Bulletin No. 2011-51 December 19, 2011 HIGHLIGHTS OF …Bulletin No. 2011-51 December 19, 2011...

Bulletin No. 2011-51December 19, 2011

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

INCOME TAX

T.D. 9556, page 862.Final regulations under section 6011 of the Code provide rulesrequiring the disclosure of listed transactions and transactionsof interest with respect to the generation-skipping transfer taxand make conforming amendments under sections 6111 and6112. The regulations provide guidance under section 6112regarding the length of time a material advisor has to preparethe list that must be maintained after the list maintenance re-quirement first arises with respect to the reportable transactionand clarify the provisions regarding designation agreements.

T.D. 9557, page 855.Final regulations under section 108 of the Code provide guid-ance in determining the discharge of indebtedness income of apartnership that transfers a partnership interest to a creditor insatisfaction of the partnership’s indebtedness, provide that sec-tion 721 generally applies to a contribution of a partnership’sindebtedness by a creditor to the partnership in exchange foran interest in the partnership, and provide guidance for how apartnership’s discharge of indebtedness income is allowed asa minimum gain chargeback under section 704.

T.D. 9558, page 859.REG–101273–10, page 873.Temporary regulations under section 358 of the Code clarifythat, in certain reorganizations where no stock or securities ofthe issuing corporation is issued and distributed in the transac-tion, the ability to designate the share of stock of the issuingcorporation to which the basis, if any, of the stock or securitiessurrendered will attach applies only to a shareholder that ownsactual shares in the issuing corporation.

Announcement 2011–77, page 874.This announcement informs bankruptcy trustees (or debtors-in-possession) of a change of address for the Centralized Insol-vency Operation that should be used for the submission of re-quests for tax refunds under section 505(a) of the BankruptcyCode or requests for prompt determinations of any unpaid taxliability of the estate incurred during the bankruptcy case undersection 505(b) of the Bankruptcy Code. Rev. Procs. 2010–27and 2006–24 modified.

Announcement 2011–80, page 903.This announcement describes a correction to final and tempo-rary regulations (T.D. 9554, 2011–50 I.R.B. 843) extendingthe exceptions from taxes under the Federal Insurance Con-tributions Act (“FICA”) and the Federal Unemployment Tax Act(“FUTA”) under sections 3121(b)(3) (concerning individuals whowork for certain family members), 3127 (concerning membersof religious faiths), and 3306(c)(5) (concerning persons em-ployed by children and spouses and children under 21 em-ployed by their parents) of the Code to entities that are disre-garded as separate from their owners for Federal tax purposes.The temporary regulations also clarify the existing rule that theowners of disregarded entities, except for qualified subchapterS subsidiaries, are responsible for backup withholding and re-lated information reporting requirements under section 3406.

(Continued on the next page)

Finding Lists begin on page ii.

EMPLOYEE PLANS

Announcement 2011–78, page 874.This announcement describes rules that the Treasury Depart-ment and the IRS are considering proposing relating to the de-termination of whether a plan is a governmental plan within themeaning of section 414(d) of the Code and contains an ap-pendix that includes a draft notice of proposed rulemaking onwhich Treasury Department and IRS invite comments.

Announcement 2011–79, page 892.This announcement describes rules that the Treasury Depart-ment and the IRS are considering proposing relating to the de-termination of whether a plan of an Indian tribal government isa governmental plan within the meaning of section 414(d) ofthe Code and contains an appendix that includes a draft noticeof proposed rulemaking on which Treasury Department and IRSinvite comments.

ESTATE TAX


REG–112196–07, page 865.Proposed regulations will amend regulations section20.2032-1 to provide guidance that clarifies for the executorof an estate that elects to use the alternate valuation methodunder section 2032 of the Code what constitutes a distribu-tion, sale, exchange, or other disposition and what post-deathoccurrences the executor may consider when valuing propertyincludible in the gross estate on the alternate valuation date.A public hearing is scheduled for March 9, 2012.


EMPLOYMENT TAX


ADMINISTRATIVE



December 19, 2011 2011–51 I.R.B.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the 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.

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

2011–51 I.R.B. December 19, 2011

December 19, 2011 2011–51 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 108.—Income FromDischarge of Indebtedness26 CFR 1.108–8: Indebtedness satisfied by partner-ship interest.

T.D. 9557

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Application of Section108(e)(8) to IndebtednessSatisfied by a PartnershipInterest

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations relating to the applicationof section 108(e)(8) of the Internal Rev-enue Code (Code) to partnerships and theirpartners. These regulations provide guid-ance regarding the determination of dis-charge of indebtedness income of a part-nership that transfers a partnership inter-est to a creditor in satisfaction of the part-nership’s indebtedness. The final regula-tions also address the application of sec-tion 721 to a contribution of a partner-ship’s recourse or nonrecourse indebted-ness by a creditor to the partnership in ex-change for a capital or profits interest inthe partnership. Moreover, the final reg-ulations address how a partnership’s dis-charge of indebtedness income is allocatedas a minimum gain chargeback under sec-tion 704. The regulations affect partner-ships and their partners.

DATES: Effective Date: These regulationsare effective on November 17, 2011.

Applicability Date: For datesof applicability, see §§1.108–8(d),1.704–2(l)(1)(v), and 1.721–1(d)(4).

FOR FURTHER INFORMATIONCONTACT: Joseph R. Worst orMegan A. Stoner, Office of AssociateChief Counsel (Passthroughs and Special

Industries), (202) 622–3070 (not a toll-freenumber).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 1 under sections 108, 704, and721 of the Code relating to the applicationof section 108(e)(8) to partnerships.

Section 108(e)(8) was amended bysection 896 of the American Jobs Cre-ation Act of 2004, Public Law 108–357(118 Stat. 1648), to include dischargesof partnership indebtedness occurringon or after October 22, 2004. Priorto the amendment, section 108(e)(8)only applied to discharges of corporateindebtedness. Section 108(e)(8), asamended, provides that, for purposes ofdetermining income of a debtor fromdischarge of indebtedness (COD income),if a debtor corporation transfers stock ora debtor partnership transfers a capitalor profits interest in such partnership toa creditor in satisfaction of its recourseor nonrecourse indebtedness, suchcorporation or partnership shall be treatedas having satisfied the indebtedness withan amount of money equal to the fairmarket value of the stock or interest. Inthe case of a partnership, any COD incomerecognized under section 108(e)(8) shallbe included in the distributive shares of thepartners in the partnership immediatelybefore such discharge.

A notice of proposed rulemak-ing and a notice of public hearing(REG–164370–05, 2008–46 I.R.B. 1157)were published in the Federal Regis-ter (73 FR 64903) on October 31, 2008,proposing amendments to the regula-tions regarding the application of section108(e)(8) to partnerships and their part-ners, including the determination of CODincome of a partnership that transfers apartnership interest to a creditor in satis-faction of the partnership’s indebtedness(debt-for-equity exchange). The proposedregulations also provide that section 721generally applies to a contribution of apartnership’s recourse or nonrecourse in-debtedness by a creditor to the partnershipin exchange for a capital or profits interest

in the partnership. A public hearing on theproposed regulations was scheduled forFebruary 19, 2009, but was cancelled be-cause no one requested to speak. However,comments responding to the proposedregulations were received. After consid-eration of these comments, the proposedregulations are adopted as revised by thisTreasury decision. These final regulationsgenerally retain the provisions of the pro-posed regulations with the modificationsdiscussed in the preamble.

Summary of Comments andExplanation of Provisions

1. Valuation of Partnership InterestTransferred in Satisfaction of PartnershipIndebtedness

Section 108(e)(8) provides that, for pur-poses of determining COD income of adebtor partnership, the partnership shall betreated as having satisfied the indebted-ness with an amount of money equal to thefair market value of the interest transferredto the creditor. Generally, the amount bywhich the indebtedness exceeds the fairmarket value of the partnership interesttransferred is the amount of COD incomerequired to be included in the distributiveshares of the partners that were partners inthe debtor partnership immediately beforethe discharge.

