Bulletin No. 2009-28July 13, 2009

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.

SPECIAL ANNOUNCEMENT

Announcement 2009–56, page 145.The IRS has developed six (6) new security, privacy, andbusiness standards to better protect taxpayer information col-lected, processed and stored by Authorized IRS e-file Providersparticipating in Online Filing of Individual income tax returns.The security and privacy objectives of these standards are:setting minimum encryption standards for transmission oftaxpayer information over the internet and authentication ofWeb site owners/operators beyond that offered by standardversion SSL certificates; periodic external vulnerability scan ofthe taxpayer data environment; protection against bulk-filingof fraudulent tax returns; and the ability to timely isolate andinvestigate potentially compromised taxpayer information.These standards also address certain customer service ob-jectives such as instant access to Web site owner/operator’scontact information, and e-file Providers commitment to main-taining physical, electronic, and procedural safeguards thatcomply with applicable law and federal standards.

INCOME TAX

Rev. Rul. 2009–19, page 111.Home Affordable Modification Program (HAMP). Thisruling holds that Pay-for-Performance Success Payments thatbenefit a homeowner under the United States Government’sHome Affordable Modification Program (HAMP) are excludablefrom the homeowner’s income under the general welfareexclusion.

Rev. Rul. 2009–20, page 112.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-

poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for July 2009.

T.D. 9453, page 114.REG–112994–06, page 144.Final, temporary, and proposed regulations under section 7874of the Code relate to the determination of whether a foreign cor-poration is treated as a surrogate foreign corporation pursuantto section 7874(a)(2)(B). Notice 2006–70 obsoleted.

Notice 2009–51, page 128.This notice solicits applications for allocations of the nationalbond volume limitation authority (“volume cap”) of $2 billion toissue tribal economic development bonds (TEDBs) under sec-tion 7871(f) of the Code. This notice also provides relatedguidance on the (1) eligibility requirements that a project mustmeet to be considered for a volume cap allocation; (2) appli-cation requirements and the application form for requests forvolume cap allocations; and (3) the method that the IRS will useto allocate the volume cap.

EXEMPT ORGANIZATIONS

Rev. Proc. 2009–32, page 142.This procedure provides reliance criteria to private foundationsand sponsoring organizations that maintain donor advisedfunds in determining whether a potential grantee is a sup-porting organization described in section 509(a) of the Code.Notice 2006–109 superseded in part.

Finding Lists begin on page ii.

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.

July 13, 2009 2009–28 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 61.—Gross IncomeDefined26 CFR 1.61–1(a): Gross income.

Home Affordable Modification Pro-gram (HAMP). This ruling holds thatPay-for-Performance Success Paymentsthat benefit a homeowner under the UnitedStates Government’s Home AffordableModification Program (HAMP) are ex-cludable from the homeowner’s incomeunder the general welfare exclusion.

Rev. Rul. 2009–19

ISSUE

If a homeowner benefits fromPay-for-Performance Success Paymentsunder the United States Government’sHome Affordable Modification Program(HAMP), are those payments excludablefrom income under the general welfareexclusion?

FACTS

The deep contraction in the economyand in the housing market has createdstress for homeowners throughout thecountry. Large numbers of homeown-ers are struggling to afford their currentmonthly mortgage payments and are atrisk of losing their homes. In response, theUnited States Government announced theHomeowner Affordability and StabilityPlan (the Plan), which helps at-risk home-owners modify their mortgages to avoidforeclosure.

HAMP, a key component of the Plan,helps homeowners who have defaulted, orare at risk of default, on their mortgagesbecause, for example, they are sufferingserious hardships, decreases in income, in-creases in expenses, and high mortgagedebt compared to monthly income.

Under HAMP, homeowners that maketimely payments on their modified loansare eligible to have incentive paymentsmade on their behalf to lenders/investors.Each month that a homeowner makes amortgage payment on time, the home-owner accrues an amount toward aPay-for-Performance Success Payment.A payment of the accrued amounts ismade annually, to reduce the principalbalance on the homeowner’s mortgageloan. Homeowners can receive principalreductions of up to $1,000 per year forup to five years, subject to a de minimisthreshold.

The Federal National Mortgage Asso-ciation and the Federal Home Loan Mort-gage Corporation have a substantial role inadministering HAMP.

LAW AND ANALYSIS

Section 61(a) of the Internal RevenueCode provides that, except as otherwiseprovided by law, gross income means allincome from whatever source derived.Payments under governmental social ben-efit programs for the promotion of thegeneral welfare and not for services ren-dered, however, are not includible in arecipient’s gross income (general welfareexclusion). See Rev. Rul. 74–205, 1974–1C.B. 20; Rev. Rul. 98–19, 1998–1 C.B.840.

Pay-for-Performance Success Pay-ments made under the United States Gov-ernment’s Home Affordable ModificationProgram promote the general welfare byhelping homeowners who are at risk oflosing their homes pay the mortgage loanson their primary residences and do not in-volve the performance of services. Thesepayments meet the requirements of thegeneral welfare exclusion.

HOLDING

If a homeowner benefits fromPay-for-Performance Success Paymentsunder the United States Government’sHome Affordable Modification Program,the payments are excludable from incomeunder the general welfare exclusion.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Sheldon Iskow of the Office of Asso-ciate Chief Counsel (Income Tax and Ac-counting). For further information regard-ing this revenue ruling, contact Mr. Iskowat (202) 622–4920 (not a toll-free number).

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of July 2009. See Rev.Rul. 2009-20, page 112.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rates isset forth for the month of July 2009. See Rev. Rul.2009-20, page 112.

Section 412.—MinimumFunding Standards

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 467.—CertainPayments for the Use ofProperty or Services

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

2009–28 I.R.B. 111 July 13, 2009

Section 482.—Allocationof Income and DeductionsAmong Taxpayers

Federal short-term, mid-term, and long-term ratesare set forth for the month of July 2009. See Rev.Rul. 2009-20, page 112.

Section 483.—Interest onCertain Deferred Payments

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 642.—SpecialRules for Credits andDeductions

Federal short-term, mid-term, and long-term ratesare set forth for the month of July 2009. See Rev.Rul. 2009-20, page 112.

Section 807.—Rules forCertain Reserves

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for July 2009.

Rev. Rul. 2009–20

This revenue ruling provides vari-ous prescribed rates for federal incometax purposes for July 2009 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month

for purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(1) for buildings placed inservice during the current month. How-ever, under section 42(b)(2), the applicablepercentage for non-federally subsidizednew buildings placed in service after July30, 2008, and before December 31, 2013,shall not be less than 9%. Table 5 con-tains the federal rate for determining thepresent value of an annuity, an interest forlife or for a term of years, or a remainderor a reversionary interest for purposes ofsection 7520. Finally, Table 6 contains theblended annual rate for 2009 for purposesof section 7872.

July 13, 2009 112 2009–28 I.R.B.

REV. RUL. 2009–20 TABLE 1

Applicable Federal Rates (AFR) for July 2009

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .82% .82% .82% .82%110% AFR .90% .90% .90% .90%120% AFR .98% .98% .98% .98%130% AFR 1.07% 1.07% 1.07% 1.07%

Mid-term

AFR 2.76% 2.74% 2.73% 2.72%110% AFR 3.03% 3.01% 3.00% 2.99%120% AFR 3.32% 3.29% 3.28% 3.27%130% AFR 3.59% 3.56% 3.54% 3.53%150% AFR 4.15% 4.11% 4.09% 4.08%175% AFR 4.86% 4.80% 4.77% 4.75%

Long-term

AFR 4.36% 4.31% 4.29% 4.27%110% AFR 4.80% 4.74% 4.71% 4.69%120% AFR 5.24% 5.17% 5.14% 5.12%130% AFR 5.68% 5.60% 5.56% 5.54%

REV. RUL. 2009–20 TABLE 2

Adjusted AFR for July 2009

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

.84% .84% .84% .84%

Mid-term adjusted AFR 2.22% 2.21% 2.20% 2.20%

Long-term adjustedAFR

4.33% 4.28% 4.26% 4.24%

REV. RUL. 2009–20 TABLE 3

Rates Under Section 382 for July 2009

Adjusted federal long-term rate for the current month 4.33%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.58%

REV. RUL. 2009–20 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for July 2009

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.82%

Appropriate percentage for the 30% present value low-income housing credit 3.35%

2009–28 I.R.B. 113 July 13, 2009

REV. RUL. 2009–20 TABLE 5

Rate Under Section 7520 for July 2009

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 3.4%

REV. RUL. 2009–20 TABLE 6

Blended Annual Rate for 2009

Section 7872(e)(2) blended annual rate for 2009 0.82%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 7520.—ValuationTables

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 7872.—Treatmentof Loans With Below-MarketInterest Rates

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof July 2009. See Rev. Rul. 2009-20, page 112.

Section 7874.—RulesRelating to ExpatriatedEntities and their ForeignParents26 CFR 1.7874–2T: Surrogate foreign corporation(temporary).

T.D. 9453

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Guidance Under Section 7874Regarding Surrogate ForeignCorporations

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsfinal and temporary regulations under sec-tion 7874 of the Internal Revenue Code(Code) concerning the determination ofwhether a foreign corporation shall betreated as a surrogate foreign corporation.The temporary regulations primarily af-fect domestic corporations or partnerships(and certain parties related thereto), andcertain foreign corporations that acquiresubstantially all of the properties of suchdomestic corporations or partnerships.The text of these temporary regulationsserves as the text of the proposed reg-ulations (REG–112994–06) set forth inthe notice of proposed rulemaking on thissubject also published in this issue of theBulletin.

DATES: Effective Dates: The regulationsare effective on June 12, 2009.

Applicability Date: For dates ofapplicability, see §§1.7874–1T(g) and1.7874–2T(o).

FOR FURTHER INFORMATIONCONTACT: S. James Hawes, (202)622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

A foreign corporation is generallytreated as a surrogate foreign corporationunder section 7874(a)(2)(B) if pursuant toa plan (or a series of related transactions)three conditions are satisfied. First, theforeign corporation completes after March4, 2003, the direct or indirect acquisitionof substantially all of the properties helddirectly or indirectly by a domestic cor-poration. Second, after the acquisition atleast 60 percent of the stock (by vote orvalue) of the foreign corporation is heldby former shareholders of the domesticcorporation by reason of holding stockin the domestic corporation. Third, afterthe acquisition the expanded affiliatedgroup (defined in section 7874(c)(1)) thatincludes the foreign corporation does nothave substantial business activities in theforeign country in which, or under the lawof which, the foreign corporation is cre-ated or organized, when compared to thetotal business activities of the expandedaffiliated group. Similar provisions applyto transactions involving the acquisitionby a foreign corporation of substantiallyall of the properties constituting a trade orbusiness of a domestic partnership. Thelevel of ownership in the surrogate foreigncorporation by former shareholders of the

July 13, 2009 114 2009–28 I.R.B.

domestic corporation (or former partnersin the domestic partnership) determinesthe treatment of the transaction. Comparesections 7874(a)(1) and 7874(b).

Temporary regulations (T.D. 9265,2006–2 C.B. 1) were published in theFederal Register (71 FR 32437) on June6, 2006, concerning the treatment of aforeign corporation as a surrogate for-eign corporation (2006 temporary regu-lations). A notice of proposed rulemak-ing (REG–112994–06, 2006–2 C.B. 47)cross-referencing the temporary regula-tions was published in the same issue ofthe Federal Register (71 FR 32495). OnJuly 28, 2006, Notice 2006–70, 2006–2C.B. 252, (see §601.601(d)(2)(ii)(b)) waspublished, announcing that the effectivedate in §1.7874–2T(j) would be amendedfor certain acquisitions initiated prior toDecember 28, 2005. No public hearingwas requested or held; however, com-ments were received. After considerationof the comments, the 2006 temporary reg-ulations and the related notice of proposedrulemaking are withdrawn and replacedwith new temporary regulations and a newnotice of proposed rulemaking. Thesenew temporary regulations are discussedin this preamble.

Summary of Temporary Regulations

A. Stock Held by a Partnership

Section 1.7874–1T(b), as contained in26 CFR part 1 revised as of April 1, 2008,provided that, for purposes of section7874(c)(2)(A), stock held by a partnershipshall be considered as held proportion-ately by the partners of the partnership.Final regulations published in the FederalRegister (T.D. 9399, 2008–25 I.R.B. 1157[73 FR 29054–29058]) on May 20, 2008(2008 final regulations) modified this pro-vision to apply for all purposes of section7874. See §1.7874–1(e). By its terms,§1.7874–1(e) applies only to stock held bya partnership, not to all properties held bythe partnership.

Commentators have questioned thescope of §1.7874–1(e). In response tothese comments, the temporary regulationsmodify the rule to apply only for purposesof determining whether the ownershipcondition of section 7874(a)(2)(B)(ii) issatisfied. The temporary regulations pro-vide other partnership look-through rules,

as appropriate. See, for example, the dis-cussion in section F.4. of this preambleconcerning the partnership items that aretaken into account for purposes of section7874(a)(2)(B)(iii).

B. Indirect Acquisition of Properties

1. Clarification of Temporary Regulations

The 2006 temporary regulations iden-tify certain acquisitions that constituteindirect acquisitions of properties held by adomestic corporation. See §1.7874–2T(b).The temporary regulations retain theserules and clarify that the identified trans-actions do not represent an exclusive listof transactions that constitute indirect ac-quisitions. The temporary regulations alsoclarify that the acquisition of an interest ina partnership is an indirect acquisition ofa proportionate amount of the propertiesof the partnership for purposes of section7874(a)(2)(B)(i).

2. Certain Acquisitions by Members of theExpanded Affiliated Group

The 2006 temporary regulations pro-vide that if a corporation (acquiring cor-poration) acquires stock or assets of adomestic corporation in exchange forstock of a foreign corporation (foreignissuing corporation) that directly or indi-rectly owns more than 50 percent of thestock (by vote or value) of the acquiringcorporation after the acquisition, the for-eign issuing corporation shall be treatedas acquiring a proportionate amount of thestock or assets of the domestic corpora-tion. §1.7874–2T(b)(4).

The temporary regulations retain thisrule, with modifications. First, the rule ismodified to apply if the acquiring corpo-ration and the foreign issuing corporationare members of the same expanded affili-ated group after the acquisition. Second,the rule is modified to apply to an acquisi-tion of properties of a partnership. Finally,the rule is modified to apply if a partner-ship acquires properties of a domestic cor-poration (or partnership) in exchange forstock of a foreign issuing corporation, butonly if the foreign issuing corporation andthe partnership would be members of thesame expanded affiliated group after theacquisition if the partnership were a cor-poration.

C. Acquisitions by Multiple ForeignCorporations

The IRS and the Treasury Departmenthave become aware of transactions in-tended to avoid section 7874 that involvetwo or more foreign corporations com-pleting, in the aggregate, an acquisitiondescribed in section 7874(a)(2)(B)(i). Forexample, pursuant to a plan (or a se-ries of related transactions), two foreigncorporations would collectively acquiresubstantially all of the properties held bya domestic corporation. Taxpayers maytake the position that neither foreign cor-poration is a surrogate foreign corporationbecause no foreign corporation separatelyacquires substantially all of the propertiesheld by the domestic corporation. Taxpay-ers may also take the position that section7874(c)(4) does not apply to these trans-actions.

Even if substantially all of the prop-erties held by a domestic corporation (orconstituting a trade or business of a do-mestic partnership) are not acquired bya single foreign corporation, this type oftransaction presents the policy concernsthat prompted the enactment of section7874. Accordingly, the temporary regu-lations provide that, if pursuant to a plan(or a series of related transactions) twoor more foreign corporations complete, inthe aggregate, an acquisition described insection 7874(a)(2)(B)(i), then each foreigncorporation shall be treated as completingthe acquisition for purposes of determiningwhether such foreign corporation shall betreated as a surrogate foreign corporation.See also section 7874(c)(4).

D. Acquisition of Multiple DomesticCorporations (or Partnerships)

The preamble to the 2008 final regu-lations identifies another transaction in-tended to avoid section 7874 that involvesa single foreign corporation completingmore than one acquisition described insection 7874(a)(2)(B)(i) as part of thesame plan (or a series of related transac-tions). The preamble to the 2008 finalregulations explains that the IRS and theTreasury Department disagree with thecharacterization of this type of transactionfor purposes of section 7874 under currentlaw and are considering issuing regula-tions clarifying the application of section

2009–28 I.R.B. 115 July 13, 2009

7874 to such transactions. In particular,the IRS and the Treasury Department dis-agree with the position that in determiningwhether the foreign corporation is a sur-rogate foreign corporation the ownershippercentage under section 7874(a)(2)(B)(ii)is determined separately with respect toeach domestic corporation (or partner-ship).

The preamble to the 2008 final regula-tions explains that any regulations issuedwould clarify that references in section7874(a)(2)(B) to “a domestic corporation”shall, as appropriate, mean “one or moredomestic corporations” where the proper-ties of more than one domestic corpora-tion are, directly or indirectly, acquired bya foreign corporation pursuant to the sameplan. See §1.368–2(h). The preamble in-dicates that similar clarifications would bemade for transactions involving domesticpartnerships.

The temporary regulations clarify thatif a foreign corporation completes morethan one acquisition described in section7874(a)(2)(B)(i) pursuant to a plan (or aseries of related transactions), then, forpurposes of section 7874(a)(2)(B)(ii), theacquisitions shall be treated as a singleacquisition and the domestic corpora-tions (and/or domestic partnerships) shallbe treated as a single entity. This ruleshall apply equally to transactions in-volving multiple corporations, multiplepartnerships, or multiple corporations andpartnerships.

