.R.B. 633

2008-16, 2008-11 I.R.B. 585

2008-17, 2008-12 I.R.B. 626

2008-18, 2008-13 I.R.B. 674

2008-19, 2008-13 I.R.B. 669

2008-20, 2008-14 I.R.B. 716

2008-21, 2008-15 I.R.B. 734

2008-22, 2008-16 I.R.B. 796

Tax Conventions:

2008-8, 2008-6 I.R.B. 403

Treasury Decisions:

9368, 2008-6 I.R.B. 382

9369, 2008-6 I.R.B. 394

9370, 2008-7 I.R.B. 428

9371, 2008-8 I.R.B. 447

9372, 2008-8 I.R.B. 462

9373, 2008-8 I.R.B. 463

9374, 2008-10 I.R.B. 521

9375, 2008-5 I.R.B. 344

9376, 2008-11 I.R.B. 587

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin2007–52, dated December 26, 2007.

April 21, 2008 ii 2008–16 I.R.B.

Treasury Decisions— Continued:

9377, 2008-11 I.R.B. 578

9378, 2008-14 I.R.B. 720

9379, 2008-14 I.R.B. 715

9380, 2008-14 I.R.B. 718

9381, 2008-14 I.R.B. 694

9382, 2008-9 I.R.B. 482

9383, 2008-15 I.R.B. 738

9384, 2008-16 I.R.B. 792

9385, 2008-15 I.R.B. 735

9386, 2008-16 I.R.B. 788

9387, 2008-16 I.R.B. 789

2008–16 I.R.B. iii April 21, 2008

Finding List of Current Actions onPreviously Published Items1

Bulletins 2008–1 through 2008–16

Announcements:

2006-88

Clarified and superseded by

Notice 2008-35, 2008-12 I.R.B. 647Notice 2008-36, 2008-12 I.R.B. 650

2008-6

Superseded by

Ann. 2008-19, 2008-11 I.R.B. 624

Notices:

2001-16

Modified by

Notice 2008-20, 2008-6 I.R.B. 406

2001-60

Modified and superseded by

Notice 2008-31, 2008-11 I.R.B. 592

2002-44

Superseded by

Notice 2008-39, 2008-13 I.R.B. 684

2003-51

Superseded by

Rev. Proc. 2008-24, 2008-13 I.R.B. 684

2006-27


Notice 2008-35, 2008-12 I.R.B. 647

2006-28


Notice 2008-36, 2008-12 I.R.B. 650

2006-52

Clarified and amplified by

Notice 2008-40, 2008-14 I.R.B. 725

2006-77


Notice 2008-25, 2008-9 I.R.B. 484

2006-107

Modified by

Notice 2008-7, 2008-3 I.R.B. 276

2007-30


Notice 2008-14, 2008-4 I.R.B. 310

2007-54

Clarified by

Notice 2008-11, 2008-3 I.R.B. 279

2008-27

Clarified, amended, supplemented, and

superseded by

Notice 2008-41, 2008-15 I.R.B. 742

Proposed Regulations:

REG-209020-86

Corrected by

Ann. 2008-11, 2008-7 I.R.B. 445

REG-107592-00

Partial withdrawal by

Ann. 2008-25, 2008-14 I.R.B. 732

REG-149856-03

Hearing scheduled by

Ann. 2008-26, 2008-13 I.R.B. 693

REG-113891-07


Ann. 2008-4, 2008-2 I.R.B. 269

REG-114126-07

Corrected by

Ann. 2008-36, 2008-16 I.R.B. 827

REG-127770-07


Ann. 2008-24, 2008-13 I.R.B. 692

REG-141399-07

Hearing cancelled by

Ann. 2008-31, 2008-15 I.R.B. 787

Revenue Procedures:

97-36

Modified by

Rev. Proc. 2008-23, 2008-12 I.R.B. 664

2001-23

Modified by

Rev. Proc. 2008-23, 2008-12 I.R.B. 664

2002-9

Modified by

Rev. Proc. 2008-18, 2008-10 I.R.B. 573

Modified and amplified by

Rev. Proc. 2008-25, 2008-13 I.R.B. 686

2007-1

Superseded by

Rev. Proc. 2008-1, 2008-1 I.R.B. 1

2007-2

Superseded by

Rev. Proc. 2008-2, 2008-1 I.R.B. 90

2007-3

Superseded by

Rev. Proc. 2008-3, 2008-1 I.R.B. 110

2007-4

Superseded by

Rev. Proc. 2008-4, 2008-1 I.R.B. 121

2007-5

Superseded by

Rev. Proc. 2008-5, 2008-1 I.R.B. 164

Revenue Procedures— Continued:

2007-6

Superseded by

Rev. Proc. 2008-6, 2008-1 I.R.B. 192

2007-7

Superseded by

Rev. Proc. 2008-7, 2008-1 I.R.B. 229

2007-8

Superseded by

Rev. Proc. 2008-8, 2008-1 I.R.B. 233

2007-26

Obsoleted in part by

Rev. Proc. 2008-17, 2008-10 I.R.B. 549

2007-31

Obsoleted in part by

Rev. Proc. 2008-19, 2008-11 I.R.B. 594

2007-39

Superseded by

Rev. Proc. 2008-3, 2008-1 I.R.B. 110

2007-52

Superseded by

Rev. Proc. 2008-9, 2008-2 I.R.B. 258

2008-13

Corrected by

Ann. 2008-15, 2008-9 I.R.B. 511

Revenue Rulings:

58-612


Rev. Rul. 2008-15, 2008-12 I.R.B. 633

64-250

Amplified by

Rev. Rul. 2008-18, 2008-13 I.R.B. 674

89-42


Rev. Rul. 2008-17, 2008-12 I.R.B. 626

92-19

Supplemented in part by

Rev. Rul. 2008-19, 2008-13 I.R.B. 669

97-31


Rev. Rul. 2008-17, 2008-12 I.R.B. 626

2001-48


Rev. Rul. 2008-17, 2008-12 I.R.B. 626

2007-4

Supplemented and superseded by

Rev. Rul. 2008-3, 2008-2 I.R.B. 249

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26,2007.

April 21, 2008 iv 2008–16 I.R.B.

Treasury Decisions:

9273

Corrected by

Ann. 2008-33, 2008-16 I.R.B. 826

9362

Corrected by

Ann. 2008-9, 2008-7 I.R.B. 444Ann. 2008-12, 2008-7 I.R.B. 446

9363

Corrected by

Ann. 2008-10, 2008-7 I.R.B. 445

9368

Corrected by

Ann. 2008-29, 2008-15 I.R.B. 786Ann. 2008-30, 2008-16 I.R.B. 825

9375

Corrected by

Ann. 2008-16, 2008-9 I.R.B. 511

2008–16 I.R.B. v April 21, 2008

April 21, 2008 2008–16 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNETYou may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under

related topics, select More Topics. Then select Internal Revenue Bulletins.

INTERNAL REVENUE BULLETINS ON CD-ROMInternal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be

purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two tosix weeks, plus mailing time, for delivery.

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