The proposed regulations provide that,for purposes of determining the amountof COD income, the fair market valueof the partnership interest transferred tothe creditor in a debt-for-equity exchange(debt-for-equity interest) is the liquidationvalue of the partnership interest if four re-quirements are satisfied (liquidation valuesafe harbor). For this purpose, liquidationvalue equals the amount of cash that thecreditor would receive with respect to thedebt-for-equity interest if, immediatelyafter the transfer, the partnership sold allof its assets (including goodwill, goingconcern value, and any other intangibles)for cash equal to the fair market value ofthose assets, and then liquidated.

The four conditions of the liquidationvalue safe harbor in the proposed regu-lations are that (i) the debtor partnershipdetermines and maintains capital accounts

2011–51 I.R.B. 855 December 19, 2011

of its partners in accordance with the capi-tal accounting rules of §1.704–1(b)(2)(iv)(capital account maintenance require-ment); (ii) the creditor, debtor partnership,and its partners treat the fair market valueof the indebtedness as being equal tothe liquidation value of the debt-for-eq-uity interest for purposes of determiningthe tax consequences of the debt-for-eq-uity exchange (consistency requirement);(iii) the debt-for-equity exchange is anarm’s-length transaction (arm’s-lengthrequirement); and (iv) subsequent to thedebt-for-equity exchange, neither the part-nership redeems nor any person related tothe partnership purchases the debt-for-eq-uity interest as part of a plan at the time ofthe debt-for-equity exchange which has asa principal purpose the avoidance of CODincome by the partnership (anti-abuseprovision). If these requirements are notsatisfied, all of the facts and circumstancesare considered in determining the fairmarket value of the debt-for-equity in-terest for purposes of applying section108(e)(8). Each of the four requirementsof the proposed regulations is discussed inthe preamble.

The first requirement is the capitalaccount maintenance requirement. Com-menters requested that the final regula-tions clarify that this requirement doesnot necessitate compliance with all as-pects of the substantial economic effectsafe harbor under §1.704–1(b)(2), notablythe requirement that the partnership liq-uidate in accordance with the positivecapital account balances of its partners.To eliminate confusion over the capitalaccount maintenance requirement in theliquidation value safe harbor, the IRS andthe Treasury Department have decided toremove the capital account maintenancerequirement from the liquidation valuesafe harbor because the maintenance ofcapital accounts is not necessary to thedetermination of the liquidation value ofthe partner’s interest.

The second requirement of the liqui-dation value safe harbor in the proposedregulations is the consistency requirement.This requirement is intended to ensureconsistent reporting by the creditor, debtorpartnership, and its partners. One com-menter suggested narrowing the scope ofthis requirement in the final regulations sothat the failure of a partner to consistentlytreat the fair market value of the indebt-

edness as being equal to the liquidationvalue of the debt-for-equity interest doesnot invalidate the partnership’s use of theliquidation value safe harbor, providedthe creditor and the partnership otherwiseconsistently determine and report CODincome based on such valuation. The IRSand the Treasury Department consideredthe issue and decided to not modify thisrequirement in the final regulations. Theamount of COD income computed underthe liquidation value safe harbor may dif-fer from the amount computed using thefair market value of the partnership inter-est. Thus, in order for the partnership touse the liquidation value safe harbor, theIRS and the Treasury Department believethat the partnership and all of its partnersmust report consistently.

One commenter suggested that taxpay-ers should not be able to selectively exploitto their benefit the discrepancy betweenliquidation value and fair market value andsuggested that the final regulations requirethat a partnership apply a consistent val-uation methodology to all equity issued inany debt-for-equity exchange that is part ofthe same overall transaction. The IRS andthe Treasury Department agree, and there-fore the final regulations add this as a con-dition to the liquidation value safe harbor.

The third requirement of the liquida-tion value safe harbor in the proposed reg-ulations is the arm’s-length requirement.Commenters requested that the final reg-ulations clarify whether this requirementcan be satisfied where the exchange is be-tween the partnership and an existing part-ner. The IRS and the Treasury Departmentbelieve that the liquidation value safe har-bor should be available where the trans-action involves related parties and haveclarified this requirement in the final reg-ulations to provide that, as long as thedebt-for-equity exchange has terms thatare comparable to terms that would beagreed to by unrelated parties negotiatingwith adverse interests, the third require-ment is satisfied even if the transaction isbetween related parties.

The fourth requirement of the liqui-dation value safe harbor in the proposedregulations is an anti-abuse provision.The final regulations follow the anti-abuseprovision of the proposed regulations byadding a restriction on subsequent pur-chases of the debt-for-equity interest by aperson related to any partner (in addition

to purchases by a person related to thepartnership) as part of a tax-avoidanceplan. Thus, under the final regulations,the partnership cannot redeem and no per-son related to the partnership or to anypartner can purchase the debt-for-equityinterest as part of a plan at the time ofthe debt-for-equity exchange that has as aprincipal purpose the avoidance of CODincome by the partnership. Commentersrequested that the final regulations clarifythe meaning of “related” in this context.The IRS and the Treasury Departmentagree that clarification is warranted andtherefore the final regulations refer to sec-tions 267(b) and 707(b) for the meaningof “related” in the anti-abuse provision.

The final regulations also address theapplication of the liquidation value safeharbor rule to a partnership (upper-tierpartnership) that directly or indirectlyowns an interest in one or more partner-ships (lower-tier partnership(s)). The finalregulations provide that, with respect tointerests held in one or more lower-tierpartnerships, the liquidation value of aninterest in an upper-tier partnership isdetermined by taking into account theliquidation value of such lower-tier part-nership interest.

The final regulations provide that if thefair market value of the debt-for-equity in-terest does not equal the fair market valueof the indebtedness exchanged, then gen-eral tax law principles shall apply to ac-count for the difference. Moreover, sec-tion 707(a)(2)(A), as it relates to the treat-ment of payments to partners for transfersof property, will be considered, if appro-priate.

2. Application of Section 721 toDebt-for-Equity Exchanges

The proposed regulations generallyprovide that the nonrecognition rule ofsection 721 applies to the debt-for-equityexchange. Under the proposed regula-tions, the creditor does not recognize a lossor a bad debt deduction in the debt-for-eq-uity exchange. The creditor’s basis in thedebt-for-equity interest is increased undersection 722 by the adjusted basis of theindebtedness. The preamble to the pro-posed regulations requested comments onalternative approaches.

A number of commenters agreed withthe general application of section 721 to

December 19, 2011 856 2011–51 I.R.B.

the debt-for-equity exchange, but recom-mended that the rule be modified in thefinal regulations. The commenters ar-gued that the application of section 721 tothe debt-for-equity exchange may resultin asymmetry in the timing of the part-nership’s COD income inclusion and thecreditor’s loss, character conversion forthe creditor from ordinary loss to capitalloss, and disparities between the partners’aggregate bases in their partnership in-terests and the partnership’s basis in itsassets. Some commenters suggested thatthese results could be alleviated if the finalregulations bifurcate the debt-for-equityexchange into two transactions, namelythe cancellation of a portion of the in-debtedness, and the contribution of thebalance in exchange for an interest in thepartnership in a transaction to which sec-tion 721 applies (bifurcation approach).Another commenter, however, stated thata bifurcation approach is not consistentwith section 721 or case law.