The IRS and the Treasury Departmentdetermined that providing a specific oper-ative rule was preferable to simply statingthat, for purposes of section 7874(a)(2)(B),any reference to a single domestic cor-poration (or partnership) includes one ormore domestic corporations (or partner-ships). However, the operative rule of thetemporary regulations is not a change fromcurrent law.

E. “By Reason of” Standard of Section7874(a)(2)(B)(ii)

1. Distributions and Other Transactions

The 2006 temporary regulations pro-vide that stock of a foreign corporation re-ceived by a former shareholder of a do-mestic corporation in exchange for stockof the domestic corporation is held by rea-son of holding stock in the domestic cor-

poration. §1.7874–2T(c)(1). Commenta-tors have questioned whether an exchangeis the exclusive means by which stock ofa foreign corporation can be held by rea-son of holding stock in the domestic cor-poration. For example, one commentatorquestioned whether stock of a foreign cor-poration received by a former shareholderas a distribution with respect to the stock ofthe domestic corporation is held by reasonof holding stock in the domestic corpora-tion.

Section 7874(a)(2)(B)(ii) does not re-quire stock of the foreign corporation to bereceived in exchange for stock of the do-mestic corporation (or an interest in the do-mestic partnership). Therefore, the tempo-rary regulations clarify that the “by reasonof” condition of section 7874(a)(2)(B)(ii)is satisfied if stock of a foreign corporationis received in exchange for, or with respectto, stock in a domestic corporation (or aninterest in a domestic partnership). Thisincludes a taxable or nontaxable distribu-tion. The temporary regulations also clar-ify that the “by reason of” condition maybe satisfied other than through exchangesor distributions.

2. Acquisitions Involving Other Property

One commentator questioned whetherall the stock of a foreign corporationreceived by a former shareholder in ex-change for stock of a domestic corporationand other property could be treated as heldby reason of holding stock of the domesticcorporation, if the other property bearssome relationship to the stock of the do-mestic corporation.

In response to this comment, the tempo-rary regulations clarify that, subject to sec-tion 7874(c)(4) and general tax principles,the “by reason of” standard applies basedon the amount of stock of the foreign cor-poration received in exchange for, or withrespect to, the stock of the domestic cor-poration (or interest in the domestic part-nership). This determination is based onthe relative values of the stock of the do-mestic corporation (or interest in a domes-tic partnership) and any other property ex-changed for the stock of the foreign corpo-ration. Thus, subject to section 7874(c)(4)and general tax principles, the “by reasonof” standard is not affected by a relation-ship between stock of the domestic corpo-

ration (or interest in the domestic partner-ship) and such other property.

F. Substantial Business ActivitiesCondition of Section 7874(a)(2)(B)(iii)

1. Removal of Safe Harbor and Examples

The third condition for the treatmentof a foreign corporation as a surrogateforeign corporation is that, after the ac-quisition, the expanded affiliated group(defined in section 7874(c)(1)) that in-cludes the foreign corporation does nothave substantial business activities in theforeign country in which, or under thelaw of which, the foreign corporationis created or organized, when comparedto the total business activities of the ex-panded affiliated group (the substantialbusiness activities condition). Section7874(a)(2)(B)(iii). For purposes of deter-mining whether the substantial businessactivities condition is satisfied, the 2006temporary regulations provide a generalrule that, with certain exceptions, is basedon all the facts and circumstances, and asafe harbor. §1.7874–2T(d)(1) through(3). The 2006 temporary regulations alsoprovide examples illustrating the applica-tion of the general rule. §1.7874–2T(d)(4).

The IRS and the Treasury Departmenthave concluded that the safe harbor pro-vided by the 2006 temporary regulationsmay apply to certain transactions that areinconsistent with the purposes of section7874, which is meant to prevent certaintransactions that seek to avoid U.S. tax bymerely shifting the place of organizationof a domestic corporation (or partnership).The temporary regulations, therefore, donot retain the safe harbor provided by the2006 temporary regulations. The tem-porary regulations also do not retain theexamples illustrating the general rule con-tained in the 2006 temporary regulations.Thus, taxpayers can no longer rely on thesafe harbor or the examples illustratingthe general rule provided by the 2006temporary regulations. Instead, taxpayersmust apply the general rule to determinewhether the substantial business activitiescondition is satisfied. In addition, thequestion of whether the substantial busi-ness activities condition is satisfied willcontinue to be on the list of provisions withrespect to which the IRS will not ordinar-ily issue rulings or determination letters.

July 13, 2009 116 2009–28 I.R.B.

See Rev. Proc. 2009–7, 2009–1 I.R.B.226, Section 4.01(30). Comments are re-quested with respect to these changes.

2. Sales and Services Between ExpandedAffiliated Group Members

The 2006 temporary regulations iden-tify sales made by the expanded affili-ated group to customers located in theforeign country as an item to considerin determining whether the substantialbusiness activities condition is satisfied.§1.7874–2T(d)(1)(ii)(3). Commentatorshave asked whether sales (or the perfor-mance of services) between expandedaffiliated group members may be takeninto account for this purpose.

The IRS and the Treasury Departmentare concerned that sales (and the perfor-mance of services) between expanded af-filiated group members can be structuredin a manner that does not represent actualbusiness activities. However, subject tosection 7874(c)(4) and general tax princi-ples, the IRS and the Treasury Departmentbelieve that in appropriate circumstancessales (or the performance of services) be-tween members of the expanded affiliatedgroup may be taken into account under thegeneral rule.

3. Items Not to Be Considered

The 2006 temporary regulations iden-tify certain assets, activities, or incomenot to be taken into account in deter-mining whether the substantial businessactivities condition is satisfied. See§1.7874–2T(d)(1)(iii). See also section7874(c)(4). The temporary regulationsadd to these items any assets, businessactivities, or employees located in theforeign country in which, or under thelaw of which, the foreign acquiring cor-poration is created or organized if suchassets, business activities or employeesare transferred to another country pursuantto a plan in existence at the time of theacquisition.

4. Partnership Items

The 2006 temporary regulations pro-vide that if one or more members of theexpanded affiliated group own capital orprofits interests in a partnership, the pro-portionate amount of certain items of thepartnership are considered to be items of

the member (or members) of the expandedaffiliated group. §1.7874–2T(d)(3)(iv).

The temporary regulations retain andmodify this provision to provide that, forpurposes of the substantial business activ-ities condition, a member of the expandedaffiliated group that holds at least a 10 per-cent capital and profits interest in a partner-ship shall take into account its proportion-ate share of the items of the partnership, in-cluding business activities, employees, as-sets, income, and sales.

G. Publicly Traded Foreign Partnerships

1. Scope

For purposes of section 7874, the 2006temporary regulations treat as a foreigncorporation any foreign partnership thatwould, but for section 7704(c), be treatedas a corporation under section 7704 at anytime during the two-year period follow-ing the completion by the foreign partner-ship of an acquisition described in sec-tion 7874(a)(2)(B)(i). The IRS and theTreasury Department are concerned thattaxpayers may be taking the position thatthe rule does not apply to a foreign part-nership whose interests become publiclytraded outside this two-year period, evenif the public trading occurs pursuant to aplan that existed at the time of the acquisi-tion.

To address these transactions, the tem-porary regulations modify the rule to ap-ply to any foreign partnership that would,but for section 7704(c), be treated as acorporation under section 7704(a) at thetime of the acquisition described in sec-tion 7874(a)(2)(B)(i), or at any time afterthe acquisition pursuant to a plan that ex-isted at the time of the acquisition. For thispurpose, a plan shall be deemed to existat the time of the acquisition if the foreignpartnership would, but for section 7704(c),be treated as a corporation under section7704(a) at any time during the two-yearperiod following the acquisition.

The temporary regulations also clarifythat a publicly traded foreign partnershiptreated as foreign corporation under therule is treated as a foreign corporation forall purposes of section 7874.

2. Implication Regarding Scope of PublicOffering Rule

Section 1.7874–2T(e)(5), Example 3,involves a publicly traded foreign partner-ship that is treated as a surrogate foreigncorporation under section 7874(a)(2)(B),but not as a domestic corporation undersection 7874(b). In the example, the pub-licly traded foreign partnership acquiresthe stock of a domestic corporation in ex-change for 75 percent of its outstanding in-terests. At the same time as the acquisition,an unrelated person acquires the remaining25 percent interest in exchange for stock ofa foreign corporation. The example con-cludes that the former shareholders of thedomestic corporation hold 75 percent ofthe interests in the publicly traded foreignpartnership by reason of holding stock ofthe domestic corporation. Implicit in thisconclusion is that the 25 percent interestreceived by the unrelated person in ex-change for the stock of the foreign corpo-ration is not subject to the public offeringrule of section 7874(c)(2)(B).

The IRS and the Treasury Departmentdid not intend for this example to addressthe scope or application of the public of-fering rule of section 7874(c)(2)(B). Thetemporary regulations modify the exampleto eliminate the implication. The IRS andthe Treasury Department are consideringissuing guidance concerning the public of-fering rule of section 7874(c)(2)(B). Com-ments are requested in this regard.

H. Options and Similar Interests

The 2006 temporary regulationsprovide that, for purposes of section7874(a)(2)(B)(ii), options and intereststhat are similar to options held by reason ofholding stock in a domestic corporation (oran interest in a domestic partnership) shallbe treated as exercised. Not addressed bythe 2006 temporary regulations, however,is the treatment of options (or similar in-terests) or stock in a foreign corporationheld by reason of holding options (or simi-lar interests) in a domestic corporation (ora partnership, domestic or foreign). Thisissue may arise, for example, if the holderof a warrant to acquire stock of the domes-tic corporation exchanges the warrant fora warrant to acquire stock of the foreignacquiring corporation. The 2006 regula-tions also do not address the treatment of

2009–28 I.R.B. 117 July 13, 2009

options (or similar interests) in a foreigncorporation not held by reason of holdingstock in a domestic corporation (or aninterest in a domestic partnership). Fur-ther, the IRS and the Treasury Departmentbelieve that treating options (or similar in-terests) as exercised may, in certain cases,lead to inappropriate results. For example,treating options (or similar interests) asexercised may distort the ownership of theforeign corporation for purposes of section7874(a)(2)(B)(ii). For these reasons, thetemporary regulations make the followingchanges to the rule provided by the 2006temporary regulations.

1. Domestic Corporations (orPartnerships)

An option (or similar interest) repre-sents a claim on equity to the extent thevalue of the stock (or partnership interest)that may be acquired pursuant to the op-tion (or similar interest) exceeds the ex-ercise price under the terms of the option(or similar interest). As a result, the tem-porary regulations provide that, for pur-poses of section 7874, an option (or simi-lar interest) in a domestic corporation (or apartnership, domestic or foreign) shall betreated as stock of the domestic corpora-tion (or an interest in the partnership) witha value equal to the holder’s claim on theequity of the domestic corporation (or part-nership) immediately before the acquisi-tion described in section 7874(a)(2)(B)(i).For this purpose, the equity of the domesticcorporation (or partnership) shall not in-clude the value of any property the holderof the option (or similar interest) would berequired to provide to the domestic cor-poration (or partnership) pursuant to theterms of the option (or similar interest) ifsuch option (or similar interest) were ex-ercised. Pursuant to these rules, for exam-ple, if the holder of an option in a domesticcorporation receives stock of a foreign cor-poration by reason of holding the option,the holder shall be treated as holding thestock of the foreign corporation by reasonof holding stock in the domestic corpora-tion.

2. Foreign Corporations

The temporary regulations further pro-vide that an option (or similar interest) ina foreign corporation shall generally be

treated as stock of the foreign corporationwith a value equal to the holder’s claim onthe equity of the foreign corporation im-mediately after the acquisition described insection 7874(a)(2)(B)(i). As is the case foroptions (and similar interests) with respectto domestic corporations (or partnerships),for this purpose the equity of the foreigncorporation shall not include the value ofany property the holder of the option (orsimilar interest) would be required to pro-vide to the foreign corporation pursuant tothe terms of the option (or similar interest)if such option (or similar interest) were ex-ercised. This rule shall not apply, however,if a principal purpose of the issuance or ac-quisition of an option (or similar interest)is to avoid the foreign corporation beingtreated as a surrogate foreign corporation.

3. Multiple Claims on Equity

The rules of the temporary regulationsconcerning options (or similar interests)shall not apply to the extent treating an op-tion (or similar interest) as stock of a cor-poration (or an interest in a partnership)would duplicate, in whole or in part, ashareholder’s (or partner’s) claim on theequity of the corporation (or partnership).However, except to the extent otherwiseprovided in section 7874, stock of a corpo-ration held by a shareholder, or an interestin a partnership held by a partner, shall inall cases be taken into account for purposesof section 7874.

4. Comments

The IRS and the Treasury Departmentrequest comments on the rules providedby the temporary regulations concerningoptions (or similar interests). For exam-ple, comments are requested as to whetherthe rules should not apply to certain op-tions, such as publicly traded options orcompensatory options. Comments are alsorequested on the general approach of therules, which treats the option (or similar in-terest) as stock or a partnership interest tothe extent of the holder’s claim on equity,as compared to an approach that woulddeem the options (or similar interests) asexercised. Any comments should considerthe potential impact of treating options (orsimilar interests) as exercised on the deter-mination of ownership in the foreign cor-poration under section 7874(a)(2)(B)(ii).

I. Economically Equivalent Interests

The IRS and the Treasury Departmenthave become aware of transactions in-tended to avoid section 7874 by usinginterests (such as stock or partnershipinterests) that, although not in form ex-changeable or convertible into stock of aforeign corporation, are structured to besubstantially equivalent to an equity inter-est in the foreign corporation. In one suchtransaction, for example, a privately helddomestic corporation (UST) intends tomake an initial public offering of its stockfor cash. The UST shareholders, however,would prefer a foreign corporation to bethe publicly-traded corporation.

To accomplish these objectives thefollowing transactions are completed. Anewly formed foreign corporation (FC)issues shares to the public in exchangefor cash and then contributes all or partof the cash to a newly-formed domesticcorporation (S) in exchange for all thestock of S. S then merges with and intoUST. Pursuant to the merger agreement,the UST shareholders exchange their USTstock for a new class of UST stock (class Bstock) and cash. FC exchanges its S stockfor all of the remaining class of stock ofUST (class A stock). FC holds few assetsother than the class A stock.

The class B stock entitles the USTshareholders to dividend distributionsapproximately equal to any dividend dis-tributions made by FC with respect to itspublicly traded stock. The class B stockalso permits the UST shareholders, in cer-tain cases, to require UST to redeem theclass B stock at fair market value. Theclass B stock does not provide the holdervoting rights with respect to FC.

Because FC holds few assets other thanthe class A stock of UST, the value ofthe class B stock held by the former USTshareholders is approximately equal to thevalue of a corresponding amount of FCstock. Further, the distribution and liquid-ity rights provided by the class B stock areintended to place the former UST share-holders in the same approximate economicposition as if they had received publiclytraded FC stock instead of the class Bstock in the merger. Nonetheless, the for-mer UST shareholders may take the posi-tion that they hold UST stock (and not FCstock) by reason of holding, in form, stockin UST and that the 2006 temporary reg-

July 13, 2009 118 2009–28 I.R.B.

ulations do not treat the class B stock asFC stock. For example, the former USTshareholders may take the position that theclass B stock is not, in substance, an in-strument other than debt that is convertibleinto stock of FC. See §1.7874–2T(f)(2).The former UST shareholders may furthertake the position that section 7874(c)(4)does not apply to the transaction. If thesepositions are correct, FC would not betreated as a surrogate foreign corporation.The IRS and the Treasury Department un-derstand that similar transactions may bestructured using a partnership.

The IRS and the Treasury Departmentbelieve these transactions are contraryto the policies underlying section 7874.Therefore, the temporary regulations pro-vide that, for purposes of section 7874,any interest (including stock or a partner-ship interest) that is not otherwise treatedas stock of a foreign corporation (includ-ing under the rules concerning options (orsimilar interests)) shall be treated as stockof the foreign corporation if the followingtwo conditions are satisfied: (1) the inter-est entitles the holder to distribution rightsthat are substantially similar in all materialrespects to the distribution rights entitledto a shareholder of the foreign corporationby reason of holding stock in the foreigncorporation; and (2) treating the interestas stock of the foreign corporation hasthe effect of treating the foreign corpo-ration as a surrogate foreign corporation.For purposes of the first condition, dis-tribution rights include rights to dividenddistributions (or partnership distributions),distributions in redemption of the interest(in whole or in part), distributions in liq-uidation, or other similar distributions thatrepresent a return on, or of, the holder’sinvestment in the interest.

J. Insolvent Entities

The preamble to the 2008 final regula-tions describes a transaction involving aninsolvent domestic corporation in whichthe creditors of the corporation claimnot to be shareholders of the corpora-tion for purposes of determining whethera foreign corporation that acquires sub-stantially all of the properties held bythe domestic corporation is treated as asurrogate foreign corporation. As furtherstated in the preamble, the IRS and theTreasury Department disagree with this

interpretation under current law. See, forexample, Helvering v. Alabama AsphalticLimestone Co., 315 U.S. 179 (1942), and§1.368–1(e)(6).

The temporary regulations clarify that,for purposes of section 7874, if imme-diately prior to the first date propertiesare acquired as part of an acquisition de-scribed in section 7874(a)(2)(B)(i), a do-mestic corporation is in a title 11 or sim-ilar case (as defined in section 368(a)(3)),or the liabilities of the domestic corpora-tion exceed the value of its assets, thenany claim by a creditor against the domes-tic corporation shall be treated as stockof the domestic corporation. Therefore,any stock of a foreign corporation held bya creditor of the domestic corporation byreason of its claim against the domesticcorporation would be considered held bya former shareholder of the domestic cor-poration by reason of holding stock in thedomestic corporation.