The IRS and the Treasury Departmentagree with the latter comment and believethat the bifurcation approach would be in-consistent with the treatment of analogouscorporate debt-for-equity transactions in-volving corporate indebtedness evidencedby a security in which section 351 wouldapply, for example. Further, commentsin favor of the bifurcation approach as-sume a creditor has not validly taken a baddebt deduction under section 166 prior tothe debt-for-equity exchange in a transac-tion independent of and separate from thedebt-for-equity exchange. After consider-ation of the issue, the IRS and the TreasuryDepartment have determined that the finalregulations will not adopt the bifurcationapproach.

3. Obligations for Unpaid Rent, Royalties,and Interest

The proposed regulations provide thatsection 721 does not apply to the trans-fer of a partnership interest to a creditor insatisfaction of a partnership’s recourse ornonrecourse indebtedness for unpaid rent,royalties, or interest on indebtedness (in-cluding accrued original issue discount).These items generally give rise to ordinaryincome to the creditor and a deduction tothe partnership. Most commenters agreedthat the general nonrecognition rule under

section 721 should not apply to the trans-fer of a partnership interest in satisfactionof these items. The IRS and the TreasuryDepartment believe that the exception tosection 721 for these items is necessary toprevent the conversion of ordinary incomeinto capital gain.

The final regulations retain the ex-ception for these ordinary income items,but, in response to a comment, limit thescope of the exception. The commentersuggested that the exception be limited toitems that accrued on or after the begin-ning of the creditor’s holding period forthe indebtedness. The IRS and the Trea-sury Department agree with the comment,and therefore, the final regulations pro-vide that section 721 does not apply to adebt-for-equity exchange to the extent thepartnership interest is exchanged for thepartnership’s indebtedness for unpaid rent,royalties, or interest on the partnership’sindebtedness (including accrued originalissue discount) that accrued on or after thebeginning of the creditor’s holding periodfor the indebtedness.

The preamble to the proposed regu-lations states the general rule that whenproperty is transferred as payment on in-debtedness (or in satisfaction thereof),gain or loss on the property is recognized.Under that approach, in a debt-for-equityexchange, if the partnership is treated assatisfying its indebtedness for unpaid rent,royalties, or interest on indebtedness (in-cluding accrued original issue discount)with a fractional interest in each asset ofthe partnership, the partnership could rec-ognize gain or loss equal to the differencebetween the fair market value of each par-tial asset deemed transferred to the creditorand the adjusted basis in that partial asset.The IRS and the Treasury Departmentbelieve that in a debt-for-equity exchangewhere the partnership has not disposed ofany of its assets, the partnership should notbe required to recognize gain or loss on thetransfer of a partnership interest in satis-faction of its indebtedness for unpaid rent,royalties, or interest. Therefore, under thefinal regulations, a debtor partnership willnot recognize gain or loss upon the trans-fer of a partnership interest to a creditorin a debt-for-equity exchange for unpaidrent, royalties, or interest that accrued onor after the beginning of the creditor’sholding period for the indebtedness.

4. COD Income as First-tier Item forMinimum Gain Chargeback Rules

The preamble to the proposed regula-tions requested comments regarding themanner in which COD income arisingfrom a debt-for-equity exchange should betreated for purposes of the minimum gainchargeback rules under §1.704–2(f)(6).Section 1.704–2(f)(6) provides that anyminimum gain chargeback required fora partnership taxable year consists firstof certain gains recognized from the dis-position of partnership property subjectto one or more partnership nonrecourseliabilities and then, if necessary, of a prorata portion of the partnership’s otheritems of income and gain for that year.A similar rule applies to chargebacks ofpartner nonrecourse debt minimum gain.See §1.704–2(i)(4).

Commenters recommended that, wherea minimum gain chargeback results fromthe discharge of partnership or partnernonrecourse debt, the first-tier of the min-imum gain chargeback should includeCOD income relating to such debt. TheIRS and the Treasury Department agreewith this comment, and therefore the fi-nal regulations provide that COD incomearising from a discharge of a partner-ship or partner nonrecourse indebtednessis treated as a first-tier item for mini-mum gain chargeback purposes under§§1.704–2(f)(6), 1.704–2(j)(2)(i)(A), and1.704–2(j)(2)(ii)(A).

5. Disposition of Installment Obligations

Section 453B provides rules regardingdispositions of installment obligations.Generally, if an installment obligation of ataxpayer is satisfied at other than its facevalue or the taxpayer distributes, trans-mits, sells, or otherwise disposes of aninstallment obligation, the taxpayer recog-nizes any deferred gain or loss. However,§1.453–9(c)(2) provides that the contri-bution of an installment obligation to apartnership under section 721, for exam-ple, does not constitute a disposition. TheIRS and the Treasury Department believethat this exception does not apply to acreditor who disposes of an installmentobligation of a partnership by contributingit to the debtor partnership, even if thetransaction qualifies under section 721.In that case, the creditor must recognize

2011–51 I.R.B. 857 December 19, 2011

gain or loss under section 453B. Thistreatment is consistent with the corporaterules that require a creditor to recognizegain or loss under section 453B on thedisposition of an installment obligation ofa corporation to the debtor corporation ina transaction that qualifies under section351. Rev. Rul. 73–423, 1973–2 C.B. 161,(see §601.601(d)(2)(ii)(b)). Accordingly,the IRS and the Treasury Department areproposing regulations under section 453Bto clarify this issue.

6. Additional Issues

The preamble to the proposed regula-tions requested comments on whether anyspecial allocation rules of COD incomeshould apply where partnership indebt-edness owed to a preexisting partner issatisfied with the transfer of a partner-ship interest. The proposed regulationsdid not address this issue. Commentersrecommended that the final regulationsnot impose any special allocation rulesregarding COD income realized undersection 108(e)(8) from the cancellation ofa partnership indebtedness owed to a pre-existing partner. Commenters suggestedthat Rev. Rul. 92–97, 1992–2 C.B. 124,and Rev. Rul. 99–43, 1999–2 C.B. 506,(see §601.601(d)(2)(ii)(b)), provide anappropriate framework for determininghow COD income should be allocated,whether or not the creditor is a partner inthe partnership. The IRS and the TreasuryDepartment agree that existing guidanceprovides a framework for allocating CODincome and, thus, the final regulations donot adopt any additional guidance regard-ing the allocation of COD income amongpartners in a debt-for-equity exchange.

Effective/Applicability Date

These final regulations apply to debt-for-equity exchanges occurring on or af-ter the date these final regulations are pub-lished in the Federal Register.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations, and becausethese regulations do not impose a collec-tion of information on small entities, theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to section7805(f) of the Code, the notice of proposedrulemaking that preceded these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Adminis-tration for comment on its impact on smallbusiness.

Drafting Information

The principal authors of these reg-ulations are Joseph R. Worst andMegan A. Stoner of the Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However,other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendment to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.108–8 is added to read

as follows:

§1.108–8 Indebtedness satisfied bypartnership interest.

(a) In general. For purposes of deter-mining income of a debtor from dischargeof indebtedness (COD income), if a debtorpartnership transfers a capital or profits in-terest in the partnership to a creditor in sat-isfaction of its recourse or nonrecourse in-debtedness (a debt-for-equity exchange),the partnership is treated as having satis-fied the indebtedness with an amount ofmoney equal to the fair market value of thepartnership interest.

(b) Determination of fair marketvalue—(1) In general. All the facts andcircumstances are considered in determin-ing the fair market value of a partnershipinterest transferred by a debtor partnership

to a creditor in satisfaction of the debtorpartnership’s indebtedness (debt-for-eq-uity interest) for purposes of paragraph (a)of this section. If the fair market value ofthe debt-for-equity interest does not equalthe fair market value of the indebtednessexchanged, then general tax law principlesshall apply to account for the difference.

(2) Safe harbor—(i) General rule. Forpurposes of paragraph (a) of this section,the fair market value of a debt-for-equityinterest is deemed to be equal to the liqui-dation value of the debt-for-equity interest,as defined in paragraph (b)(2)(iii) of thissection, if the following requirements aresatisfied—

(A) The creditor, debtor partnership,and its partners treat the fair market valueof the indebtedness as being equal to theliquidation value of the debt-for-equityinterest for purposes of determining thetax consequences of the debt-for-equityexchange;

(B) If, as part of the same overall trans-action, the debtor partnership transfersmore than one debt-for-equity interest toone or more creditors, then each creditor,debtor partnership, and its partners treatthe fair market value of each debt-for-eq-uity interest transferred by the debtorpartnership to such creditors as equal to itsliquidation value;

(C) The debt-for-equity exchange is atransaction that has terms that are compa-rable to terms that would be agreed to byunrelated parties negotiating with adverseinterests; and

(D) Subsequent to the debt-for-equityexchange, the debtor partnership does notredeem the debt-for-equity interest, and noperson bearing a relationship to the debtorpartnership or its partners that is specifiedin section 267(b) or section 707(b) pur-chases the debt-for-equity interest, as partof a plan at the time of the debt-for-eq-uity exchange that has as a principal pur-pose the avoidance of COD income by thedebtor partnership.

(ii) Tiered-partnership rule. For pur-poses of this paragraph (b)(2), the liquida-tion value of a debt-for-equity interest ina partnership (upper-tier partnership) thatdirectly or indirectly owns an interest inone or more partnerships (lower-tier part-nership(s)) is determined by taking into ac-count the liquidation value of such lower-tier partnership interests.

December 19, 2011 858 2011–51 I.R.B.

(iii) Definition of liquidation value. Forpurposes of this paragraph (b)(2), the liq-uidation value of a debt-for-equity interestequals the amount of cash that the credi-tor would receive with respect to the debt-for-equity interest if, immediately after thedebt-for-equity exchange, the partnershipsold all of its assets (including goodwill,going concern value, and any other intan-gibles) for cash equal to the fair marketvalue of those assets and then liquidated.

(c) Example. The following exampleillustrates the provisions of this section:

Example. (i) AB partnership has $1,000 of out-standing indebtedness owed to C. C agrees to trans-fer to AB partnership the $1,000 indebtedness in adebt-for-equity exchange for a debt-for-equity inter-est in AB partnership. The liquidation value of C’sdebt-for-equity interest is $700, which is the amountof cash that C would receive with respect to that in-terest if, immediately after the debt-for-equity ex-change, AB partnership sold all of its assets for cashequal to the fair market value of those assets and thenliquidated. Each of the requirements of the liquida-tion value safe harbor described in paragraph (b)(2)of this section is satisfied.

(ii) Because the requirements in paragraph (b)(2)of this section are satisfied, the fair market value ofC’s debt-for-equity interest in AB partnership for pur-poses of determining AB partnership’s COD incomeis the liquidation value of C’s debt-for-equity inter-est, or $700. Accordingly, AB partnership is treatedas satisfying the $1,000 indebtedness for $700 undersection 108(e)(8).

(d) Effective/applicability date.This section applies to debt-for-eq-uity exchanges occurring on or afterNovember 17, 2011.

Par. 3. Section 1.704–2 is amended asfollows:

1. In paragraph (f)(6), the first sen-tence is revised and in the last sentence, thelanguage “(j)(2)(i) and (iii)” is removedand the language “(j)(2)(i) and (j)(2)(iii)”is added in its place.

2. Paragraphs (j)(2)(i)(A) and(j)(2)(ii)(A) are revised.

3. In paragraph (l), revise the paragraphheading and add a new paragraph (l)(1)(v).

The revisions and additions read as fol-lows:

§1.704–2 Allocations attributable tononrecourse liabilities.

* * * * *(f) * * *(6) * * * Any minimum gain charge-

back required for a partnership taxableyear consists first of a pro rata portion ofcertain gains recognized from the dispo-sition of partnership property subject to

one or more partnership nonrecourse lia-bilities and income from the discharge ofindebtedness relating to one or more part-nership nonrecourse liabilities to whichpartnership property is subject, and then,if necessary, consists of a pro rata portionof the partnership’s other items of incomeand gain for that year.* * *

* * * * *(j) * * *(2) * * *(i) * * *(A) First, a pro rata portion of gain

from the disposition of property subjectto partnership nonrecourse liabilities anddischarge of indebtedness income relat-ing to partnership nonrecourse liabilities towhich property is subject;

* * * * *(ii) * * *(A) First, a pro rata portion of gain from

the disposition of property subject to part-ner nonrecourse debt and discharge of in-debtedness income relating to partner non-recourse debt to which property is subject.

* * * * *(l) Effective/applicability dates. * * *(1) * * *(v) The first sentence of paragraph

(f)(6) of this section and paragraphs(j)(2)(i)(A) and (j)(2)(ii)(A) of this sectionapply on and after November 17, 2011.

* * * * *Par. 4. Section 1.721–1 is amended

by adding new paragraph (d) to read asfollows:

§1.721–1 Nonrecognition of gain or losson contribution.

* * * * *(d) Debt-for-equity exchange—(1) In

general. Except as otherwise providedin section 721 and the regulations undersection 721, section 721 applies to a con-tribution of a partnership’s indebtednessby a creditor to the debtor partnershipin exchange for a capital or profits in-terest in the partnership (debt-for-equityexchange). See §1.108–8(a) for rules indetermining the debtor partnership’s dis-charge of indebtedness income.

(2) Exception. Section 721 does not ap-ply to a debt-for-equity exchange to theextent the transfer of the partnership in-terest to the creditor is in exchange for

the partnership’s indebtedness for unpaidrent, royalties, or interest (including ac-crued original issue discount) that accruedon or after the beginning of the creditor’sholding period for the indebtedness. Thedebtor partnership will not recognize gainor loss upon the transfer of a partnershipinterest to a creditor in a debt-for-equityexchange for unpaid rent, royalties, or in-terest (including accrued original issue dis-count).

(3) Cross reference. For rules in de-termining whether a partnership interesttransferred to a creditor in a debt-for-eq-uity exchange is treated as payment of in-terest or accrued original issue discount,see §§1.446–2 and 1.1275–2, respectively.

(4) Effective/applicability date. Thisparagraph (d) applies to debt-for-eq-uity exchanges occurring on or afterNovember 17, 2011.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved November 8, 2011.

Emily S. McMahon,Acting Assistant

Secretary of the Treasury.

(Filed by the Office of the Federal Register on November 15,2011, 11:15 a.m., and published in the issue of the FederalRegister for November 17, 2011, 76 F.R. 71255)

Section 358.—Basis toDistributees26 CFR 1.358–2: Allocation of basis among nonrecg-nition property.

T.D. 9558

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Corporate Reorganizations;Allocation of Basis in “All CashD” Reorganizations


ACTION: Final and temporary regula-tions.

2011–51 I.R.B. 859 December 19, 2011

SUMMARY: This document contains tem-porary regulations regarding the determi-nation of the basis of stock or securities ina reorganization where no stock or securi-ties of the issuing corporation is issued anddistributed in the transaction. These tem-porary regulations clarify that, in certainreorganizations where no stock or securi-ties of the issuing corporation is issued anddistributed in the transaction, the ability todesignate the share of stock of the issu-ing corporation to which the basis, if any,of the stock or securities surrendered willattach applies only to a shareholder thatowns actual shares in the issuing corpora-tion. These temporary regulations affectcorporations engaging in such transactionsand their shareholders. The text of the tem-porary regulations also serves as the textof the proposed regulations set forth in thenotice of proposed rulemaking on this sub-ject in this issue of the Bulletin.

DATES: Effective Date: These regulationsare effective on November 21, 2011.

Applicability Date: For dates of appli-cability, see §1.358–2T(d).