A similar rule applies with respect toa domestic or foreign partnership. For-eign partnerships are included in thisrule because, for purposes of section7874(a)(2)(B)(ii), the acquisition of aninterest in a foreign partnership that ownsstock of a domestic corporation is con-sidered an acquisition of a proportionateamount of the stock of domestic corpora-tion. Therefore, if a foreign corporationacquired a sufficient interest in that for-eign partnership, the foreign corporationcould be treated as a surrogate foreigncorporation.

One commentator requested the regula-tions clarifying the treatment of creditorsfor purposes of section 7874 make clearthat a creditor that is treated as a share-holder of a domestic corporation is treatedas a shareholder for all purposes of sec-tion 7874. In particular, the commentatorrequested the regulations make clear thatthe provisions of the 2008 final regulationsconcerning the determination of the stockof a foreign corporation held by reason ofholding stock of the domestic corporationapply equally to such a creditor. The IRSand the Treasury Department agree withthis comment. Accordingly, the tempo-rary regulations clarify that a creditor thatis treated as a shareholder of a domesticcorporation (or as a partner in a partner-ship) is treated as a shareholder (or part-ner) for all purposes of section 7874. Thus,for example, subject to section 7874(c)(4)

and general tax principles, stock of the for-eign corporation received by a creditor inexchange for other property would not betaken into account in determining formershareholder (or former partner) ownershipunder section 7874(a)(2)(B)(ii).

K. Modification to Internal RestructuringException of 2008 Final Regulations

The IRS and the Treasury Depart-ment have become aware of divisivetransactions involving an acquisition de-scribed in section 7874(a)(2)(B)(i) inwhich the ownership condition of section7874(a)(2)(B)(ii) may not be satisfied byreason of the internal group restructuringexception provided by §1.7874–1(c)(2).For example, assume that a publicly-tradeddomestic corporation (USP) wholly ownsa domestic subsidiary (S1) that in turnwholly owns another domestic subsidiary(S2). The S2 stock does not representsubstantially all of the properties of S1.Pursuant to a plan, S2 transfers substan-tially all of its properties to a newly formedforeign corporation (F1) in exchange forF1 stock and then distributes the F1 stockto S1. Pursuant to the same plan, S1 dis-tributes the F1 stock to USP, and USP thendistributes the F1 stock to its shareholders.

The acquisition by F1 of substantiallyall of the properties held by S2 is de-scribed in section 7874(a)(2)(B)(i). Inaddition, S1, the former shareholder ofS2, holds all the F1 stock by reason ofholding S2 stock. However, taxpayer maytake the position that the condition of sec-tion 7874(a)(2)(B)(ii) is not satisfied byreason of the internal group restructur-ing exception under §1.7874–1(c)(2). Inrelevant part, the internal group restructur-ing exception provides that, for purposesof section 7874(a)(2)(B)(ii), stock of theforeign corporation held by a memberof the expanded affiliated group shall beincluded in the denominator, but not inthe numerator, of the ownership fraction,if: (i) before the acquisition, at least 80percent of the stock (by vote and value) ofthe domestic corporation was held directlyor indirectly by the corporation that is thecommon parent of the expanded affiliatedgroup after the acquisition; and (ii) afterthe acquisition, at least 80 percent of thestock (by vote and value) of the acquir-ing foreign corporation is held directlyor indirectly by such common parent.

2009–28 I.R.B. 119 July 13, 2009

Taxpayer may take the position that theinternal restructuring exception appliesbecause before the acquisition USP indi-rectly owned 100 percent of the stock ofS2 and after the acquisition USP indirectlyowned 100 percent of the stock of F1.Therefore, the F1 stock held by S1 wouldbe included in the denominator but notthe numerator of the ownership fraction,yielding zero percent former shareholderownership and resulting in F1 not beingtreated as a surrogate foreign corporation.

The IRS and the Treasury Departmentbelieve it is inappropriate for the internalrestructuring exception to apply to divi-sive transactions such as the one describedabove. Accordingly, the IRS and the Trea-sury Department will issue regulations thatdetermine former shareholder ownershipunder section 7874(a)(2)(B)(ii) when pur-suant to the same plan (or a series of relatedtransactions) that includes the acquisitiondescribed in section 7874(a)(2)(B)(i), allor part of the stock of the foreign corpora-tion is transferred outside the expanded af-filiated group that includes the foreign cor-poration after the acquisition. The regula-tions will provide that the internal grouprestructuring exception of §1.7874–1(c)(2)does not apply to such transactions andwill also modify the application of the gen-eral rule of §1.7874–1(b) to such transac-tions. The regulations may apply to acqui-sitions completed on or after June 9, 2009.

L. Effective/Applicability Dates

The temporary regulations included inthis document generally apply to acquisi-tions completed on or after June 9, 2009.However, taxpayers may apply the tempo-rary regulations to acquisitions completedprior to June 9, 2009, if the temporary reg-ulations are applied consistently to all ac-quisitions completed prior to such date.

The temporary regulations includethe modifications announced by Notice2006–70, 2006–2 C.B. 252, to the effec-tive date paragraph of §1.7874–2T, ascontained in 26 CFR part 1 revised asof April 1, 2009, for certain acquisitionsinitiated prior to December 28, 2005.

No inference is intended as to the appli-cability of other Code or regulatory provi-sions, or judicial doctrines, to any transac-tions described in this preamble.

These regulations will expire on or be-fore June 8, 2012.

Effect on Other Documents

Notice 2006–70, 2006–2 C.B. 252, isobsolete as of June 9, 2009.

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 has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. Chapter 5) doesnot apply to the temporary regulations.

The temporary regulations do not im-pose a collection of information. Pursuantto the Regulatory Flexibility Act (5 U.S.C.chapter 6), it is also hereby certified thatthe temporary regulations will not have asignificant economic impact on a substan-tial number of small entities. Accordingly,a regulatory flexibility analysis is not re-quired. The complexity and cost of a trans-action to which section 7874 may applymakes it unlikely that a substantial num-ber of small entities will engage in sucha transaction. In addition, the economicimpact to any entities affected by section7874 is derived from the application of thestatute, and not from the temporary regu-lations. Pursuant to section 7805(f) of theCode, the notice of proposed rulemakingpreceding these regulations has been sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomments on its impact on small business.

Drafting Information

The principal author of the temporaryregulations is S. James Hawes, Office ofAssociate Chief Counsel (International).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Amendments to the Regulations

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 USC 7805 * * *

Section 1.7874–1T also issued under26 U.S.C. 7874(g). * * *

Section 1.7874–2T also issued under26 U.S.C. 7874(c)(6) and (g). * * *

Par. 2. Section 1.7874–1(e) is revisedto read as follows:

§1.7874–1 Disregard of affiliate-ownedstock.

* * * * *(e) [Reserved]. For further guidance,

see §1.7874–1T(e).

* * * * *Par. 3. Section 1.7874–1T is added to

read as follows:

§1.7874–1T Disregard of affiliate-ownedstock (temporary).

(a) through (d) [Reserved]. For furtherguidance, see §1.7874–1(a) through (d).

(e) Stock held by a partnership. Forpurposes of this section, each partner in apartnership shall be treated as holding itsproportionate share of stock held by thepartnership, as determined under the rulesand principles of sections 701 through 777.

(f) [Reserved]. For further guidance,see §1.7874–1(f).

(g) Effective/applicability date. Para-graph (e) of this section shall apply to ac-quisitions completed on or after June 9,2009. See §1.7874–1(e), as contained in26 CFR part 1 revised as of April 1, 2009,for transactions completed before June 9,2009.

(h) Expiration date. The applicabilityof this section expires on or before June 8,2012.

Par. 4. Section 1.7874–2T is revised toread as follows:

§1.7874–2T Surrogate foreign corporation(temporary).

(a) Scope. This section provides rulesfor determining whether a foreign corpora-tion shall be treated as a surrogate foreigncorporation under section 7874(a)(2)(B).Paragraph (b) of this section providesdefinitions and special rules. Paragraph(c) of this section provides rules to de-termine whether a foreign corporationhas indirectly acquired properties heldby a domestic corporation (or of a part-nership). Paragraph (d) of this sectionprovides rules that apply when two ormore foreign corporations complete, in

July 13, 2009 120 2009–28 I.R.B.

the aggregate, an acquisition described insection 7874(a)(2)(B)(i). Paragraph (e) ofthis section provides rules that apply whena single foreign corporation completesmore than one acquisition described insection 7874(a)(2)(B)(i). Paragraph (f) ofthis section provides rules to identify thestock of a foreign corporation that is heldby reason of holding stock in a domesticcorporation (or an interest in a domesticpartnership). Paragraph (g) of this sectionprovides rules concerning the substantialbusiness activities condition of section7874(a)(2)(B)(iii). Paragraph (h) of thissection provides rules that treat certainpublicly traded foreign partnerships asforeign corporations for purposes of sec-tion 7874. Paragraph (i) of this sectionis reserved. Paragraph (j) of this sectionprovides rules concerning the treatmentof certain options (or similar interests)for purposes of section 7874. Paragraph(k) of this section provides rules that treatcertain interests (including debt, stock, ora partnership interest) as stock of a foreigncorporation for purposes of section 7874.Paragraph (l) of this section is reserved.Paragraph (m) of this section providesrules concerning the conversion of a for-eign corporation to a domestic corporationby reason of section 7874(b). Paragraph(n) of this section provides examples thatillustrate the rules of this section. Para-graph (o) of this section provides theeffective/applicability dates of this sec-tion. Paragraph (p) of this section providesthe expiration date of this section.

(b) Definitions and special rules. Ex-cept as otherwise indicated, the followingdefinitions and special rules apply for pur-poses of this section.

(1) The rules of this section are subjectto section 7874(c)(4).

(2) An interest in a partnership includesa capital or profits interest.

(3) A former shareholder of a domes-tic corporation is any person that heldstock in the domestic corporation be-fore the acquisition described in section7874(a)(2)(B)(i), including any personthat holds stock in the domestic corpora-tion both before and after the acquisition.

(4) A former partner of a domesticpartnership is any person that held aninterest in the domestic partnership be-fore the acquisition described in section7874(a)(2)(B)(i), including any personthat holds an interest in the domestic

partnership both before and after the ac-quisition.

(5) References to properties held bya domestic corporation include propertiesheld directly or indirectly by the domesticcorporation.

(6) The rules and principles of sec-tions 701 through 777 shall be applied forpurposes of determining a proportionateamount (or share) of items of a partnership(such as stock, properties, activities andemployees).

(7) Any reference to the acquisition ofproperties held by a domestic corporation(or of a partnership) includes a direct orindirect acquisition of such properties.

(8) In the case of an acquisition of stockof a domestic corporation or an interest ina partnership, the proportionate amount ofproperties held by the domestic corpora-tion (or of the partnership) that is treatedas indirectly acquired shall, as applicable,be determined on the date of the acquisi-tion based on the relative value of—

(i) The stock acquired compared to alloutstanding stock of the domestic corpora-tion; or

(ii) The interest acquired compared toall interests in the partnership.

(9) The determination of whether aforeign corporation is a surrogate foreigncorporation is made after the acquisitiondescribed in section 7874(a)(2)(B)(i). Aforeign corporation that is treated as asurrogate foreign corporation (including asurrogate foreign corporation treated as adomestic corporation described in section7874(b)) shall continue to be treated as asurrogate foreign corporation (or a domes-tic corporation), even if the conditions ofsection 7874(a)(2)(B)(ii) and (iii) are notsatisfied at a later date.

(c) Acquisition of properties—(1) Indi-rect acquisition of properties. For pur-poses of section 7874(a)(2)(B)(i), an indi-rect acquisition of properties held by a do-mestic corporation (or of a partnership) in-cludes the acquisitions described in para-graphs (c)(1)(i) through (iv) of this section.An acquisition of less than all of the stockof a domestic corporation (or interests in apartnership) shall constitute an indirect ac-quisition of a proportionate amount of theproperties held by the domestic corpora-tion or of the partnership. See paragraph(b)(8) of this section for rules determiningthe proportionate amount of properties in-directly acquired.

(i) An acquisition of stock of a domesticcorporation. See Example 1 of paragraph(n) of this section for an illustration of therules of this paragraph.

(ii) An acquisition of an interest in apartnership. See Example 2 of paragraph(n) of this section for an illustration of therules of this paragraph.

(iii) An acquisition by a corporation(acquiring corporation) of properties heldby a domestic corporation (or of a partner-ship) in exchange for stock of a foreigncorporation (foreign issuing corporation)that is part of the expanded affiliated groupthat includes the acquiring corporation af-ter the acquisition shall be treated as anacquisition by the foreign issuing corpora-tion. See Example 3 of paragraph (n) ofthis section for an illustration of the rulesof this paragraph.

(iv) An acquisition by a partnership (ac-quiring partnership) of properties held by adomestic corporation (or of a partnership)in exchange for stock of a foreign corpo-ration that is part of the expanded affili-ated group that would include the acquir-ing partnership after the acquisition (if thepartnership were a corporation) shall betreated as an acquisition by the foreign is-suing corporation.

(2) Acquisition of stock of foreign cor-poration. An acquisition of stock of a for-eign corporation that owns directly or indi-rectly stock of a domestic corporation (oran interest in a partnership) shall not con-stitute an indirect acquisition of any prop-erties held by the domestic corporation (orthe partnership). See Example 4 of para-graph (n) of this section for an illustrationof the rules of this paragraph.

(d) Acquisitions by multiple foreign cor-porations. If, pursuant to a plan (or a se-ries of related transactions), two or moreforeign corporations complete, in the ag-gregate, an acquisition described in sec-tion 7874(a)(2)(B)(i), then each foreigncorporation shall be treated as completingthe acquisition for purposes of determiningwhether such foreign corporation is treatedas a surrogate foreign corporation. See Ex-amples 5 and 6 of paragraph (n) of thissection for illustrations of the rules of thisparagraph.

(e) Acquisitions of multiple domesticentities. If, pursuant to a plan (or a series ofrelated transactions), a foreign corporationcompletes two or more acquisitions de-scribed in section 7874(a)(2)(B)(i) involv-

2009–28 I.R.B. 121 July 13, 2009

ing domestic corporations and/or domesticpartnerships (domestic entities), then, forpurposes of section 7874(a)(2)(B)(ii), theacquisitions shall be treated as a single ac-quisition and the domestic entities shall betreated as a single domestic entity. If thetransaction involves one or more domes-tic corporations and one or more domesticpartnerships, the stock of the foreign cor-poration held by former shareholders andformer partners by reason of holding stockor a partnership interest in the domestic en-tities shall be aggregated for purposes ofdetermining whether the ownership condi-tion of section 7874(a)(2)(B)(ii) is satis-fied. See Example 7 of paragraph (n) ofthis section for an illustration of the rulesof this paragraph.

(f) Stock held by reason of holdingstock in a domestic corporation or aninterest in a domestic partnership—(1)Specified transactions. For purposes ofsection 7874(a)(2)(B)(ii), stock of a for-eign corporation that is held by reason ofholding stock in a domestic corporation(or an interest in a domestic partnership)includes the stock described in paragraphs(f)(1)(i) through (iii) of this section.

(i) Stock of a foreign corporation re-ceived in exchange for, or with respect to,stock of a domestic corporation.

(ii) Stock of a foreign corporation re-ceived in exchange for, or with respect to,an interest in a domestic partnership.

(iii) To the extent that paragraph(f)(1)(ii) of this section does not apply,stock of a foreign corporation received bya domestic partnership in exchange for allor part of its properties. In such a case,each partner in the domestic partnershipshall be treated as holding its proportionateshare of the stock of the foreign corpora-tion by reason of holding an interest in thedomestic partnership.

(2) Transactions involving other prop-erty—(i) Stock of a domestic corporation.If, pursuant to the same transaction, stockof a foreign corporation is received in ex-change for, or with respect to, stock of adomestic corporation and other property,the stock of the foreign corporation thatwas received in exchange for, or with re-spect to, the stock of the domestic corpora-tion shall be determined based on the rela-tive value of the stock of the domestic cor-poration compared to the aggregate valueof such stock and the other property.

(ii) Interest in a domestic partnership.If, pursuant to the same transaction, stockof a foreign corporation is received in ex-change for, or with respect to, an interestin a domestic partnership and other prop-erty, the stock of the foreign corporationthat was received in exchange for, or withrespect to, the interest in the domestic part-nership shall be determined based on therelative value of the interest in the domes-tic partnership compared to the aggregatevalue of such interest and the other prop-erty.

(3) See Examples 8 through 10 of para-graph (n) of this section for illustrations ofthe rules of this paragraph (f).

(g) Substantial business activities—(1)General rule. The determination ofwhether, after the acquisition, the ex-panded affiliated group that includes theforeign corporation has substantial busi-ness activities in the foreign country inwhich, or under the law of which, the for-eign corporation is created or organizedwhen compared to the total business ac-tivities of the expanded affiliated group, is(subject to paragraph (g)(5) of this section)based on all facts and circumstances.

(2) Threshold of business activities.The determination of whether the ex-panded affiliated group has sufficientbusiness activities in a foreign country isnot solely based on the absolute amountof business activities in the foreign coun-try. Rather the determination is based ona comparison of the amount of businessactivities in the foreign country to thetotal business activities of the expandedaffiliated group. The determination musttake into account the total business ac-tivities of the expanded affiliated group,including the relevant items identified inparagraph (g)(3) of this section. Thus, it ispossible for the business activities of oneexpanded affiliated group in a particularcountry to be substantial when comparedto the total business activities of such ex-panded affiliated group, but for identicalbusiness activities of another expandedaffiliated group in the same country not tobe substantial when compared to the totalbusiness activities of that other expandedaffiliated group. This may result, for ex-ample, because the total business activitiesof the second expanded affiliated groupare more extensive than that of the firstexpanded affiliated group.