FOR FURTHER INFORMATIONCONTACT: Lisa A. Fuller at (202)622–7550 (not a toll-free number).


Background

On December 19, 2006, the IRS and theTreasury Department published a notice ofproposed rulemaking (REG–125632–06,2007–5 I.R.B. 415) in the Federal Reg-ister (71 FR 75898) that included regu-lations under section 368 (the TemporaryRegulations). These regulations pro-vided guidance regarding whether thedistribution requirement under sections368(a)(1)(D) and 354(b)(1)(B) is satis-fied if there is no actual distribution ofstock or securities. On December 18,2009, the IRS and the Treasury Depart-ment published final regulations (T.D.9475, 2010–4 I.R.B. 304) in the Fed-eral Register (71 FR 75879) that, inaddition to providing guidance regardingthe qualification of certain transactionsas reorganizations described in section368(a)(1)(D), amended the regulationsunder §1.358–2(a)(2)(iii) to providethat in the case of a reorganization inwhich the property received consists

solely of non-qualifying property equalto the value of the assets transferred (aswell as a nominal share described inthe final regulations), the shareholderor security holder may designate theshare of stock of the issuing corporationto which the basis, if any, of the stockor securities surrendered will attach.The IRS and the Treasury Departmentissued these regulations in response tocomments that, in a transaction where theconsideration received consists solely ofcash and a nominal share, the mechanics ofpreserving basis, if any, in the shares of thestock or securities surrendered in the basisof the stock of the issuing corporationwere unclear under current law.

The IRS and the Treasury Departmenthave become aware that some maintainthese rules, as written, could be interpretedto allow an inappropriate allocation of ba-sis by persons that do not own actual sharesof stock in the issuing corporation. This in-terpretation would most likely be assertedin the context of a lower-tier reorganiza-tion transaction involving corporations intwo different ownership chains that havethe same ultimate indirect shareholder(s).Specifically, the argument is that the rulescould be interpreted to allow persons whodo not own actual shares of stock of the is-suing corporation to allocate the adjustedbasis of the nominal share to an actualshare of stock of the issuing corporationdirectly owned by someone else beforethe nominal share is deemed to be furthertransferred through the chains of owner-ship to reflect the actual ownership of thetarget and issuing corporations. Under thisinterpretation of the rules, the actual shareto which the basis was allocated could thenbe sold to recognize a loss, and taxpayerswould avoid losing the nominal share’s ba-sis, which would otherwise be zero follow-ing its deemed transfer through the chainsof ownership to the actual shareholder ofthe issuing corporation.

For example, assume that J owns all thestock of corporations X and Y, and X ownsall of the stock of corporation T. X has a$150 basis in the T stock. The corpora-tions do not join in the filing of a consol-idated return. T sells all of its assets to Yfor $100 cash, their fair market value, andliquidates. Pursuant to §1.368–2(l), Y willbe deemed to issue a nominal share of Ystock to T in addition to the $100 actuallyexchanged for the T assets, and T will be

deemed to distribute the nominal share ofY stock to X. X will have a basis of $50 inthe nominal share of Y stock under section358(a). Pursuant to §1.368–2(l), the nom-inal share of Y stock is deemed to be fur-ther transferred to J in order to reflect theactual ownership of Y. J’s basis in the nom-inal share of Y stock would be zero undersection 301(d). However, some argue thatthe rule, as currently written, could be in-terpreted as allowing X to allocate the $50of basis in the nominal share to an actualshare of Y stock owned by J prior to thenominal share of Y stock being deemed tobe further distributed to J.

The IRS and the Treasury Departmentdid not intend for the final regulations toallow such an inappropriate allocation ofbasis and do not believe the current reg-ulations support such an allocation. Ac-cordingly, the IRS and the Treasury De-partment are proposing rules in this issueof the Bulletin, to clarify that, in certainreorganizations where no stock or securi-ties of the issuing corporation is issued anddistributed in the transaction, the ability todesignate the share of stock of the issu-ing corporation to which the basis, if any,of the stock or securities surrendered willattach applies only to a shareholder thatowns actual shares in the issuing corpora-tion.

Explanation of Provisions

The preamble to the final regulationnoted that the IRS and the Treasury De-partment believe the ability to designateany remaining basis is consistent withcurrent law regarding basis determina-tion, as a similar result would occur under§1.358–2 if an amount of issuing corpo-ration stock was actually issued in thetransaction (74 FR 67053; 74 FR 67056;T.D. 9475). To complete the analogy,however, in the case where stock is actu-ally issued in a lower-tier transfer, suchstock would then be transferred throughchains of ownership, and in the process, ifbasis in the stock exceeded value, the basisin the shares would be reduced to the fairmarket value of the shares in the hands ofthe distributee, under section 301(d). Ac-cordingly, in such a case, basis in excess ofthe value of the issuing corporation shareswould generally be preserved only wherethe shareholder of the transferor corpora-tion does not further distribute the stock of

December 19, 2011 860 2011–51 I.R.B.

the issuing corporation in a transaction towhich section 301 applies.

Consistent with this view, these tem-porary regulations clarify and amendthe final regulations (T.D. 9475) under§1.358–2(a)(2)(iii) by providing that ifan actual shareholder of the issuing cor-poration is deemed to receive a nominalshare of stock of the issuing corporationdescribed in §1.368–2(l), such shareholdermust, after allocating and adjusting thebasis of the nominal share in accordancewith the rules of this section and §1.358–1,and after adjusting the basis in the nom-inal share for any transfers described in§1.358–1, designate the share of stock ofthe issuing corporation to which the basis,if any, of the nominal share will attach.

The IRS and the Treasury Departmentalso are clarifying the effective date for a2009 amendment to the regulations under§1.358–2(a)(iii).

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. Forthe applicability of the Regulatory Flexi-bility Act, please refer to the cross-refer-ence notice of proposed rulemaking pub-lished elsewhere in this Bulletin. Pursuantto section 7805(f) of the Internal RevenueCode, these regulations were submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on their impact on small business.


The principal author of these regula-tions is Lisa A. Fuller of the Office ofthe Associate Chief Counsel (Corporate).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *Section 1.358–2 also issued under

26 U.S.C. 358(b)(1).Par. 2. Section 1.358–2 is amended by:1. Revising paragraph (a)(2)(iii).2. Revising paragraph (d).The revisions read as follows:

§1.358–2 Allocation of basis amongnonrecognition property.

(a) * * *(2) * * *(iii) [Reserved]. For further guidance,

see §1.358–2T(a)(2)(iii).

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

section generally applies to exchangesand distributions of stock and securi-ties occurring on or after January 23,2006. However, paragraph (a)(2)(iii)of this section applies to exchanges anddistributions of stock and securities oc-curring on or after November 21, 2011.See §1.358–2(a)(2)(iii), as contained in26 CFR part 1 revised as of April 1,2010, for exchanges and distributionsof stock and securities occurring onor after January 23, 2006, and beforeNovember 21, 2011.

Par. 3. Section 1.358–2T is added toread as follows:

§1.358–2T Allocation of basis amongnonrecognition property (temporary).

(a)(1) through (a)(2)(ii) [Reserved].For further guidance, see §1.358–2(a)(1)through (a)(2)(ii).

(iii) For purposes of this section, if ashareholder or security holder surrenders ashare of stock or a security in a transactionunder the terms of section 354 (or so muchof section 356 as relates to section 354) inwhich such shareholder or security holderreceives no property or property (includingproperty permitted by section 354 to bereceived without the recognition of gainor “other property” or money) with a fairmarket value less than that of the stock orsecurities surrendered in the transaction,such shareholder or security holder shallbe treated as follows.

(A) First, the shareholder or secu-rity holder shall be treated as receivingthe stock, securities, other property, andmoney actually received by the share-holder or security holder in the transaction

and an amount of stock of the issuing cor-poration (as defined in §1.368–1(b)) thathas a value equal to the excess of the valueof the stock or securities the shareholder orsecurity holder surrendered in the transac-tion over the value of the stock, securities,other property, and money the shareholderor security holder actually received inthe transaction. If the shareholder ownsonly one class of stock of the issuing cor-poration the receipt of which would beconsistent with the economic rights associ-ated with each class of stock of the issuingcorporation, the stock deemed received bythe shareholder pursuant to the previoussentence shall be stock of such class. Ifthe shareholder owns multiple classes ofstock of the issuing corporation the receiptof which would be consistent with theeconomic rights associated with each classof stock of the issuing corporation, thestock deemed received by the shareholdershall be stock of each such class ownedby the shareholder immediately prior tothe transaction, in proportion to the valueof the stock of each such class owned bythe shareholder immediately prior to thetransaction. The basis of each share ofstock or security deemed received and ac-tually received shall be determined underthe rules of this section.

(B) Second, the shareholder or securityholder shall then be treated as surrender-ing all of its shares of stock and securitiesin the issuing corporation, including thoseshares of stock or securities held immedi-ately prior to the transaction, those sharesof stock or securities actually received inthe transaction, and those shares of stockdeemed received pursuant to the previoussentence, in a reorganization under section368(a)(1)(E) in exchange for the sharesof stock and securities of the issuing cor-poration that the shareholder or securityholder actually holds immediately after thetransaction. The basis of each share ofstock and security deemed received in thereorganization under section 368(a)(1)(E)shall be determined under the rules of thissection.

(C) If an actual shareholder of the is-suing corporation is deemed to receivea nominal share of stock of the issuingcorporation described in §1.368–2(l), suchshareholder must, after allocating and ad-justing the basis of the nominal share inaccordance with the rules of this sectionand §1.358–1, and after adjusting the ba-

2011–51 I.R.B. 861 December 19, 2011

sis in the nominal share for any transfersdescribed in §1.368–2(l), designate theshare of stock of the issuing corporationto which the basis, if any, of the nominalshare will attach.

(a)(2)(iv) through (c), Example 14[Reserved]. For further guidance, see§1.358–2(a)(2)(iv) through (c), Example14.

Example 15. (i) Facts. Each of Corporation X andCorporation Y has a single class of stock outstanding,all of which is owned by J, an individual. J acquired100 shares of Corporation X stock on Date 1 for $1.50each. On Date 2, Corporation Y acquires the assetsof Corporation X for $100 of cash, their fair mar-ket value, in a transaction described in §1.368–2(l).Pursuant to the terms of the exchange, CorporationX does not receive any Corporation Y stock. Cor-poration X distributes the $100 of cash to J in liqui-dation. Pursuant to §1.368–2(l), Corporation Y willbe deemed to issue a nominal share of Corporation Ystock to Corporation X in addition to the $100 of cashactually exchanged for the Corporation X assets, andCorporation X will be deemed to distribute all of theconsideration to J. J will have a basis of $50 in thenominal share of Corporation Y stock under section358(a).

(ii) Analysis. Under paragraph (a)(2)(iii) of thissection, J is the actual shareholder of CorporationY, the issuing corporation, deemed to receive thenominal share of Corporation Y stock described in§1.368–2(l). Therefore, J must designate any shareof Corporation Y stock to which the basis of $50 inthe nominal share of Corporation Y stock will attach.

Example 16. (i) Facts. Each of Corporation X andCorporation Y has a single class of stock outstand-ing, all of which is owned by Corporation P. Corpo-ration T has a single class of stock outstanding, allof which is owned by Corporation X. The corpora-tions do not join in the filing of a consolidated return.Corporation X acquired 100 shares of Corporation Tstock on Date 1 for $1.50 each. On Date 2, Corpora-tion Y acquires the assets of Corporation T for $100of cash, their fair market value, in a transaction de-scribed in §1.368–2(l). Pursuant to the terms of theexchange, Corporation T does not receive any Cor-poration Y stock. Corporation T distributes the $100of cash to Corporation X in liquidation. Pursuant to§1.368–2(l), Corporation Y will be deemed to issue anominal share of Corporation Y stock to CorporationT in addition to the $100 of cash actually exchangedfor the Corporation T assets, and Corporation T willbe deemed to distribute all of the consideration toCorporation X. Corporation X will have a basis of$50 in the nominal share of Corporation Y stock un-der section 358(a). Corporation X will be deemed todistribute the nominal share of Corporation Y stock toCorporation P. Corporation X does not recognize theloss on the deemed distribution of the nominal shareto Corporation P under section 311(a). CorporationP’s basis in the nominal share is zero, its fair marketvalue, under section 301(d).

(ii) Analysis. Corporation X is deemed to re-ceive the nominal share of Corporation Y stock de-scribed in §1.368–2(l). However, under paragraph(a)(2)(iii) of this section, Corporation X is not an ac-tual shareholder of Corporation Y, the issuing corpo-

ration. Therefore, Corporation X cannot designateany share of Corporation Y stock to which the basis,if any, of the nominal share of Corporation Y stockwill attach. Furthermore, Corporation P cannot des-ignate a share of Corporation Y stock to which basiswill attach because Corporation P receives the nomi-nal share with a basis of zero.

(d) Effective/applicability date. Thissection applies to exchanges and distribu-tions of stock and securities occurring onor after November 21, 2011.

(e) Expiration date. This section ex-pires on or before November 18, 2014.



Emily S. McMahon,Acting Assistant Secretary of

the Treasury (Tax Policy).


Section 6011.—GeneralRequirement of Return,Statement, or List26 CFR 26.6011–4: Requirement of statement dis-closing participation in certain transactions by tax-payers.

T.D. 9556

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 26 and 301

Generation-SkippingTransfers (GST) Section6011 Regulations andAmendments to the Section6112 Regulations


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations that provide rules relatingto the disclosure of listed transactions andtransactions of interest with respect tothe generation-skipping transfer tax under

section 6011 of the Internal Revenue Code(Code), conforming amendments undersections 6111 and 6112, and rules relat-ing to the preparation and maintenanceof lists with respect to reportable transac-tions under section 6112. The regulationsaffect taxpayers participating in listedtransactions and transactions of interestand material advisors to such transactions.The final regulations also contain rulesunder section 6112 that affect materialadvisors to reportable transactions. Theseregulations provide guidance regardingthe length of time a material advisor hasto prepare the list that must be maintainedafter the list maintenance requirementfirst arises with respect to a reportabletransaction. These regulations also clarifyguidance regarding designation agree-ments.

DATE: These regulations are effectiveNovember 14, 2011.

FOR FURTHER INFORMATIONCONTACT: Charles D. Wien, (202)622–3070 (not a toll-free number).

Background

This document contains final regulationsthat amend 26 CFR part 26 to providerules for purposes of the generation-skip-ping transfer tax that require the disclosureof listed transactions and transactions ofinterest by certain taxpayers on their Fed-eral tax returns under section 6011. Thisdocument also contains final regulationsthat modify and clarify some of the rulesunder 26 CFR part 301 relating to thedisclosure obligations of material advisorsunder section 6111 and the list mainte-nance requirements of material advisorswith respect to reportable transactions un-der section 6112.

On July 31, 2007, the IRS and Trea-sury Department issued final regulationsunder section 6011 (T.D. 9350, 72 FR43146) 6111 (T.D. 9351, 72 FR 43157)and 6112 (T.D. 9352, 72 FR 43154) (theJuly 2007 regulations) that were publishedin the Federal Register on August 3,2007. In the July 2007 regulations, theIRS and Treasury Department amended26 CFR parts 20, 25, 31, 53, 54, and 56to provide that certain taxpayers wouldbe required to disclose transactions ofinterest, in addition to listed transactions,

December 19, 2011 862 2011–51 I.R.B.

on their Federal tax returns under section6011. On September 10, 2009, the IRS andTreasury Department issued a notice ofproposed rulemaking under sections 6011,6111, and 6112 (REG–136563–07) (theSeptember 2009 proposed regulations).The September 2009 proposed regulationswere published in the Federal Register(74 FR 46705) on September 11, 2009.