(3) Items to be considered. Except asprovided in paragraph (g)(5) of this sec-tion, relevant items to be considered fordetermining whether, after the acquisition,the expanded affiliated group has substan-tial business activities in a foreign coun-try when compared to the total businessactivities of the expanded affiliated groupinclude the items identified in paragraphs(g)(3)(i) through (v) of this section. Thepresence or absence of any item, or set ofitems, is not determinative and the weightgiven to any item, or set of items, dependson the facts and circumstances.

(i) The historical conduct of continuousbusiness activities in the foreign countryby the expanded affiliated group.

(ii) The conduct of continuous busi-ness activities in the foreign country by theexpanded affiliated group in the ordinarycourse of one or more active trades or busi-nesses, involving—

(A) Property located in the foreigncountry that is owned by members of theexpanded affiliated group;

(B) The performance of services in theforeign country by employees of the ex-panded affiliated group; and

(C) Sales of goods to customers.(iii) The performance in the foreign

country of substantial managerial activ-ities by officers and employees of theexpanded affiliated group who are basedin the foreign country.

(iv) A substantial degree of ownershipof the expanded affiliated group by in-vestors resident in the foreign country.

(v) Business activities in the foreigncountry that are material to the achieve-ment of the overall business objectives ofthe expanded affiliated group.

(4) Attribution from a partnership. Forpurposes of this paragraph (g), a mem-ber of the expanded affiliated group thatholds at least a 10 percent capital and prof-its interest in a partnership shall take intoaccount its proportionate share of all theitems of the partnership, including busi-ness activities, employees, assets, incomeand sales. See paragraph (b)(6) of thissection for determining a partner’s propor-tionate share of the items of a partnership.

(5) Items not to be considered. The fol-lowing items shall not be taken into ac-count in determining whether, after theacquisition, the expanded affiliated grouphas substantial business activities in a for-eign country when compared to the total

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business activities of the expanded affili-ated group.

(i) Any business activities or incomeattributable to properties or liabilities thetransfer of which is disregarded under sec-tion 7874(c)(4).

(ii) Any assets, business activities, oremployees located in a foreign country atany time as part of a plan with a principalpurpose of avoiding the purposes of sec-tion 7874.

(iii) Any assets, business activities, oremployees located in the foreign countryin which, or under the law of which, theforeign corporation is created or organizedif such assets, business activities or em-ployees are transferred to another coun-try pursuant to a plan that existed at thetime of the acquisition described in section7874(a)(2)(B)(i).

(h) Publicly traded foreign partner-ships—(1) Treatment as a foreign cor-poration. For purposes of section 7874,a publicly traded foreign partnership de-scribed in paragraph (h)(2) of this sectionshall be treated as a foreign corporationthat is organized in the foreign countryin which, or under the law of which, thepublicly traded foreign partnership wascreated or organized, and interests in thepublicly traded foreign partnership shallbe treated as stock of the foreign corpora-tion. For purposes of determining whetherthe foreign corporation shall be treated asa surrogate foreign corporation, a deemedacquisition of assets and liabilities byreason of §1.708–1(b)(4) shall not con-stitute an acquisition described in section7874(a)(2)(B)(i).

(2) Publicly traded foreign partnership.A publicly traded foreign partnership de-scribed in this paragraph (h)(2) is any for-eign partnership that would, but for section7704(c), be treated as a corporation undersection 7704(a):

(i) At the time of the acquisition de-scribed in section 7874(a)(2)(B)(i); or

(ii) At any time after the acquisitionpursuant to a plan that existed at the timeof the acquisition. For this purpose, a planshall be deemed to exist at the time ofthe acquisition if the foreign partnershipwould, but for section 7704(c), be treatedas a corporation under section 7704(a) atany time during the two-year period fol-lowing the completion of the acquisition.

(3) Surrogate foreign corporation towhich section 7874(b) applies. If para-

graph (h)(1) of this section applies to apublicly traded foreign partnership andthe foreign corporation is a surrogate for-eign corporation to which section 7874(b)applies, the publicly traded foreign part-nership shall be treated as a domesticcorporation for purposes of the InternalRevenue Code (Code). See paragraph(h)(6) of this section for the timing andtreatment of the conversion of the publiclytraded foreign partnership to a domesticcorporation. See Example 11 of paragraph(n) of this section for an illustration of therules of this paragraph.

(4) Surrogate foreign corporation towhich section 7874(b) does not apply. Ifparagraph (h)(1) of this section applies toa publicly traded foreign partnership andthe foreign corporation is a surrogate for-eign corporation to which section 7874(b)does not apply, the publicly traded foreignpartnership shall continue to be treated asa foreign partnership for purposes of theCode, but section 7874(a)(1) shall applyto any expatriated entity (as defined insection 7874(a)(2)(A)). See Example 13of paragraph (n) of this section for an il-lustration of the rules of this paragraph.

(5) Foreign corporation not treated asa surrogate foreign corporation. If para-graph (h)(1) of this section applies to apublicly traded foreign partnership and theforeign corporation is not treated as a sur-rogate foreign corporation, the status ofthe publicly traded foreign partnership asa foreign partnership shall not be affectedby section 7874. See Example 12 of para-graph (n) of this section for an illustrationof the rules of this paragraph.

(6) Conversion to a domestic corpora-tion. Except for purposes of determin-ing whether the publicly traded foreignpartnership is a surrogate foreign corpora-tion, if paragraph (h)(1) of this section ap-plies to a publicly traded foreign partner-ship and the foreign corporation is a sur-rogate foreign corporation to which sec-tion 7874(b) applies, then immediately be-fore the first date properties are acquired aspart of the acquisition described in section7874(a)(2)(B)(i) the publicly traded for-eign partnership shall be treated as trans-ferring all of its assets and liabilities toa newly formed domestic corporation inexchange solely for stock of the domes-tic corporation, and then distributing suchstock to its partners in proportion to theirpartnership interests in liquidation of the

partnership. The treatment of the transferof assets and liabilities to the domestic cor-poration and the distribution of the stock ofthe domestic corporation to the partners inliquidation of the partnership shall be de-termined under all relevant provisions ofthe Code and general tax principles.

(i) [Reserved].(j) Options and similar interests—(1)

Domestic corporation (or partnership).Except to the extent provided in this para-graph (j), for purposes of section 7874, anoption (or similar interest) with respect toa domestic corporation (or a partnership,domestic or foreign) shall be treated asstock of the domestic corporation (or aninterest in the partnership) with a valueequal to the holder’s claim on the equityof the domestic corporation (or partner-ship) immediately before the acquisitiondescribed in section 7874(a)(2)(B)(i). Forthis purpose, the equity of the domes-tic corporation (or partnership) shall notinclude the amount of any property theholder of the option (or similar interest)would be required to provide to the do-mestic corporation (or partnership) underthe terms of the option (or similar interest)if such option (or similar interest) wereexercised. See Example 16 of paragraph(n) of this section for an illustration of therules of this paragraph.

(2) Foreign corporation—(i) Generalrule. Except to the extent provided inthis paragraph (j), for purposes of section7874 an option (or similar interest) withrespect to a foreign corporation shall betreated as stock of the foreign corporationwith a value equal to the holder’s claimon the equity of the foreign corporationafter the acquisition described in section7874(a)(2)(B)(i). For this purpose, the eq-uity of the foreign corporation shall notinclude the amount of any property theholder of the option (or similar interest)would be required to provide to the for-eign corporation under the terms of the op-tion (or similar interest) if such option (orsimilar interest) were exercised. See Ex-amples 14 through 16 of paragraph (n) ofthis section for illustrations of the rules ofthis paragraph (j)(2)(i).

(ii) Certain options (or similar inter-ests) disregarded. Paragraph (j)(2)(i) ofthis section shall not apply to an option (orsimilar interest) if a principal purpose ofthe issuance or acquisition of the option (orsimilar interest) is to avoid the foreign cor-

2009–28 I.R.B. 123 July 13, 2009

poration being treated as a surrogate for-eign corporation.

(3) Similar interest. For purposes ofthis paragraph (j), an interest similar to anoption (a similar interest) includes, but isnot limited to, a warrant, a convertible debtinstrument, an instrument other than debtthat is convertible into stock or a partner-ship interest, a put, stock or a partnershipinterest subject to risk of forfeiture, a con-tract to acquire or sell stock or a partner-ship interest, and an exchangeable share orexchangeable partnership interest.

(4) Multiple claims on equity. Para-graphs (j)(1) and (j)(2)(i) of this sectionshall not apply to an option (or similar in-terest) to the extent treating the option (orsimilar interest) as stock of a corporation(or interest in a partnership) would dupli-cate a shareholder’s (or partner’s) claim onthe equity of the corporation (or partner-ship) by reason of holding stock in the cor-poration (or an interest in the partnership).However, except to the extent otherwiseprovided in section 7874, in all cases stockof a corporation held by a shareholder or aninterest in a partnership held by a partner(without regard to this paragraph (j)) shallbe taken into account for purposes of sec-tion 7874. See Example 15 of paragraph(n) of this section for an illustration of therules of this paragraph (j)(4).

(k) Interests treated as stock of a for-eign corporation—(1) Stock or other in-terests. If the conditions of paragraphs(k)(1)(i) and (ii) of this section are satis-fied, then, for purposes of section 7874,any interest (including stock or a partner-ship interest) that is not otherwise treatedas stock of a foreign corporation (includ-ing under paragraph (j)(2)(i) of this sec-tion) shall be treated as stock of the for-eign corporation. See Examples 17 and 18of paragraph (n) of this section for illustra-tions of the rules of this paragraph (k)(1).

(i) The interest provides the holder dis-tribution rights that are substantially simi-lar in all material respects to the distribu-tion rights provided by stock in the foreigncorporation. For this purpose, distributionrights include rights to dividends (or part-nership distributions), distributions in re-demption of the interest (in whole or inpart), distributions in liquidation, or othersimilar distributions that represent a returnon, or of, the holder’s investment in the in-terest.

(ii) Treating the interest as stock of theforeign corporation has the effect of treat-ing the foreign corporation as a surrogateforeign corporation.

(2) Creditor claims—(i) Domestic cor-poration. For purposes of section 7874, if,immediately prior to the first date proper-ties are acquired as part of an acquisitiondescribed in section 7874(a)(2)(B)(i), a do-mestic corporation is in a title 11 or similarcase (as defined in section 368(a)(3)), orthe liabilities of the domestic corporationexceed the value of its assets, then eachcreditor of the domestic corporation shallbe treated as a shareholder of the domesticcorporation and any claim of the creditoragainst the domestic corporation shall betreated as stock of the domestic corpora-tion. See Example 19 of paragraph (n) ofthis section for an illustration of the rulesof this paragraph (k)(2)(i).

(ii) Domestic or foreign partnership.For purposes of section 7874, if, immedi-ately prior to the first date properties areacquired as part of an acquisition describedin section 7874(a)(2)(B)(i), a partnership(foreign or domestic) is in a title 11 or sim-ilar case (as defined in section 368(a)(3)),or the liabilities of the partnership exceedthe value of its assets, then each creditor ofthe partnership shall be treated as a part-ner in the partnership and any claim ofthe creditor against the partnership shall betreated as an interest in the partnership.

(iii) Treatment of creditor as share-holder or partner. A creditor that is treatedas a shareholder or partner under para-graph (k)(2)(i) or (ii) of this section shallbe treated as a shareholder or partner forall purposes of section 7874. See, for ex-ample, §1.7874–1(c) and paragraph (f) ofthis section. See Example 19 of paragraph(n) of this section for an illustration of therules of this paragraph (k)(2)(iii).

(l) [Reserved].(m) Application of section

7874(b)—(1) Conversion to a domesticcorporation. Except for purposes ofdetermining whether a foreign corpo-ration is treated as a surrogate foreigncorporation, the conversion of a foreigncorporation to a domestic corporation byreason of section 7874(b) shall constitutea reorganization described in section368(a)(1)(F) that occurs immediatelybefore the first date properties are ac-quired as part of the acquisition described

in section 7874(a)(2)(B)(i). See, forexample, §§1.367(b)–2 and 1.367(b)–3for certain consequences of the reorgani-zation. The treatment of all other aspectsof the conversion shall be determinedunder the relevant provisions of the Codeand general tax principles. See Example20 of paragraph (n) of this section for anillustration of the rules of this paragraph(m)(1).

(2) Entity classification. A foreign cor-poration that is treated as a domestic cor-poration under section 7874(b) is not an el-igible entity as defined in §301.7701–3(a)of this chapter and therefore may not electto be treated as other than an associationfor Federal tax purposes.

(3) Application of section 367. If aforeign corporation is treated as a domes-tic corporation under section 7874(b), sec-tion 367 shall not apply to any transfer ofproperty by a United States person to suchforeign corporation as part of the acquisi-tion described in section 7874(a)(2)(B)(i).However, section 367 shall apply to theconversion of the foreign corporation toa domestic corporation. See paragraph(m)(1) of this section. See Example 20 ofparagraph (n) of this section for an illustra-tion of the rules of this paragraph (m)(3).

(n) Examples—(1) Assumed facts. Ex-cept as otherwise stated, assume the fol-lowing for purposes of the examples in-cluded in paragraph (n)(2) of this section.

(i) DC1 and DC2 are domestic corpora-tions.

(ii) FA, FP, F1, F2, F3, and F4 are for-eign corporations organized in Country A.

(iii) DPS is a domestic partnership thatconducts a trade or business.

(iv) FPS is a foreign partnership that isnot publicly traded.

(v) A, B, and C are unrelated individu-als.

(vi) Each entity has a single class ofequity outstanding and is unrelated to allother entities.

(vii) All transactions are completed pur-suant to a plan.

(viii) All acquisitions of properties arecompleted after March 4, 2003.

(ix) Neither section 7874(c)(4) norparagraph (j)(2)(ii) of this section applies.

(2) Examples. The following examplesillustrate the rules of this section.

Example 1. Acquisition of stock of a domesticcorporation. (i) Facts. FA acquires 25 percent of theoutstanding stock of DC1.

July 13, 2009 124 2009–28 I.R.B.

(ii) Analysis. Under paragraph (c)(1)(i) of thissection, for purposes of section 7874(a)(2)(B)(i) FA istreated as acquiring 25 percent of the properties heldby DC1 on the date of the stock acquisition.

Example 2. Acquisition of a partnership interest.(i) Facts. DPS wholly owns DC1. FA acquires a 40percent interest in DPS.

(ii) Analysis. Under paragraph (c)(1)(ii) of thissection, for purposes of section 7874(a)(2)(B)(i) FAis treated as acquiring 40 percent of the DC1 stockheld by DPS on the date of the acquisition of the part-nership interest. Further, under paragraph (c)(1)(i) ofthis section, for purposes of section 7874(a)(2)(B)(i)FA is treated as acquiring 40 percent of the proper-ties held by DC1 on the date of the acquisition of thepartnership interest.

Example 3. Acquisition of stock by a subsidiary.(i) Facts. FP wholly owns FA. FA acquires all theoutstanding stock of DC1 in exchange solely for FPstock. FP and FA are members of the same expandedaffiliated group after the acquisition.

(ii) Analysis. Under paragraph (c)(1)(i) of thissection, for purposes of section 7874(a)(2)(B)(i) FA istreated as acquiring 100 percent of the properties heldby DC1 on the date of the stock acquisition. Further,under paragraph (c)(1)(iii) of this section, for pur-poses of section 7874(a)(2)(B)(i) FP is also treated asacquiring 100 percent of the properties held by DC1on the date of the stock acquisition. The result wouldbe the same if instead FA had directly acquired all theproperties held by DC1 in exchange for FP stock.

Example 4. Acquisition of stock of a foreign cor-poration. (i) Facts. FP wholly owns DC1. FA ac-quires all of the outstanding stock of FP.

(ii) Analysis. Under paragraph (c)(2) of this sec-tion, for purposes of section 7874(a)(2)(B)(i) FA isnot treated as acquiring any properties held by DC1on the date of the acquisition of the FP stock.

Example 5. Acquisition of stock by multiple for-eign corporations. (i) Facts. Pursuant to the sameplan, the shareholders of DC1 transfer all of their DC1stock equally to F1, F2, F3, and F4 in exchange solelyfor stock of each foreign corporation.

(ii) Analysis. Under paragraph (c)(1)(i) of thissection, in the aggregate F1, F2, F3 and F4 are treatedas acquiring substantially all of the properties heldby DC1. Because the acquisition was pursuant to thesame plan, under paragraph (d) of this section, F1, F2,F3, and F4 are each treated as acquiring substantiallyall of the properties held by DC1 for purposes of de-termining whether each foreign corporation shall betreated as a surrogate foreign corporation.

Example 6. Acquisition of assets by multiple for-eign corporations. (i) Facts. Individual A whollyowns DC1. DC1 forms F1, F2, F3, and F4, and trans-fers an equal portion of its properties to each corpora-tion in exchange solely for stock of the corporation.Pursuant to the same plan DC1 then distributes thestock of each foreign corporation to individual A.

(ii) Analysis. Because pursuant to the same planF1, F2, F3 and F4 acquired, in the aggregate, substan-tially all of the properties held by DC1, under para-graph (d) of this section, F1, F2, F3, and F4 are eachtreated as acquiring substantially all of the proper-ties held by DC1 for purposes of determining whethereach foreign corporation shall be treated as a surro-gate foreign corporation.