In response to the September 2009 pro-posed regulations, the IRS and TreasuryDepartment received two written publiccomments. A public hearing was not re-quested. After consideration of the com-ments received, the IRS and Treasury De-partment are adopting the proposed regu-lations without change.

Explanation of Comments

Two commentators expressed concernthat if the IRS and Treasury Departmentdesignate a transaction involving gift, es-tate, or generation-skipping transfer taxesas a listed transaction or transaction of in-terest, that a corporate fiduciary, merelyby acting as an executor or trustee withrespect to an estate or trust that is inci-dental to the transaction, would be treatedas a material advisor under section 6112and the regulations thereunder. One of thecommentators proposed that the Septem-ber 2009 proposed regulations and exist-ing final regulations under sections 6011,6111, and 6112 be amended to require pub-lic comment before a transaction involvingChapters 11, 12, and 13 of the Code can bedesignated as a listed transaction or trans-action of interest.

The IRS and Treasury Department be-lieve that in the situation described by thecommentators the existing regulations un-der sections 6111 and 6112 properly ad-dress which parties are material advisors,and transactions involving gift, estate, orgeneration-skipping transfer taxes shouldnot be treated differently than other trans-actions. A fiduciary will not be treated as amaterial advisor merely by acting as an ex-ecutor or trustee with respect to an estate ortrust that is incidental to a transaction. Afiduciary will be treated as a material ad-visor only if the fiduciary provides mate-rial aid, assistance or advice as described in§301.6111–3(b)(2), the fiduciary directlyor indirectly derives gross income in ex-cess of the threshold amount as described

in §301.6111–3(b)(3), and the transactionis entered into by the taxpayer.

In addition, the regulations are notamended to require advance notice beforedesignating a transaction as a transactionof interest or as a listed transaction as sug-gested by a commentator. In appropriatecircumstances, the IRS and Treasury De-partment may choose to publish advancenotice of a transaction of interest and re-quest comments in certain circumstances.The IRS and Treasury Department will de-termine whether to provide advance noticeand a request for comments on a trans-action by transaction basis. Accordingly,the proposed regulations will be adoptedwithout change.

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 these regulations. It is herebycertified that the collection of informationin these regulations will not have a sig-nificant economic impact on a substantialnumber of small entities. This certificationis based on the fact that most of the mate-rial advisors affected by these regulationsare not small entities and for those mate-rial advisors that are small entities mostof the information is already required un-der the current regulations. Any additionalrecordkeeping burdens on material advi-sors that result from this regulation are in-substantial. Also, the collection of infor-mation referenced in these regulations hasbeen approved under OMB control num-ber 1545–1686. The clarification and newinformation required by these final regula-tions add little or no new burden to thoseexisting requirements. Therefore, a Regu-latory Flexibility Analysis under the Reg-ulatory Flexibility Act (5 U.S.C. chapter 6)is not required. Pursuant to section 7805(f)of the Code, the notice of proposed rule-making preceding these regulations wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.


The principal author of these regula-tions is Charles D. Wien, Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However,other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 26 and 301are amended as follows:

PART 26—GENERATION-SKIPPINGTRANSFER TAX REGULATIONSUNDER THE TAX REFORM ACT OF1986

Paragraph 1. The authority citation forpart 26 is amended to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Section 26.6011–4 also issued under

26 U.S.C. 6011 * * *Par. 2. Section 26.6011–4 is added to

read as follows:

§26.6011–4 Requirement of statementdisclosing participation in certaintransactions by taxpayers.

(a) In general. If a transaction is iden-tified as a listed transaction or a transac-tion of interest as defined in §1.6011–4 ofthis chapter by the Commissioner in pub-lished guidance, and the listed transactionor transaction of interest involves a tax ongeneration-skipping transfers under chap-ter 13 of subtitle B of the Internal RevenueCode, the transaction must be disclosed inthe manner stated in such published guid-ance.

(b) Effective/applicability date. Thissection applies to listed transactions andtransactions of interest entered into on orafter November 14, 2011.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 3. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 4. Section 301.6111–3 is amended

as follows:

2011–51 I.R.B. 863 December 19, 2011

1. Paragraphs (b)(2)(i)(A) and(b)(3)(i)(B) are amended by adding thelanguage “26.6011–4,” after each occur-rence of “25.6011–4,”.

2. Paragraphs (c)(2) and (c)(13)are amended by adding the language“26.6011–4,” after “25.6011–4,”.

3. Paragraph (i)(1) is revised.The revision reads as follows:

§301.6111–3 Disclosure of reportabletransactions.

* * * * *(i) Effective/applicability date—(1) In

general. This section applies to trans-actions with respect to which a materialadvisor makes a tax statement on or afterAugust 3, 2007. However, this sectionapplies to transactions of interest en-tered into on or after November 2, 2006,with respect to which a material advisormakes a tax statement under this sectionon or after November 2, 2006. Para-graphs (b)(2)(i)(A), (b)(3)(i)(B), (c)(2),and (c)(13) of this section apply to trans-actions with respect to which a materialadvisor makes a tax statement under thissection after November 14, 2011. Para-graph (h) of this section applies to rulingrequests received on or after November 2,2006. Otherwise, the rules that applyon or before November 14, 2011 arecontained in this section in effect prior toNovember 14, 2011, (see 26 CFR part 301revised as of April 1, 2011).

* * * * *Par. 5. Section 301.6112–1 is amended

as follows:1. Paragraph (b)(1) is revised.2. Paragraphs (c)(3) and (c)(12)

are amended by adding the language“26.6011–4,” after “25.6011–4,”.

3. Paragraphs (f) and (g) are revised.The revisions read as follows:

§301.6112–1 Material advisors ofreportable transactions must keep lists ofadvisees, etc.

* * * * *

(b) * * * (1) In general. A separate listmust be prepared and maintained for eachreportable transaction. However, one listmust be maintained for substantially sim-ilar transactions. A material advisor willhave 30 calendar days from the date thelist maintenance requirement first arises(see §301.6111–3(b)(4) and paragraph (a)of this section) with respect to a reportabletransaction to prepare the list that must bemaintained under this section with respectto that transaction. The Commissioner inhis discretion also may provide in pub-lished guidance designating a transactionas a reportable transaction a list prepara-tion time period greater than 30 calendardays. If a list is requested under this sec-tion during the list preparation time period,the request for the list will be treated ashaving been made on the day after the listpreparation time period ends. A list mustbe maintained in a form that enables theIRS to determine without undue delay ordifficulty the information required in para-graph (b)(3) of this section. The Com-missioner in his discretion may provide inpublished guidance a form or method formaintaining or furnishing the list.

* * * * *(f) Designation agreements. If more

than one material advisor is required tomaintain a list of persons for a reportabletransaction, in accordance with paragraph(b) of this section, the material advisorsmay designate by written agreement a sin-gle material advisor (the designated mate-rial advisor) to maintain the list or a por-tion of the list. A designation agreementdoes not relieve material advisors fromtheir obligation to maintain a list in accor-dance with paragraph (b) of this section orto furnish their list to the IRS in accordancewith paragraph (e)(1) of this section, but adesignation agreement may allow one ma-terial advisor to maintain a list on behalfof the other material advisors who are aparty to the designation agreement. A ma-terial advisor is not relieved from the re-quirement of this section because a mate-rial advisor is unable to obtain the list from

any designated material advisor, any des-ignated material advisor did not maintaina list, or the list maintained by any des-ignated material advisor is not complete.The existence of a designation agreementdoes not affect the ability of the IRS to re-quest a list from any party to the designa-tion agreement. The IRS may request a listfrom any party to the designation agree-ment, and the party receiving the requestmust furnish their list to the IRS in accor-dance with paragraph (e)(1) of this sec-tion, regardless of whether their list wasmaintained by another party pursuant tothe terms of a designation agreement.