Example 7. Acquisition of multiple domestic cor-porations. (i) Facts. Individual A wholly owns DC1,

and individual B wholly owns DC2. Pursuant to thesame plan, A and B transfer all of their DC1 stockand DC2 stock to FA, a newly formed corporation, inexchange solely for all 100 shares of FA stock out-standing.

(ii) Analysis. Under paragraph (c)(1)(i) of thissection, for purposes of section 7874(a)(2)(B)(i) FA istreated as acquiring all of the properties held by DC1and DC2 on the date of the stock acquisition. Underparagraph (e) of this section, because pursuant to thesame plan FA acquired substantially all of the proper-ties held by DC1 and DC2, for purposes of determin-ing whether FA shall be treated as a surrogate foreigncorporation, DC1 and DC2 shall be treated as a singledomestic corporation, of which A and B are formershareholders. Thus, individuals A and B are treatedas holding all 100 shares of the FA stock by reason ofholding stock of such domestic corporation, and theownership fraction under section 7874(a)(2)(B)(ii) is100/100, or 100 percent.

Example 8. Exchange of stock and other prop-erty. (i) Facts. Individual A wholly owns DC1 andF1. DC1 has a $40x value and F1 has a $60x value.Individual A transfers all of the DC1 stock and F1stock to FA, a newly-formed corporation, in exchangesolely for FA stock.

(ii) Analysis. Under paragraphs (f)(1)(i) and(f)(2)(i) of this section, for purposes of section7874(a)(2)(B)(ii) individual A is considered to hold40 percent of the FA stock by reason of holding stockin DC1 ($100x FA stock multiplied by $40x/$100x,the relative value of the DC1 stock to all the propertytransferred by A to FA).

Example 9. Stock received as a distribution. (i)Facts. Pursuant to a divisive reorganization describedin section 368(a)(1)(D), DC1 contributes substan-tially all of its properties to FA, a newly-formedcorporation, in exchange solely for FA stock and thendistributes the FA stock to its shareholders undersection 355.

(ii) Analysis. Under paragraph (f)(1)(i) of thissection, for purposes of section 7874(a)(2)(B)(ii) theFA stock received by the DC1 shareholders as a dis-tribution with respect to the DC1 stock is consideredheld by reason of holding stock in DC1. The resultwould be the same if the transaction did not qualifyas a reorganization (for example, if the distributionwere subject to sections 301 and 311(b)).

Example 10. Incorporation of a partnership tradeor business. (i) Facts. Individuals A and B equallyown DPS. DPS transfers substantially all of its prop-erties constituting a trade or business to FA, a newly-formed corporation, solely in exchange for FA stock.DPS retains the FA stock after the transaction.

(ii) Analysis. Under paragraph (f)(1)(iii) of thissection, for purposes of section 7874(a)(2)(B)(ii) in-dividuals A and B are treated as holding a proportion-ate amount (that is, an equal amount) of the FA stockheld by DPS by reason of holding an interest in DPS.

Example 11. Publicly traded foreign partnershiptreated as domestic corporation. (i) Facts. Pursuantto a plan, DC1 and individual B organize a limitedliability company (HPS) under the law of CountryA. DC1 owns 99.9 percent of the membership inter-ests in HPS, and B owns 0.1 percent of the member-ship interests in HPS. HPS is a foreign eligible entityunder §301.7701–2 of this chapter, and DC1 and Bmake an election under §301.7701–3 of this chapterto treat HPS as a partnership for Federal tax purposes

as of the date of the formation of HPS. HPS formsDC2. DC2 merges with and into DC1. Pursuant to themerger agreement, the DC1 shareholders exchangetheir DC1 stock solely for membership interests inHPS. After the merger HPS wholly owns DC1, andthe former shareholders of DC1 own a greater than80 percent interest in HPS by reason of holding stockof DC1. Public trading of the HPS ownership inter-ests begins the day after the date on which mergeris completed. HPS is not treated as a corporationunder section 7704(a) by reason of section 7704(c).If HPS were a corporation, the condition of section7874(a)(2)(B)(iii) would be satisfied.

(ii) Analysis. HPS is a publicly traded foreignpartnership that is described in paragraph (h)(2) ofthis section. Therefore, under paragraph (h)(1) of thissection, for purposes of section 7874 HPS is treatedas a foreign corporation organized under the law ofCountry A and the membership interests in HPS aretreated as stock of the foreign corporation. The for-eign corporation is treated as a surrogate foreign cor-poration under section 7874(a)(2)(B) because, pur-suant to the merger, HPS acquired substantially allof the properties held by DC1, the former sharehold-ers of DC1 hold at least 60 percent of the stock ofthe foreign corporation by reason of holding stockof DC1, and the expanded affiliated group that in-cludes the foreign corporation does not have substan-tial business activities in Country A when comparedto the total business activities of the expanded affili-ated group. Further, because the former shareholdersof DC1 hold at least 80 percent of the stock of the for-eign corporation by reason of holding stock of DC1,section 7874(b) applies to the surrogate foreign cor-poration, and therefore HPS is treated as a domesticcorporation for purposes of the Code. Under para-graph (h)(6) of this section, except for purposes ofdetermining whether HPS is a surrogate foreign cor-poration, immediately before the merger of DC2 withand into DC1 HPS is treated as transferring all of itsassets and liabilities to a new domestic corporationin exchange solely for stock of the domestic corpora-tion. HPS is then treated as proportionately distribut-ing such stock to its membership holders in liquida-tion of the partnership. In addition, as a result of themerger of DC2 with and into DC1, the former share-holders of DC1 shall be treated as receiving stockof a domestic corporation in exchange for their DC1stock.

Example 12. Publicly traded foreign partnershipnot treated as a surrogate foreign corporation. (i)Facts. The facts are the same as in Example 11 ofthis section, except that, after the acquisition, the ex-panded affiliated group that includes HPS (treated asa foreign corporation for this purpose) has substan-tial business activities in Country A when comparedto the total business activities of the expanded affili-ated group.

(ii) Analysis. Under paragraph (h)(1) of thissection, for purposes of section 7874 HPS is treatedas a foreign corporation and the membership in-terests in HPS are treated as stock of the foreigncorporation. However, the foreign corporation isnot treated as a surrogate foreign corporation undersection 7874(a)(2)(B) because, after the acquisition,the expanded affiliated group that includes HPS hassubstantial business activities in Country A whencompared to the total business activities of the ex-panded affiliated group. Therefore, under paragraph

2009–28 I.R.B. 125 July 13, 2009

(h)(5) of this section, section 7874 does not applyand the status of HPS as a foreign partnership isnot affected. In addition, DC1 is not treated as anexpatriated entity under section 7874(a) by reason ofthe acquisition.

Example 13. Publicly traded foreign partnershiptreated as a surrogate foreign corporation but not asa domestic corporation. (i) Facts. FPS is a publiclytraded foreign partnership organized in Country Athat, by reason of section 7704(c), is not treated as acorporation under section 7704(a). FPS acquires allthe stock of DC1 in exchange for partnership interestsin FPS. After the acquisition, the former shareholdersof DC1 hold a 75 percent interest in FPS by reasonof holding DC1 stock. After the acquisition, theexpanded affiliated group that includes FPS (treatedas a foreign corporation for this purpose) does nothave substantial business activities in Country Awhen compared to the total business activities of theexpanded affiliated group.

(ii) Analysis. Under paragraph (h)(1) of this sec-tion, for purposes of section 7874 FPS is treated asa foreign corporation and the partnership interests inFPS are treated as stock of the foreign corporation.FPS is treated as a surrogate foreign corporation be-cause the conditions of section 7874(a)(2)(B) are sat-isfied. However, because the former shareholders ofDC1 hold less than an 80 percent interest in FPS byreason of holding DC1 stock, section 7874(b) doesnot apply to FPS. Therefore, under paragraph (h)(4)of this section FPS continues to be treated as a for-eign partnership for purposes of the Code, but section7874(a)(1) applies to DC1 and any other expatriatedentity.

Example 14. Warrant to acquire stock from theforeign corporation. (i) Facts. Individual A whollyowns DC1. DC1 has a $200x value. Individual Bwholly owns FA. Individual C holds a warrant to ac-quire FA stock from FA at an exercise price of $20x.Individual A transfers all of its DC1 stock to FA in ex-change solely for FA stock. At the time of the transfer,the FA stock that individual C can acquire pursuant tothe warrant has a $70x value.

(ii) Analysis. Under paragraph (j)(2) of this sec-tion, for purposes of section 7874 individual C istreated as owning FA stock with a $50x value. Thisamount represents individual C’s claim on the equityof FA after the acquisition ($70x value of FA stockthat may be acquired pursuant to the warrant, less$20x exercise price), without taking into account the$20x individual C would be required to provide to FAupon the exercise of the warrant.

Example 15. Option to acquire stock from an-other shareholder. (i) Facts. The facts are the same asin Example 14 except that, instead of holding a war-rant issued by FA, individual C holds an option to ac-quire FA stock from individual B for an exercise priceof $20x. At the time of the acquisition, the FA stockthat individual C can acquire under the option has a$70x value.

(ii) Analysis. Under paragraph (j)(4) of this sec-tion, for purposes of section 7874, individual C is nottreated as owning FA stock by reason of holding theoption because treating the option as FA stock wouldhave the effect of partially duplicating individual B’sclaim on the equity of FA at the time of the acquisi-tion by reason of holding FA stock. However, all ofthe FA stock owned by individual B shall be takeninto account for purposes of section 7874.

Example 16. Warrant to acquire stock from thedomestic corporation. (i) Facts. A DC1 employeeholds a warrant to acquire DC1 stock from DC1. Inconnection with the acquisition by FA of substantiallyall of the properties held by DC1, the DC1 employeereceives a warrant from FA to acquire 15 shares ofFA stock in exchange for the warrant to acquire DC1stock.

(ii) Analysis. Under paragraph (j)(1) of this sec-tion, for purposes of section 7874 the warrant heldby the DC1 employee is treated as DC1 stock witha value equal to the employee’s claim on the equityof DC1 immediately before the acquisition. Further,under paragraph (j)(2) of this section, for purposes ofsection 7874 the DC1 employee is treated as holdingFA stock with a value equal to the employee’s claimon the equity of FA after the acquisition by reason ofholding the warrant to acquire DC1 stock (treated asDC1 stock for this purpose).

Example 17. Stock in a subsidiary treated as stockof a foreign parent corporation. (i) Facts. (A) In-dividuals A and B equally own DC1. FA, a newlyformed corporation, issues stock in a public offeringfor cash. FA contributes part of the cash from thepublic offering to DC2, a newly-formed corporation,in exchange for all the stock of DC2. DC2 mergeswith and into DC1 with DC1 surviving. Pursuant tothe merger agreement, individuals A and B exchangetheir DC1 stock for cash and shares of class B stockof DC1. Following the merger FA owns all the classA stock of DC1. FA holds few assets other than theclass A stock of DC1. Individuals A and B own allthe class B stock of DC1. DC1 has no other class ofstock outstanding.

(B) The class B stock entitles individuals A andB to dividend distributions approximately equal toany dividend distributions made by FA with respectto its publicly traded stock. In certain circumstances,the class B stock also permits individuals A and B torequire DC1 to redeem the stock at fair market value.The class B stock does not provide individuals A andB voting rights with respect to FA.

(ii) Analysis. The dividend rights provided by theclass B stock are substantially similar in all materialrespects to the dividend rights provided by the FAstock. In addition, because FA holds few assets otherthan the class A stock, the value of the class B stockheld by individuals A and B is approximately equalto the value of a corresponding amount of publiclytraded FA stock. The distribution rights on liquida-tion (or redemption) provided by the class B stock,therefore, are substantially similar in all material re-spects to the distribution rights on liquidation (or re-demption) provided by the FA stock. As a result, thedistribution rights provided by the class B stock aresubstantially similar in all material respects to the dis-tribution rights provided by the publicly traded FAstock. Thus, if treating the class B stock as FA stockwould have the effect of treating FA as a surrogateforeign corporation, under paragraph (k)(1) of thissection the class B stock shall be treated as FA stockfor purposes of section 7874.

Example 18. Partnership interest treated as stockof foreign acquiring corporation. (i) Facts. (A) In-dividuals A and B equally own DC1. FA, a newly-formed corporation, issues stock in a public offeringfor cash. Individuals A and B and FA organize FPS.FA transfers part of the cash from the public offeringto FPS in exchange for a class A partnership interest.

FA holds few assets other than the class A partnershipinterest. Individuals A and B transfer their DC1 stockto FPS in exchange for class B partnership interests.

(B) The class B partnership interests entitle indi-viduals A and B to cash distributions from FPS ap-proximately equal to any dividend distributions madeby FA with respect to its publicly traded stock. In cer-tain circumstances, the class B partnership interestsalso permit individuals A and B to require FPS to re-deem the interests in exchange for cash equal to thevalue of an amount of FA stock as determined on theredemption date. The class B partnership interests donot provide individuals A or B voting rights with re-spect to FA.

(ii) Analysis. The non-liquidating distributionrights provided by the class B partnership interestsare substantially similar in all material respects to thedividend rights provided by the FA stock. BecauseFA holds few assets other than the class A partnershipinterest, the value of the class B partnership inter-ests held by individuals A and B is approximatelyequal to a corresponding amount of FA stock. Thedistribution rights on liquidation (or redemption)provided by the class B partnership interests, there-fore, are substantially similar in all material respectsto distribution rights on liquidation (or redemption)provided by the FA stock. Thus, the distributionrights provided by the class B partnership interestsare substantially similar in all material respects to thedistribution rights provided by the publicly traded FAstock. As a result, if treating the class B partnershipinterests as FA stock would have the effect of treatingFA as a surrogate foreign corporation, under para-graph (k)(1) of this section the class B partnershipinterests shall be treated as FA stock for purposes ofsection 7874.

Example 19. Creditor treated as a shareholder.(i) Facts. Individuals A and B equally own DC1. Theliabilities of DC1 exceed the value of its assets. Pur-suant to a plan, FA, a newly-formed corporation, ac-quires substantially all of the properties held by DC1in exchange solely for FA stock. Pursuant to the plan,the DC1 stock held by individuals A and B is can-celled, and the creditors of DC1 receive all the FAstock in exchange for their claims against DC1.

(ii) Analysis. Because immediately before thefirst date on which properties are acquired as part ofthe acquisition described in section 7874(a)(2)(B)(i)the liabilities of DC1 exceed the value of its assets,under paragraph (k)(2)(i) of this section, for purposesof section 7874 the creditors of DC1 are treatedas shareholders of DC1 and the creditors’ claimsagainst DC1 are treated as DC1 stock. Therefore, forpurposes of section 7874(a)(2)(B)(ii) the FA stockreceived by the creditors of DC1 by reason of theirclaims against DC1 is considered held by formershareholders of DC1 by reason of holding DC1 stock.

Example 20. Conversion to a domestic corpora-tion and application of section 367. (i) Facts. Indi-viduals A and B are United States persons and equallyown DC1. Pursuant to a plan, individuals A and Btransfer their DC1 stock to FA in exchange solely for80 percent of the outstanding FA stock. After the ac-quisition, the expanded affiliated group that includesFA does not have substantial business activities inCountry A when compared to the total business ac-tivities of the expanded affiliated group.

(ii) Analysis. Under paragraph (c)(1)(i) of thissection, for purposes of section 7874(a)(2)(B)(i) FA

July 13, 2009 126 2009–28 I.R.B.

is treated as acquiring all of the properties held byDC1 on the date of the stock acquisition. After theacquisition, the former shareholders of DC1 own80 percent of the stock of FA by reason of holdingDC1 stock. Therefore, FA is a surrogate foreigncorporation that is treated as a domestic corporationunder section 7874(b). Under paragraph (m)(1)of this section, except for purposes of determiningwhether FA is treated as a surrogate foreign corpora-tion, the conversion of FA to a domestic corporationshall constitute a reorganization described in section368(a)(1)(F) that occurs immediately before the stockacquisition. Section 367 applies to the conversionof FA to a domestic corporation. See, for example,§§1.367(b)–2 and 1.367(b)–3 for the consequencesof the conversion. Under paragraph (m)(3) of thissection, section 367 does not apply to the transfers ofDC1 stock by individuals A and B to FA.

(o) Effective/applicability date—(1)Temporary regulations filed on June 9,2009. This section shall apply to acquisi-tions completed on or after June 9, 2009.However, taxpayers may apply this section

to acquisitions completed before June 9,2009, if this section is applied consistentlyto all acquisitions completed before suchdate.

(2) Application of prior temporaryregulations to certain acquisitions com-pleted on or after June 6, 2006. Section1.7874–2T, as contained in 26 CFR part 1revised as of April 1, 2009, shall not applyto acquisitions completed on or after June6, 2006, pursuant to a written agreementthat was (subject to customary conditions)binding on December 28, 2005, and at alltimes thereafter (binding commitment).A binding commitment shall include op-tions and similar interests entered intoin connection with one or more writtenagreements described in the precedingsentence. Accordingly, §1.7874–2T, ascontained in 26 CFR part 1 revised as of

April 1, 2009, shall not apply to acquisi-tions that occur, in whole or in part, as aresult of the exercise of such options orsimilar interests.

(p) Expiration date. The applicabilityof this section expires on or before June 8,2012.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved June 8, 2009.

Michael Mundaca,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on June 9, 2009,11:15 a.m., and published in the issue of the Federal Registerfor June 12, 2009, 74 F.R. 27920)

2009–28 I.R.B. 127 July 13, 2009

Part III. Administrative, Procedural, and MiscellaneousTribal Economic DevelopmentBonds

Notice 2009–51

SECTION 1. PURPOSE

This notice solicits applications for al-locations of the $2 billion national bondvolume limitation authority (“volumecap”) to issue tribal economic develop-ment bonds (“Tribal Economic Develop-ment Bonds”) under new § 7871(f) of theInternal Revenue Code (the “Code”). Thisnotice also provides related guidance onthe following: (1) eligibility requirementsthat a project must meet to be consideredfor a volume cap allocation, (2) applica-tion requirements, deadlines, and formsfor requests for volume cap allocations,(3) the method that the Internal RevenueService (“IRS”) and the Department of theTreasury (“Treasury”) will use to allocatethe volume cap, and (4) certain interimguidance in this area.

SECTION 2. INTRODUCTION

Section 1402 of Title I of Division Bof the American Recovery and Reinvest-ment Act of 2009, Pub. L. No. 111–5,123 Stat. 115 (2009) (the “Act”), addednew § 7871(f) to the Code. In general,the purpose of new § 7871(f) is to giveIndian tribal governments greater flexi-bility to use tax-exempt bonds to financeeconomic development projects than isallowable under the existing standard of§ 7871(c). The more restrictive standardunder § 7871(c) generally limits the use byIndian tribal governments of tax-exemptbonds to the financing of certain activi-ties that constitute essential governmentalfunctions customarily performed by Stateand local governments with general taxingpowers and certain manufacturing facili-ties. The more flexible standard under new§ 7871(f) generally allows Indian tribalgovernments to use tax-exempt bondsunder the new $2 billion volume cap to fi-nance any economic development projects(excluding certain gaming facilities andprojects located outside of Indian reser-vations as provided in § 7871(f)(3)(B))or other activities for which State or local

governments could use tax-exempt bondsunder § 103.

State and local governments generallycan use tax-exempt governmental bondsto finance an unspecified broad range ofprojects and activities so long as (1) notmore than 10 percent of the bond proceedsare used for private business use and (2)the debt service on no more than 10 per-cent of bond proceeds is payable or se-cured from payments or property used forprivate business use. In addition, specialrules under § 141(b)(3) and § 141(c) fur-ther limit the use of tax-exempt govern-mental bonds in certain circumstances in-volving disproportionate or unrelated pri-vate business use and private loans.

In addition, State and local govern-ments can use tax-exempt qualified privateactivity bonds to finance certain specifiedtypes of projects and activities withoutregard to the level of private involve-ment. State and local governments canissue qualified tax-exempt private activitybonds under § 141(e) and related provi-sions for projects and activities, includingthe following : (1) airports, (2) docks andwharves, (3) mass commuting facilities,(4) facilities for the furnishing of water,(5) sewage facilities, (6) solid waste dis-posal facilities, (7) qualified low-incomeresidential rental multifamily housingprojects, (8) facilities for the local fur-nishing of electric energy or gas, (9) localdistrict heating or cooling facilities, (10)qualified hazardous waste facilities, (11)high-speed intercity rail facilities, (12)environmental enhancements of hydro-electric generating facilities, (13) qualifiedpublic educational facilities, (14) qualifiedgreen buildings and sustainable designprojects, (15) qualified highway or surfacefreight transfer facilities, (16) qualifiedmortgage bonds or qualified veteransmortgage bonds for certain single-familyhousing mortgage loans, (17) qualifiedsmall issue bonds for certain manufac-turing facilities, (18) qualified studentloan bonds, (19) qualified redevelopmentbonds, and (20) qualified 501(c)(3) bondsfor the exempt charitable and educationalactivities of § 501(c)(3) nonprofit organi-zations.

Finally, State and local governmentscan use tax-exempt bonds in “refunding is-

sues,” as defined in § 1.150–1(d) of the In-come Tax Regulations, to refinance priorbonds, subject to certain restrictions, in-cluding a restriction under § 149(d) againstnot more than one “advance refunding is-sue,” as defined in § 1.150–1(d)(4), for tax-exempt governmental bonds, and a prohi-bition against any advance refunding is-sue for tax-exempt qualified private activ-ity bonds.

Thus, subject to the restrictions of§ 7871(f)(3)(B), Indian tribal governmentscan use Tribal Economic DevelopmentBonds to finance a broad range of gov-ernmental projects, including hotels, con-vention centers, or golf courses, as wellas projects involving certain qualifiedprivate activities, to the same extent andsubject to the same limitations imposedon State and local governments. TheTribes can also, subject to the limitationsof § 7871(f)(3)(B), use the Bonds for re-funding issues, to the same extent as Stateand local governments.

SECTION 3. BACKGROUND

Section 7871(a)(4) provides that, sub-ject to § 7871(c), an Indian tribal govern-ment is to be treated as a State for purposesof § 103 (relating to State and local bonds).Section 7871(c)(1) provides generally that,except for obligations for certain manufac-turing facilities described in § 7871(c)(3),§ 103(a) shall apply to any obligation is-sued by an Indian tribal government (orsubdivision thereof) only if such obliga-tion is part of an issue substantially all ofthe proceeds of which are to be used inthe exercise of any essential governmen-tal function. Section 7871(e) provides thatfor purposes of § 7871 the term “essen-tial governmental function” shall not in-clude any function which is not customar-ily performed by State and local govern-ments with general taxing power.

New §7871(f)(1) added by the Act pro-vides that the Treasury Department shallallocate the $2 billion national volume capfor Tribal Economic Development Bondsamong the Indian tribal governments insuch manner as the Treasury Department,in consultation with the Secretary of theInterior, determines appropriate. Section7871(f)(2)(A) provides that, notwithstand-ing the provisions of § 7871(c), Tribal Eco-

July 13, 2009 128 2009–28 I.R.B.

nomic Development Bonds are treated forpurposes of the Code as if they were is-sued by a State. Section 7871(f)(2)(B) pro-vides that with respect to Tribal EconomicDevelopment Bonds, the Indian tribal gov-ernment issuing such bonds and any instru-mentality of such Indian tribal governmentare to be treated as a State for purposes of§ 141. Section 7871(f)(2)(C) provides thatthe § 146 volume cap limitations on pri-vate activity bonds do not apply to TribalEconomic Development Bonds.

Section 7871(f)(3)(A) defines a TribalEconomic Development Bond generally tomean any bond issued by an Indian tribalgovernment the interest on which would beexempt from tax under § 103 if issued bya State or local government and which isdesignated by the Indian tribal governmentas a Tribal Economic Development Bondfor purposes of § 7871(f).

Section 7871(f)(3)(B) further providesthat the term Tribal Economic Develop-ment Bond shall not include any bond is-sued as part of an issue if any portion ofthe proceeds of such issue are used to fi-nance: (1) any portion of a building inwhich class II or class III gaming (as de-fined in section 4 of the Indian GamingRegulatory Act) is conducted or housedor any other property actually used in theconduct of such gaming or (2) any facilitylocated outside the Indian reservation (asdefined in § 168(j)(6)). Section 168(j)(6)provides that the term “Indian reservation”means a reservation as defined in § 3(d)of the Indian Financing Act of 1974, 25U.S.C. § 1452(d) applied by treating theterm “Indian reservations in Oklahoma” asincluding only lands which are within thejurisdictional area of an Oklahoma Indiantribe (as determined by the Secretary ofthe Interior) and which are recognized bythe Secretary of the Interior as eligible fortrust land status under 25 CFR Part 151 (asin effect on the date of the enactment ofthis sentence) or a reservation defined in§ 4(10) of the Indian Child Welfare Act of1978, 25 U.S.C. 1903(10)

Section 7871(f)(3)(C) provides that themaximum aggregate face amount of bondswhich may be designated by any Indiantribal government under § 7871(f)(3)(A)may not exceed the amount of nationalTribal Economic Development Bond vol-ume cap allocated to such Indian tribalgovernment under § 7871(f)(1).

SECTION 4. APPLICATIONREQUIREMENTS IN GENERAL

Each application for an allocation ofthe Tribal Economic Development Bondvolume cap under § 7871(f)(1) (“Appli-cation”) must be prepared and submittedin accordance with this section. In orderfor an Application to comply with thissection, among other things, the Appli-cation must be prepared in substantiallythe form attached to this notice as Ap-pendix A, subject to such minor changesor variations as the IRS and the TreasuryDepartment may approve in their discre-tion. This notice, including AppendixA, may be found on the IRS web siteat http://www.irs.gov/taxexemptbond/in-dex.html or http://www.irs.gov/pub/irs-drop/. By submitting an Application, theapplicant agrees to comply with the re-quirements of this notice.

a. Qualified issuer. An Applicationmust be submitted by an Indian tribal gov-ernment. Section § 7701(a)(40)(A) de-fines an Indian tribal government as thegoverning body of any tribe, band, com-munity, village, or group of Indians, orAlaska Natives, which is determined bythe Secretary, after consultation with theSecretary of the Interior, to exercise gov-ernmental functions. Section 2.01 of Rev-enue Procedure 2008–55, 2008–39 I.R.B.768, provides that an Indian tribal entitythat appears on the most recent list pub-lished by the Department of the Interior inthe Federal Register pursuant to the Fed-erally Recognized Indian Tribe List Act of1994, Pub. L. 103–454, 108 Stat. 4791(“List Act”), is designated an Indian tribalgovernment for purposes of § 7701(a)(40).Section 2.03 of Rev. Proc. 2008–55 fur-ther provides that a tribe that does not ap-pear on the most recent list published bythe Department of the Interior in the Fed-eral Register pursuant to the requirementsof the List Act nonetheless will be treatedas an Indian tribal government for pur-poses of § 7701(a)(40) if the tribe has beenacknowledged as a federally recognizedIndian tribe, as stated in a letter from theDepartment of the Interior. An Applica-tion must identify the Indian tribal govern-ment, including the Indian tribal govern-ment’s Federal tax identification number,and either: (1) state that the entity is in-cluded on the most recent list publishedby the Department of the Interior in the

Federal Register pursuant to the List Act,or (2) provide the letter from the Depart-ment of the Interior stating that the tribehas been acknowledged as a federally rec-ognized Indian tribe.

b. Signatures. An Application mustbe signed and dated by, and must includethe printed name and title of, an authorizedofficial of the Indian tribal government.For purposes of this notice, the term “au-thorized official of the Indian tribal gov-ernment” means an officer, board mem-ber, employee, or other official of the In-dian tribal government who is duly autho-rized to execute legal documents on be-half of the Indian tribal government in con-nection with incurring debt of the Indiantribal government (e.g., a tribal chairper-son, chief executive officer, or chief finan-cial officer), similar to the kind of duly au-thorized official of an Indian tribal gov-ernment who would be authorized to ex-ecute documents in connection with anIndian tribal government’s declaration ofofficial intent to reimburse expendituresfrom the proceeds of a borrowing under§ 1.150–2(e).

c. Contact person. An Applicationmust designate one or more persons withknowledge of the project that the qualifiedissuer duly authorizes to discuss with theIRS any information relating to the Appli-cation. The designation must include thedesignee’s name, title, telephone number,fax number, and mailing address. If a de-signee is not an official or officer of the is-suer, the Application must include an ex-ecuted Form 8821 (Taxpayer InformationAuthorization) or Form 2848 (Power of At-torney and Declaration of Representative)authorizing the disclosure of taxpayer in-formation specifically relating to the Ap-plication.

d. Addresses. An Application mustbe submitted by hard copy in duplicateaccompanied by a copy of the Applica-tion in electronic format on compact disc(“CD”) sent by mail to the Internal Rev-enue Service (IRS), SE:T:GE:TEB:CPM,Attention: Mark Helfer, 1122 Town &Country Commons, St. Louis, Missouri63017.

e. Due date. To receive an allocationfrom the first $1 billion of volume cap be-ing allocated (“First Allocation”), an Ap-plication must be filed with the IRS on orbefore the Application deadline of August15, 2009 (“First Allocation Deadline”). To

2009–28 I.R.B. 129 July 13, 2009

receive an allocation from the remainingvolume cap (“Second Allocation”), an Ap-plication must be filed with the IRS afterAugust 15, 2009, and on or before January1, 2010 (“Second Allocation Deadline”).See section 7 for further discussion of thetwo allocations.

f. Project description. Each Applica-tion must contain the information requiredby this subsection f.

(i) Qualified project. Each Applica-tion must describe in reasonable detail theproject to be financed with the proceedsof the Tribal Economic DevelopmentBonds. The Application must indicatethe expected date that the acquisition andconstruction of the project will commenceand the expected date that the project willbe placed in service.

(ii) Location of project. The Applica-tion must include a certification that theproject’s location is within the Indian tribalgovernment’s reservation.

(iii) Project not used for gaming pur-poses. The Application must contain a cer-tification that no portion of the proceeds ofany Tribal Economic Development Bondsissued pursuant to the application will beused to finance any portion of a buildingin which class II or class III gaming, asdefined in section 4 of the Indian GamingRegulatory Act, is conducted or housed,or any other property actually used in theconduct of such gaming. For a safe harborstandard regarding certain determinationswith respect to separate buildings, see sec-tion 10 of this notice.

(iv) Regulatory approvals. The Appli-cation must state whether all necessaryFederal, State and local regulatory ap-provals for the project have been obtainedand, if those approvals have not yet beenobtained, the Application must describethe Indian tribal government’s plan forobtaining them and the time frame duringwhich the Indian tribal government ex-pects to receive them.

g. Plan of financing. The Applicationmust contain (1) a reasonably detaileddescription of the plan of financing for theproject, including all reasonably expectedsources (e.g., a public offering through anamed underwriter or a private placementto a named institution) and uses of financ-ing, including financing from the TribalEconomic Development Bonds and fromother sources, (2) the status of all financ-ing, including the name and addresses of

all entities expected to provide any financ-ing, (3) the anticipated date of issuance ofthe Tribal Economic Development Bondsand any expected purchasers of the TribalEconomic Development Bonds, (4) thesources of security and repayment for theTribal Economic Development Bonds,(5) the aggregate face amount of TribalEconomic Development Bonds expectedto be issued for the project, and (6) theissuer’s reasonably expected schedule forspending proceeds of the Tribal EconomicDevelopment Bonds. If the Indian tribalgovernment intends to use the proceedsof Tribal Economic Development Bondsto reimburse amounts paid with respect toa qualified project, the Application mustdemonstrate that the requirements under§ 1.150–2 of the Income Tax Regulationswill be met.

h. Dollar amount of allocation re-quested. The Application must specify thedollar amount of the volume cap requestedfor the project.

i. Statement of readiness to issue. AnApplication for an allocation of volumecap from the First Allocation must containthe statement that the issuer reasonably ex-pects to issue any Tribal Economic Devel-opment Bonds, pursuant to the requestedallocation of volume cap, on or before De-cember 31, 2010. An Application for anallocation of volume cap from the SecondAllocation must contain a statement thatthe issuer reasonably expects to issue anyTribal Economic Development Bonds pur-suant to the requested allocation of volumecap on or before December 31, 2011.

SECTION 5. REQUIREDDECLARATIONS IN APPLICATIONS

Each Application submitted under thisnotice must include the following declara-tion signed and dated by an authorized offi-cial of the Indian tribal government: “Un-der penalties of perjury, I declare that Ihave examined this document and, to thebest of my knowledge and belief, all of thefacts contained herein are true, correct, andcomplete.”

SECTION 6. CONSENT TODISCLOSURE OF ALLOCATION

In order to provide the public with in-formation on how the volume cap has beenallocated and to facilitate oversight of the

Tribal Economic Development Bond pro-gram, the IRS intends to publish the re-sults of the allocation process. The in-formation will be most useful to the pub-lic if it identifies the specific allocationsawarded. Pursuant to § 6103, consent isrequired in order for the IRS to discloseidentifying information with respect to ap-plicants awarded an allocation. Therefore,the IRS requests that each applicant submitwith the Application a declaration, con-senting to the disclosure by the IRS of thename of the issuer, the type and location ofthe project that is the subject of the Appli-cation, and the amount of the Tribal Eco-nomic Development Bond volume cap al-location awarded to that applicant if theApplicant receives an allocation. To pro-vide valid consent, the declaration must bein the form set forth in Appendix B. An ap-plicant is not required to provide a declara-tion consenting to disclosure in order to re-ceive an allocation. The IRS will not pub-lish identifying information with respect toapplications that are not awarded an allo-cation of volume cap or while applicationsare pending.

SECTION 7. VOLUMECAP ALLOCATIONS ANDMETHODOLOGY

a. First Allocation. Tribal EconomicDevelopment Bond volume cap under§ 7871(f) will be allocated in at least twotranches. The first $1 billion in volumecap will be allocated in accordance withthis section for qualified projects for whichApplications meeting the requirements ofthis notice have been filed with the IRS onor before the First Allocation Deadline. Ifthe total amount of volume cap requestedin all applications received on or beforethe First Allocation Deadline does not ex-ceed $1 billion then each qualified projectwill be allocated the amount of volumecap requested, and any amount of the first$1 billion in volume cap remaining willbe available for allocation as part of theSecond Allocation. If the total amount ofvolume cap requested in all applicationsreceived on or before the First Alloca-tion Deadline exceeds $1 billion, thaneach qualified project will be allocatedthe amount of volume cap requested re-duced pro rata such that the total amountallocated as part of the First Allocationdoes not exceed $1 billion. Applicants

July 13, 2009 130 2009–28 I.R.B.

receiving a reduced allocation may submitan application requesting the remainder ofthe allocation before the Second Alloca-tion Deadline.

b. Second Allocation.(1)The Second Allocation will allocate

the second $1 billion plus any portion ofthe first $1 billion not allocated as partof the First Allocation (the “Second Al-location Amount”). The Second Alloca-tion will be allocated in accordance withthis section for qualified projects for whichapplications meeting the requirements ofthis notice have been filed with the IRSon or before the Second Allocation Dead-line set forth in this notice. If the totalamount of volume cap requested in all ap-plications received on or before the Sec-ond Allocation Deadline does not exceedthe Second Allocation Amount, then eachapplicant will be allocated the amount ofvolume cap requested and any volume capremaining may be available for allocationby the IRS as part of an allocation processto be announced by the IRS at some futuredate. If the total amount of volume cap re-quested in all applications received on orbefore the Second Allocation Deadline ex-ceed the Second Allocation Amount theneach applicant will be allocated the amountof volume cap requested reduced pro ratasuch that the total amount allocated as partof the Second Allocation does not exceedthe Second Allocation Amount.

(2) Applicants for any subsequent allo-cation other than the First Allocation mustinclude a description of the project, or anyrelated project, for which a prior alloca-tion was made, as well as the name of theapplicant that received the allocation. Forthis purpose, related projects include fa-cilities that are owned by the same Indiantribal government, a political subdivisionof the Indian tribal government, or an en-tity controlled by the Indian tribal govern-ment, which are (i) located at or near thesame site, and (ii) are integrated, intercon-nected, or directly or indirectly dependenton each other based on all the facts and cir-cumstances

c. Limit on amounts awarded to anyone Indian tribal government. No Indiantribal government will be awarded alloca-tions from the First Allocation for a totalamount exceeding $30 million. For pur-poses of this limitation, an Indian tribalgovernment includes the Indian tribal gov-ernment, as well as political subdivisions

of, and other entities controlled by, the In-dian tribal government. Although the IRSexpects that a similar limitation will applyto amounts allocated as part of the SecondAllocation, or any subsequent allocation,the IRS reserves the right to raise or lowerthe limitation or abolish it entirely.

d. Joint projects. An Indian tribal gov-ernment may submit an application for anallocation to finance the Indian tribal gov-ernment’s share of a joint project all ofwhich will be owned by Indian tribal gov-ernments or which will, in part, be ownedby an entity that is not an Indian tribalgovernment, provided that the joint projectwill be located entirely on one or moreof the reservations of any of the Indiantribal governments receiving an allocationwith respect to such project. For this pur-pose, the type of joint ownership of fa-cilities to be financed with Tribal Eco-nomic Development Bonds include onlythose recognized under the private activ-ity bond restrictions on tax-exempt bondsunder § 141.

e. On behalf of issuers.(1) An Indian tribal government that re-

ceives an allocation may designate an “onbehalf of issuer,” within the rules applica-ble to bonds issued under § 103, to issuethe Tribal Economic Development Bondson its behalf.

(2) An Indian tribal government that re-ceives an allocation may assign the alloca-tion to a pool bond issuer who is otherwisean Indian tribal government for the pur-pose of issuing Tribal Economic Develop-ment Bonds the proceeds of which will beloaned to the Indian tribal government whoreceived the allocation. Pooled Tribal Eco-nomic Development Bonds will be subjectto the provisions of § 149(f).

(3) The proceeds of any bonds issuedby an “on behalf of” issuer or a pool issuerwill be treated as if they were proceeds ofbonds issued by the Indian tribal govern-ment that received the allocation.

f. Forfeiture of allocation. If bonds arenot issued by December 31, 2010, for anyor all of the allocation received by an issuerpursuant to the First Allocation, then suchallocation is treated as forfeited. If bondsare not issued by December 31, 2011, forany or all of the allocation received byan issuer pursuant to the Second Alloca-tion, then such allocation is treated as for-feited. Any allocation amounts treated asforfeited may be available for allocation

by the IRS as part of an allocation processto be announced by the IRS at some fu-ture date. Issuers must notify the IRS atleast 30 days before the expiration of theperiod during which bonds may be issuedpursuant to an allocation if they do not in-tend to issue bonds pursuant to such allo-cation.

SECTION 8. INSUBSTANTIALDEVIATIONS FROM APPLICATIONPROVISIONS

Generally, any allocation of Tribal Eco-nomic Development Bond volume cap isvalid for purposes of § 7871, if bonds areissued pursuant to an allocation and areused to finance the project described inthe Application. An allocation of TribalEconomic Development Bond volumecap is also valid notwithstanding insub-stantial deviations from the informationsubmitted in the Application. Whether adeviation with respect to the informationsubmitted in the Application is insubstan-tial is determined based on all the factsand circumstances using criteria simi-lar to those used under § 5f.103–2(f)(2)and Prop. Reg. § 1.147(f)–1(b)(6), asamended from time to time, relating to theinsubstantial deviation in the informationrequired for public approval of an issueof tax-exempt bonds under § 147(f) ofthe Code. Applications for approval ofspecific insubstantial deviations must besubmitted by hard copy and in electronicformat on CD sent by mail to Internal Rev-enue Service (IRS), SE:T:GE:TEB:CPM,Attention: Mark Helfer, 1122 Town &Country Commons, St. Louis, Missouri63017. An Application for approval ofa specific insubstantial deviation mustinclude: (a) a detailed description of theproposed deviation, (b) facts establishingthe continued technical viability of theproject and that no other taxpayer, Stateor local government or Indian tribal gov-ernment will be prejudiced, (c) a copy ofthe allocation letter issued by the IRS, and(d) a declaration pursuant to section 5 ofthis notice signed by an authorized personin accordance with section 4.b. of thisNotice.

SECTION 9. INFORMATIONREPORTING

Subject to updated IRS informationreporting forms or procedures, an issuer

2009–28 I.R.B. 131 July 13, 2009

of Tribal Economic Development Bondsshould complete Part II of Form 8038–Gby checking the box on Line 18 (Other),writing “Tribal Economic DevelopmentBonds” in the space provided for the bonddescription, and entering the issue price ofthe Tribal Economic Development Bondsin the Issue Price column. For purposes ofthis notice, the term “issue” has the mean-ing used for tax-exempt bond purposes in§ 1.150–1(c).

SECTION 10. RELIANCE ONNOTICE AND INTERIM GUIDANCE

(a) GenerallyPending the promulgation and effec-

tive date of applicable future regulations orother public administrative guidance, tax-

payers may rely on the interim guidanceprovided in this notice.

(b) Safe Harbor Definition of BuildingSection 7871(f)(3)(B) provides that the

term Tribal Economic Development Bonddoes not include any bond issued as partof an issue if any portion of the proceedsof the issue are used to finance any por-tion of a building in which class II orclass III gaming (as defined in section 4of the Indian Gaming Regulatory Act) isconducted or housed or any other prop-erty actually used in the conduct of thoseclasses of gaming. As a safe harbor, astructure will be treated as a separate build-ing if it has an independent foundation,independent outer walls and an indepen-dent roof. Connections (e.g., doorways,covered walkways or other enclosed com-mon area connections) between two adja-

cent independent walls of separate build-ings may be disregarded as long as suchconnections do not affect the structural in-dependence of either wall.

SECTION 11. DRAFTINGINFORMATION

The principal authors of this notice areAviva M. Roth and Timothy L. Jones of theOffice of Associate Chief Counsel (Finan-cial Institutions and Products). However,other personnel from the IRS and Treasuryparticipated in its development. For fur-ther information regarding this notice, con-tact Aviva M. Roth or Timothy L. Jones at(202) 622–3980 (not a toll-free call). Forfurther information about submitted Ap-plications, contact Mark Helfer at (636)255–1201 (not a toll-free call).

July 13, 2009 132 2009–28 I.R.B.

APPENDIX A

APPLICATION FOR ALLOCATION OFTRIBAL ECONOMIC DEVELOPMENT BOND VOLUME CAP

Internal Revenue ServiceSE:T:GE:TEB:CPMAttention: Mark Helfer1122 Town & Country CommonsSt. Louis, Missouri 63017

Dear Sir or Madam:

The following constitutes the application (“Application”) of (Name) (the “Applicant”) for allocation of tribal economicdevelopment bond (“Tribal Economic Development Bond”) volume cap under § 7871(f) of the Internal Revenue Code (the“Code”) (unless otherwise noted, section references herein are to the Code) to finance the project described below. (If a singleApplication is used to request Tribal Economic Development Bond volume cap for more than one project, then all of the requiredinformation in the Application must be provided separately for each project.)

1. Name of Applicant/Issuer

Street Address

City State Zip

Telephone Number Fax Number

EIN

2. Status of Issuer — (Select as appropriate)

The Applicant/Issuer is a “qualified issuer” under § 7871(f) because it is —

(i) an Indian tribal entity that appears on the most recent list published by the Department of Interior in theFederal Register pursuant to the Federally Recognized Indian Tribe List Act of 1994, Pub. L. 103–454, 108Stat. 4791 (“List”), as demonstrated by the attached documents included as Exhibit A.

(ii) an Indian tribal government which is acknowledged as a federally recognized Indian tribe, as stated in aletter from the Department of the Interior, as demonstrated by the attached documents included as Exhibit A.

3. Name of Project

4. Detailed Description of the Project. A reasonably detailed description of the facility to be financed (the “Project”)is set forth below or in attached Exhibit B.

If the Project is a joint Project, please describe in detail the other owners of the project and the applicant’s ownershipinterest in the project.

5. Construction Commencement Date and Placed in Service Date. The Applicant begun or expects to begin theconstruction, installation and equipping of the Project on . The Applicant expects that theProject will be placed into service on or before .

6. Pool Issuances. Does the Applicant expect to have the Tribal Economic Development Bonds issued by a pool issueror an “on behalf of issuer”?

If the answer above is yes, please describe the pool issuer or on behalf of issuer and provide a statement that the poolissuer is an Indian tribal government or that the “on behalf of issuer” meets the requirements to be such an issuer under therules applicable to bonds issued under § 103.

2009–28 I.R.B. 133 July 13, 2009

7. Location of the Project:

Project address or physical location (do not include postal box numbers or mailing address)

City State Zip

Reservation where Project will be located:

Include in the attached Exhibit C, a certification that the Project will be located on the Applicant’s reservation. If the TribalEconomic Development Bonds will be issued for a joint project please include in attached Exhibit C a certification that the Projectwill be located on a reservation of at least one of the Indian tribal governments receiving an allocation with respect to such Project.

8. Information with respect to gaming.

Include in the attached Exhibit D a certification that no portion of the proceeds of any bonds issued pursuant to the requestedapplication will be used to finance any portion of a building in which class II or class III gaming (as defined in section 4 of theIndian Gaming Regulatory Act) is conducted or housed, or any other property actually used in the conduct of such gaming.

9. Individual to contact for more information about the Project:

Individual Name

Company Name

Street Address

City State Zip

Telephone Number

Fax Number

Email Address

(Include as appropriate) The contact person is not an authorized official or officer of the Applicant and a properlyexecuted Form 8821 (or Form 2848) is included with this Application that authorizes the disclosure by the IRS ofinformation that relates to this Application and the Project(s) described above to the contact person.

10. Regulatory Approvals. Identify each regulatory body, the action that must be taken, status of any pending actionand the remaining timeframe required to obtain each required approval. The plan of the Applicant for obtainingsuch approvals is as follows: (or attach an Exhibit)

11. Plan of Financing. Include a reasonably detailed description of the plan of financing for the Project, including allreasonably expected sources and uses of financing and other funds, the status of such financing, the anticipateddate of bond issuance, the sources of security and repayment for the bonds, the aggregate face amount of bondsexpected to be issued for the Project, and the issuer’s reasonably expected schedule for spending proceeds of theTribal Economic Development Bonds. Attached as Exhibit E is a plan of financing for the Project.

12. Statement of Readiness.

a. Application for volume cap from the First Allocation. Include in Exhibit F a statement signed underpenalties of perjury that the Issuer reasonably expects to issue bonds pursuant to the requested allocationby December 31, 2010.

b. Application for volume cap from the Second Allocation. Include in Exhibit F a statement signed underpenalties of perjury that the Issuer reasonably expects to issue bonds pursuant to the requested allocationby December 31, 2011.

13. Reimbursements. (For reimbursements, include the following statement.) The Applicant intends to use the proceedsof Tribal Economic Development Bonds to reimburse costs of the Project in accordance with § 1.150–2. (In addition,the Applicant must demonstrate that the requirements of § 1.150–2 will be met.

14. Refundings. (For refundings or refinancings, include the following statement.) The Applicant intends to use theproceeds of Tribal Economic Development Bonds to refund or refinance prior debt in circumstances that wouldqualify for a refunding or refinancing with tax-exempt bonds by a State or local government under § 103. (In addition,the Applicant must demonstrate that applicable requirements for such a refunding or refinancing issue will be met.)

15. Dollar Amount of Allocation Requested for the Project. To finance the Project, the Applicant hereby requests aTribal Economic Development Bond allocation in the amount of $ .

July 13, 2009 134 2009–28 I.R.B.

16. Prior Allocations for the Project. (If the Project or any Related Project (as defined in section 7.b.(2) of this Notice)previously received an allocation of Tribal Economic Development Bond volume cap under § 7871(f) of the Code,then this paragraph must include a statement to that effect.) [If applicable, include the following statement: On(Insert date), the Project previously received a Tribal Economic Development Bond volume cap allocation in theamount of $ . A copy of the IRS allocation letter for that allocation is attached.]

17. Assignment of allocations to another issuer. (If the applicant expects to assign its allocation to another qualifiedissuer of Tribal Economic Development Bonds as authority for the Tribal Economic Development Bond issuer toissue bonds for the project on behalf of the applicant, the applicant should provide the following statement:))

The Applicant expects to assign the requested allocation for Tribal Economic Development Bonds volumecap to a qualified issuer of Tribal Economic Development Bonds as authority for the Tribal EconomicDevelopment Bond issuer to issue bonds for the project on behalf of the Applicant. Applicant agrees to obtaina written commitment from the assignee Tribal Economic Development Bond issuer that it is a qualified issuerof Tribal Economic Development Bonds and that it will issue Tribal Economic Development Bonds for theproject within the time frame specified in the Application for the Applicant’s bonds.

18. Penalty of Perjury Statement and Signatures

I hereby certify that I am an authorized officer or official of the Applicant, that I am duly authorized to execute legaldocuments on behalf of the Applicant in connection with incurring debt, and that I am duly authorized to executelegal documents on behalf of the Applicant in making this Application. Under penalties of perjury, I declare that(i) I have knowledge of the relevant facts and circumstances relating to this Application and the Project(s), (ii) Ihave examined this Application, and (iii) to the best of my knowledge and belief, all of the facts contained in thisApplication are true, correct and complete.

By:

Name:

Title:

Date:

2009–28 I.R.B. 135 July 13, 2009

EXHIBIT A

DOCUMENTS REGARDING ISSUER STATUS AS AN INDIAN TRIBAL GOVERNMENT(RESPONSE TO QUESTION 2 OF THE APPLICATION)

(Attached hereto)

July 13, 2009 136 2009–28 I.R.B.

EXHIBIT B

DESCRIPTION OF THE PROJECT(RESPONSE TO QUESTION 4 OF THE APPLICATION)

(Attached hereto)

2009–28 I.R.B. 137 July 13, 2009

EXHIBIT C

PROJECT LOCATION ON INDIAN TRIBAL GOVERNMENT RESERVATION(RESPONSE TO QUESTION 7 OF THE APPLICATION)

July 13, 2009 138 2009–28 I.R.B.

EXHIBIT D

STATEMENT WITH RESPECT TO GAMING(RESPONSE TO QUESTION 8 OF THE APPLICATION)

2009–28 I.R.B. 139 July 13, 2009

EXHIBIT E

PLAN OF FINANCING(RESPONSE TO QUESTION 11 OF THE APPLICATION)

(Attached hereto)

July 13, 2009 140 2009–28 I.R.B.

EXHIBIT F

STATEMENT OF READINESS TO ISSUE(RESPONSE TO QUESTION 12 OF THE APPLICATION)

I hereby certify that I am an authorized officer or official of the Applicant, that I am duly authorized to execute legal documentson behalf of the Applicant in connection with incurring debt, and that I am duly authorized to execute legal documents on behalfof the Applicant in making this Application. Under penalties of perjury, I declare that the Applicant reasonably expects that bondsissued pursuant to the Tribal Economic Development Bond allocation to be received will be issued by [enter either: December 31,2010, or December 31, 2011, as applicable]

By:

Name:

Title:

Date:

2009–28 I.R.B. 141 July 13, 2009

EXHIBIT B

CONSENT TO PUBLIC DISCLOSUREOF CERTAIN TRIBAL ECONOMIC DEVELOPMENT BOND

APPLICATION INFORMATION

In the event that the Application of [(Insert name of applicant here): ] (the “Applicant”) for an allocationof authority to issue tribal economic development bonds (“Tribal Economic Development Bonds”) under section 7871(f) of theInternal Revenue Code is approved, the undersigned authorized representative of the Applicant hereby consents to the disclosureby the Internal Revenue Service through publication of a Notice in the Internal Revenue Bulletin or a press release of the name ofApplicant (issuer), the type and location of the facility that is the subject of the Application, and the amount of the allocation, ifany, of volume cap authority to issue Tribal Economic Development Bonds for such facility. The undersigned understands thatthis information might be published, broadcast, discussed or otherwise disseminated in the public record.

This authorization shall become effective upon the execution hereof. Except to the extent disclosure is authorized herein,the returns and return information of the undersigned taxpayer are confidential and are protected by law under the InternalRevenue Code.

I certify that I have the authority to execute this consent to disclose on behalf of the taxpayer named below.

Date: Signature:

Print name:

Title:

Name of Applicant-Taxpayer:

Taxpayer Identification Number:

Taxpayer’s Address:

Note: Treasury Regulations require that the Internal Revenue Service must receive this consent within 60 days after it is signedand dated.

Reliance Criteria for PrivateFoundations and SponsoringOrganizations

Rev. Proc. 2009–32

SECTION 1. PURPOSE

This Revenue Procedure provides re-liance criteria for private foundationsand sponsoring organizations that main-tain donor advised funds in determiningwhether a potential grantee is an organiza-tion described in section 509(a)(1), (2) or(3) of the Internal Revenue Code (Code).

SECTION 2. BACKGROUND

The Pension Protection Act of 2006,Pub. L. No. 109–208, 120 Stat. 780

(2006) (PPA) enacted new rules regard-ing grants by private foundations to certaintypes of supporting organizations. Undersection 4942(g)(4) of the Code, as addedby the PPA, the term “qualifying distribu-tion” does not include any amount paid bya private nonoperating foundation to ei-ther (1) a Type III supporting organiza-tion (as defined in § 4943(f)(5)(A)) that isnot functionally integrated, or (2) a TypeI, Type II, or functionally integrated TypeIII supporting organization if a disquali-fied person of the private foundation di-rectly or indirectly controls such support-ing organization or a supported organiza-tion of the supporting organization. In ad-dition, under § 4945(d)(4)(A), as amendedby the PPA, a private foundation grant toa supporting organization described in ei-ther (1) or (2) is a taxable expenditure un-der § 4945, unless the private foundationexercises expenditure responsibility with

respect to the grant in accordance with§ 4945(h).

The PPA also added § 4966 to theCode, which imposes an excise tax ona sponsoring organization (as defined in§ 4966(d)(1)) for taxable distributions (asdefined in § 4966(c)). Section 4966(c)(1)defines the term “taxable distribution”to include any distribution from a donoradvised fund (as defined in § 4966(d)(2))to a disqualified supporting organization,unless the sponsoring organization ex-ercises expenditure responsibility withrespect to the distribution in accordancewith § 4945(h). Section 4966(d)(4) de-fines the term “disqualified supportingorganization” as: (1) a Type III support-ing organization that is not functionallyintegrated, and (2) a Type I, Type II, orfunctionally integrated Type III supportingorganization if the donor, donor advisor,or related parties of the donor or donoradvisor directly or indirectly controls a

July 13, 2009 142 2009–28 I.R.B.

supported organization of the supportingorganization.

On December 18, 2006 , the TreasuryDepartment and the Internal RevenueService (IRS) issued Notice 2006–109,2006–2 C.B. 1121, to provide interimguidance regarding certain of the new rulesenacted by the PPA that affect supportingorganizations, donor advised funds, andprivate foundations that make grants tosupporting organizations. In particular,section 3.01 of Notice 2006–109 providesreliance criteria for private foundationsand sponsoring organizations that main-tain donor advised funds in determiningwhether a grantee is a public charity un-der § 509(a)(1), (2) or (3) and whether agrantee is a Type I, Type II, or functionallyintegrated Type III supporting organiza-tion. With respect to the determinationof whether a grantee is a public charityunder § 509(a)(1), (2), or (3) for purposesof §§ 4942, 4945 and 4966, as applicable,section 3.01 of Notice 2006–109 providesthat a private foundation or a sponsoringorganization that maintains a donor ad-vised fund, acting in good faith, may relyon either (1) information from the IRSBusiness Master File (“BMF”), or (2) thegrantee’s current IRS letter recognizingthe grantee as exempt from federal incometax and indicating the grantee’s publiccharity classification.

The BMF is updated monthly and, dueto its large size, is available as compressedASCII Text or Excel spreadsheet files.The files must be downloaded and uncom-pressed before viewing. The BMF and itscorresponding instructions are availablefor download directly from the IRS website. Currently, the BMF does not provideinformation as to whether an organizationdescribed in § 509(a)(3) is a Type I, TypeII, or Type III supporting organization, norwhether a Type III supporting organizationis functionally integrated.

Subsequent to the issuance of No-tice 2006–109, the IRS posted a doc-ument titled “Reliance on BMF Infor-

mation — Certain Determinations ofPublic Charity Status” on its websiteat http://www.irs.gov/charities/charita-ble/article/0,,id=168531,00.html, clarify-ing how a grantor may access BMF datafor purposes of satisfying the requirementsof section 3.01 of Notice 2006–109 todetermine whether a grantee is a publiccharity under section 509(a)(1), (2) or(3). The document provides that in lieuof downloading the BMF directly fromthe IRS website, a private foundation or asponsoring organization that maintains adonor advised fund may use a third partyto obtain the BMF information, so longas the third party provides the BMF infor-mation in a report that includes: (1) thegrantee’s name, Employer IdentificationNumber, and public charity classifica-tion under § 509(a)(1), (2), or (3); (2) astatement that the information is from themost-currently available IRS monthly up-date to the BMF, along with the IRS BMFrevision date; and (3) the date and time ofthe grantor’s search. The report must alsobe in a form that the grantor can store inhard copy or electronically.

SECTION 3. SCOPE

This Revenue Procedure applies tograntor determinations of public charitystatus under of the Code 509(a)(1), (2)or (3) for purposes of the excise taxesimposed on grants to certain supportingorganizations under sections 4942, 4945,and 4966.

SECTION 4. PROCEDURE

In determining whether a public charityis classified under 509(a)(1), (2), or (3) ofthe Code, a private foundation or a spon-soring organization that maintains a donoradvised fund, acting in good faith, mayrely on either:

(1) the grantee’s current IRS letterrecognizing the grantee as exempt fromfederal income tax and indicating the

grantee’s public charity classification un-der § 509(a)(1), (2), or (3); or

(2) information from the BMF. Agrantor may download the BMF directlyfrom the IRS website and store the relevantinformation in hard copy or electronically.A grantor may also obtain the BMF infor-mation from a third party, so long as thefollowing requirements are met:

(i) The third party provides a report tothe grantor that includes: (A) the grantee’sname, Employer Identification Number,and public charity classification under§ 509(a)(1), (2), or (3); (B) a statement thatthe information is from the most currentupdate of the BMF and the BMF revisiondate; and (C) the date and time the infor-mation was provided to the grantor; and

(ii) The report is in a form that thegrantor can store in hard copy or electron-ically.

EFFECT ON OTHER DOCUMENTS

This Revenue Procedure supersedesthe portions of section 3.01 of Notice2006–109 that relate to reliance for pur-poses of determining whether a grantee isa public charity under section 509(a)(1),(2) or (3) of the Code. All other parts ofNotice 2006–109 remain unchanged andin effect, including the separate require-ments for grantors to determine whether agrantee is a Type I, Type II, or functionallyintegrated Type III supporting organiza-tion.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Patricia Thomas of the Ex-empt Organizations, Tax Exempt andGovernment Entities Division. For furtherinformation regarding this revenue proce-dure, please contact Virginia Richardsonat (202) 283–8938 (not a toll-free call).

2009–28 I.R.B. 143 July 13, 2009

Part IV. Items of General InterestWithdrawal of Notice ofProposed Rulemakingand Notice of ProposedRulemaking byCross-Reference toTemporary Regulations

Guidance Under Section 7874Regarding Surrogate ForeignCorporations

REG–112994–06

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Withdrawal of notice of pro-posed rulemaking and notice of proposedrulemaking by cross-reference to tempo-rary regulations.

SUMMARY: In this issue of the Bulletin,the IRS and the Treasury Department areissuing temporary regulations (T.D. 9453)concerning the treatment of a foreign cor-poration as a surrogate foreign corporationunder section 7874(a)(2)(B) of the Inter-nal Revenue Code (Code). The tempo-rary regulations primarily affect domesticcorporations and partnerships (and certainparties related thereto), and certain foreigncorporations that acquire substantially allof the properties of such domestic corpo-rations or partnerships. The text of thetemporary regulations serves as the text ofthese proposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by September 10, 2009.

ADDRESSES: Send submissions toCC:PA:LPD:PR (REG–112994–06), 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–112994–06),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–112994–06).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, S. James Hawes at (202)622–3860; concerning submissions ofcomments and a request for a publichearing, contact Funmi Taylor at (202)622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

The temporary regulations in this issueof the Bulletin amend the Income Tax Reg-ulations (26 CFR part 1) relating to section7874 of the Code. The temporary regula-tions address certain issues relating to thetreatment of a foreign corporation as a sur-rogate foreign corporation under section7874(a)(2)(B). The text of the temporaryregulations serves as the text of these pro-posed regulations, and the preamble to thetemporary regulations explains these pro-posed regulations.

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 USC Chap-ter 5) does not apply to these regulations.These regulations do not impose a collec-tion of information. Pursuant to the Regu-latory Flexibility Act (5 USC chapter 6),it is hereby certified that this regulationwill not have a significant economic im-pact on a substantial number of small enti-ties. The complexity and cost of a trans-action to which section 7874 may applymake it unlikely that a substantial num-ber of small entities will engage in such atransaction. In addition, any economic im-pact to entities affected by section 7874,large or small, is derived from the opera-tion of the statute or its intended applica-tion, not the regulations in this notice ofproposed rulemaking. Pursuant to section7805(f) of the Code, these regulations havebeen submitted to the Chief Counsel forAdvocacy of the Small Business Adminis-tration for comment on its impact on smallbusiness.

Comments and Request for a 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 IRS and the Treasury Department 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 may be scheduled ifrequested by any person who timely sub-mits comments. If a public hearing isscheduled, notice of the date, time andplace for the public hearing will be pub-lished in the Federal Register.

Drafting Information

The principal author of these proposedregulations is S. James Hawes of the Of-fice of Associate Chief Counsel (Interna-tional). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Withdrawal of Notice of ProposedRulemaking

Accordingly, under the authority of26 USC 7805, the notice of proposedrulemaking (E6–8698) that was publishedin the Federal Register on June 6, 2006(71 FR 32495) is withdrawn.

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as 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 * * *Section 1.7874–2 is also issued under

26 U.S.C. 7874(c)(6) and (g). * * *Par. 2. Section 1.7874–1 is amended

by revising paragraphs (e) and (g) to readas follows:

July 13, 2009 144 2009–28 I.R.B.

§1.7874–1 Disregard of affiliate-ownedstock.

* * * * *(e) [The text of the proposed amend-

ments to §1.7874–1(e) is the same as thetext of §1.7874–1T(e) published elsewherein this issue of the Bulletin].

* * * * *(g) [The text of the proposed amend-

ment to §1.7874–1(g) is the same as thetext of §1.7874–1T(g) published else-where in this issue of the Bulletin].

Par. 3. Section 1.7874–2 is added toread as follows:

§1.7874–2 Surrogate foreign corporation.

[The text of proposed §1.7874–2 is thesame as the text of §1.7874–2T(a) through(o) published elsewhere in this issue of theBulletin].

Linda E. Stiff,Deputy Commissioner

for Services and Enforcement.

(Filed by the Office of the Federal Register on June 9, 2009,11:15 a.m., and published in the issue of the Federal Registerfor June 12, 2009, 74 F.R. 27947)

Proposed Security, Privacy,and Business Standards forAuthorized IRS e-file Providersparticipating in Online Filing ofindividual income tax returns

Announcement 2009–56

The IRS has developed six (6) newsecurity, privacy, and business standardsto better serve taxpayers and protect theirinformation collected, processed andstored by Authorized IRS e-file Providers(Providers) participating in Online Filingof individual income tax returns.

These new standards are intended tosupplement the Gramm-Leach-Bliley Actand the implementing rules and regula-tions promulgated by the Federal TradeCommission. These standards have pre-viously been reviewed by our outsidetechnical consultants, vetted internally,presented at two consecutive IRS Soft-ware Developers conferences, and postedon irs.gov for comments.

The security and privacy objectivesof these standards are: setting minimum

encryption standards for transmission oftaxpayer information over the internetand authentication of Web site owners/op-erators beyond that offered by standardversion SSL certificates; periodic externalvulnerability scan of the taxpayer data en-vironment; protection against bulk-filingof fraudulent tax returns; and the abilityto timely isolate and investigate poten-tially compromised taxpayer information.These standards also address certain cus-tomer service objectives such as instant ac-cess to Web site owner/operator’s contactinformation, and e-file Providers commit-ment to maintaining physical, electronic,and procedural safeguards that complywith applicable law and federal standards.

1. Extended Validation SSL Certificate

This standard applies to Authorized IRSe-file Providers participating in Online Fil-ing of individual income tax returns thatcollect taxpayer information via the In-ternet. These Providers shall possess avalid and current Extended Validation Se-cure Socket Layer (SSL) certificate usingSSL 3.0 / TLS 1.0 or later, and minimum1024-bit RSA / 128-bit AES.

2. External Vulnerability Scan

This standard applies to AuthorizedIRS e-file Providers participating in On-line Filing of individual income tax returnsthat collect, transmit, process, or store tax-payer information. These Providers shallcontract with an independent third-partyvendor to run weekly external networkvulnerability scans of all their “systemcomponents” in accordance with the ap-plicable requirements of the PaymentCard Industry Data Security Standards(PCIDSS). All scans shall be performedby a scanning vendor certified by the Pay-ment Card Industry Security StandardsCouncil and listed on their current listof Approved Scanning Vendors (ASV).In addition, Providers whose systems arehosted shall ensure that their host com-plies with all applicable requirements ofthe PCIDSS.

For the purposes of this standard,“system components” is defined as anynetwork component, server, or applica-tion that is included in or connected tothe taxpayer data environment. The tax-payer data environment is that part of the

network that possesses taxpayer data orsensitive authentication data.

If scan reports reveal vulnerabilities,action shall be taken to address the vul-nerabilities in line with the scan report’srecommendations. Retain weekly scan re-ports for at least one year. The ASV andthe host (if present) shall be located in theUnited States.

3. Information Privacy and SafeguardPolicies

This standard applies to AuthorizedIRS e-file Providers participating in On-line Filing of individual income tax returnsthat own or operate a Web site throughwhich taxpayer information is collected,transmitted, processed or stored. TheseProviders shall have written informationprivacy and safeguard policy consistentwith the applicable government and in-dustry guidelines. In addition, Providers’shall acquire, maintain, and display alicense/accreditation seal from a con-sumer protection and privacy seal vendoracceptable to the IRS. The list of accept-able vendors will be made available onwww.irs.gov.

4. Protection Against Bulk Filing ofFraudulent Income Tax Returns

This standard applies to AuthorizedIRS e-file Providers participating in On-line Filing of individual income tax re-turns that own or operate a Web sitethrough which taxpayer information iscollected, transmitted, processed or stored.These Providers shall implement effectivestate-of-the-art technologies to protecttheir Web site against bulk filing of fraud-ulent income tax returns. Taxpayer infor-mation shall not be collected, transmitted,processed or stored otherwise.

5. Public Domain Name Registration

This standard applies to AuthorizedIRS e-file Providers participating in On-line Filing of individual income tax returnsthat own or operate a Web site throughwhich taxpayer information is collected,transmitted, processed or stored. TheseProviders shall have their Web site’s do-main name registered with a domain nameregistrar that is located in the United Statesand accredited by the Internet Corpora-tion for Assigned Names and Numbers

2009–28 I.R.B. 145 July 13, 2009

(ICANN). The domain name shall belocked and not be private.

6. Reporting of Security Incidents

This standard applies to Authorized IRSe-file Providers participating in Online Fil-ing of individual income tax returns thatcollect, transmit, process, or store taxpayerinformation. These Providers shall reportsecurity incidents to the IRS as soon as

possible but not later than the next busi-ness day after confirmation of the incident.For the purposes of this standard, an eventthat can result in an unauthorized disclo-sure, misuse, modification, or destructionof taxpayer information shall be consid-ered a reportable security incident. Detailinstructions for submitting incident reportswill be made available on www.irs.gov

In addition, if the Provider’s Web siteis the proximate cause of the incident, the

Provider shall cease collecting taxpayer in-formation via their Web site immediatelyupon detection of the incident and until theunderlying causes of the incident are suc-cessfully resolved.

Comments may be submitted electroni-cally to new.efile.requirements@irs.gov onor before September 15, 2009. Pleaseinclude “Announcement 2009–56” in thesubject line of any electronic communica-tions.

July 13, 2009 146 2009–28 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.

2009–28 I.R.B. i July 13, 2009

Numerical Finding List1

Bulletins 2009–27 through 2009–28

Announcements:

2009-56, 2009-28 I.R.B. 145

Notices:

2009-51, 2009-28 I.R.B. 128

Proposed Regulations:

REG-112994-06, 2009-28 I.R.B. 144

Revenue Procedures:

2009-30, 2009-27 I.R.B. 27

2009-31, 2009-27 I.R.B. 107

2009-32, 2009-28 I.R.B. 142

Revenue Rulings:

2009-18, 2009-27 I.R.B. 1

2009-19, 2009-28 I.R.B. 111

2009-20, 2009-28 I.R.B. 112

Treasury Decisions:

9452, 2009-27 I.R.B. 1

9453, 2009-28 I.R.B. 114

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin2009–26, dated June 29, 2009.

July 13, 2009 ii 2009–28 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2009–27 through 2009–28

Notices:

2006-70

Obsoleted by

T.D. 9453, 2009-28 I.R.B. 114

2006-109

Superseded in part by

Rev. Proc. 2009-32, 2009-28 I.R.B. 142

Revenue Procedures:

97-49

Modified and superseded by

Rev. Proc. 2009-31, 2009-27 I.R.B. 107

2008-38

Superseded by

Rev. Proc. 2009-30, 2009-27 I.R.B. 27

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009.

2009–28 I.R.B. iii July 13, 2009

July 13, 2009 2009–28 I.R.B.

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