(g) Effective/applicability date. In gen-eral, this section applies to transactionswith respect to which a material advisormakes a tax statement under §301.6111–3on or after August 3, 2007. However, thissection applies to transactions of interestentered into on or after November 2, 2006,with respect to which a material advisormakes a tax statement under §301.6111–3on or after November 2, 2006. Para-graphs (b)(1), (c)(3), (c)(12), and (f) ofthis section apply to transactions with re-spect to which a material advisor makesa tax statement under §301.6111–3 afterNovember 14, 2011.

Otherwise, the rules that apply on or be-fore November 14, 2011, are contained inthis section in effect prior to November 14,2011, (see 26 CFR part 301 revised as ofApril 1, 2011).



Emily S. McMahon,Assistant Secretary of

the Treasury (Tax Policy).


December 19, 2011 864 2011–51 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Gross Estate; Election to Valueon Alternate Valuation Date

REG–112196–07


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations that provide guidancerespecting the election to use the alternatevaluation method under section 2032 ofthe Internal Revenue Code (Code). Theproposed regulations will affect estatesthat file Form 706, United States Estate(and Generation-Skipping Transfer) TaxReturn and elect to use the alternate valua-tion method. This document also providesnotice of a public hearing on these pro-posed regulations.

DATES: Written or electronic commentsmust be received by February 16, 2012.Outlines of topics to be discussed at thepublic hearing scheduled for March 9,2012, at 10:00 a.m. must be received byFebruary 17, 2012.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–112196–07), In-ternal Revenue Service, Room 5203, POBox 7604, Ben Franklin Station, Wash-ington, 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–112196–07),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue NW,Washington, DC 20224; or sent elec-tronically via the Federal eRulemak-ing Portal at http://www.regulations.gov(IRS-REG–112196–07). The public hear-ing will be held in the Auditorium, begin-ning at 10 a.m., at the Internal RevenueBuilding, 1111 Constitution Avenue NW,Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed

regulations, Theresa M. Melchiorre,(202) 622–3090; concerning submis-sions of comments, the hearing, and/orto be placed on the building access listto attend the hearing, Richard Hurst [email protected] orat (202) 622–7180 (not toll-free numbers).


Background

Section 2001 imposes a tax on the trans-fer of the taxable estate of every dece-dent who is a citizen or resident of theUnited States. Section 2033 provides thatthe value of the gross estate includes thevalue of all property to the extent of theinterest of the decedent at the time of hisdeath. Section 2031(a) provides that thevalue of the decedent’s gross estate in-cludes the value at the time of the dece-dent’s death of all property, real or per-sonal, tangible or intangible, wherever sit-uated. Section 2032(a) provides that thevalue of the gross estate may be deter-mined, if the executor so elects, by valuingall the property includible in the gross es-tate as follows. Property distributed, sold,exchanged, or otherwise disposed of dur-ing the 6-month period immediately af-ter the date of death (alternate valuationperiod) is valued as of the date of dis-tribution, sale, exchange, or other dispo-sition (transaction date). I.R.C. section2032(a)(1). Property not distributed, sold,exchanged, or otherwise disposed of dur-ing the alternate valuation period is valuedas of the date that is 6 months after thedecedent’s death (6-month date). I.R.C.section 2032(a)(2). Any interest or estatethat is affected by the mere lapse of timeis includible at its value as of the date ofdeath (instead of any later date), with ad-justment for any difference in its value asof the later date that is not due to the merelapse of time. I.R.C. section 2032(a)(3).

Section 2031(c) was enacted by theTaxpayer Relief Act of 1997, 105 Pub-lic Law 34 section 508(a), 111 Stat. 788(August 5, 1997). Pursuant to this section,a decedent’s estate may elect to excludefrom the gross estate a portion of the fairmarket value of property includible inthe decedent’s gross estate by granting aqualified conservation easement on that

property after the date of the decedent’sdeath but on or before the due date (in-cluding extensions) for filing the Form706, United States Estate (and Genera-tion-Skipping Transfer) Tax Return.

On April 25, 2008, a notice of proposedrulemaking (REG–112196–07, 2008–21I.R.B. 1021) relating to amendments to theEstate Tax Regulations (26 CFR part 20)under section 2032 of the Code waspublished in the Federal Register(73 FR 22300). Those regulations (73 FR22300) proposed to clarify that theelection to use the alternate valuationmethod under section 2032 is availableto estates that experience a reduction inthe value of the gross estate during thealternate valuation period, but only tothe extent that the reduction in value isdue to market conditions and not to otherpost-death events (events occurring duringthe alternate valuation period). The term“market conditions” was defined as eventsoutside of the control of the decedent (orthe decedent’s executor or trustee) or otherperson whose property is being valued thataffect the fair market value of the propertyincludible in the decedent’s gross estate.Changes in value due to mere lapse oftime or to other post-death events wouldbe ignored in determining the value of thedecedent’s gross estate under the alternatevaluation method.

No hearing was held because no per-son or organization requested to speakat a hearing. However, written com-ments were received. Some commenta-tors expressed concern that the proposedregulations (73 FR 22300) would cre-ate administrative problems because anestate would be required to trace prop-erty and to obtain appraisals based onhypothetical property. Some commen-tators stated that the current and theproposed regulations (73 FR 22300) didnot adequately address the application ofsection 2032 to certain types of property,such as property the title to which passes atdeath due to contract, and to transactionscarried out during the alternate valuationperiod between an estate and partnerships,corporations, or other entities. Forexample, §20.2032–1(c)(1) does notaddress the consequences of the estate

2011–51 I.R.B. 865 December 19, 2011

contributing property to a partnershipduring the alternate valuation period.

In addition, commentators requestedguidance on the effect of a section 2032election in calculating the portion of atrust includible in the decedent’s gross es-tate under section 2036. This would arisein the situation where the decedent hadretained the right to an annuity, unitrust,or other payment from the trust for life,for any period not ascertainable withoutreference to the grantor’s death, or for aperiod that does not in fact end before thegrantor’s death. Further, some commenta-tors requested guidance on the treatmentof the grant, during the alternate valuationperiod, of a qualified conservation ease-ment under section 2031(c).

Many commentators acknowledgedthat estates may enter into a transactionduring the alternate valuation period thatcould result in the abuse of the section2032 election. They suggested that the IRSand Treasury Department would betterserve taxpayers and address any potentialabuse by ensuring that the regulations ad-dress the issues described in this preamblerather than finalizing the approach takenin the proposed regulations.

In view of the comments, the TreasuryDepartment and the IRS are withdrawingthe proposed regulations (73 FR 22300) bythe publication of these proposed regula-tions in the Federal Register. Neverthe-less, see the background section of thoseproposed regulations (73 FR 22300) for asummary of the legislative history of sec-tion 2032 and the purpose for issuing theseproposed regulations.

This document contains revised pro-posed amendments to the regulationspromulgated under section 2032. Theseproposed regulations make irrelevant,for purposes of determining the value ofproperty as of the transaction date or the6-month date, whichever is applicable (al-ternate valuation date), the percentage ofownership or control in an entity includi-ble in the gross estate and the extent ofparticipation by the estate (or other holderof property includible in the gross estate)in the relevant post-death events.

Certain provisions in the current regu-lations that have been in effect since 1954are restated in the proposed regulations forpurposes of clarity. The effective date ofthose provisions is not changed.


These regulations propose to amendseveral sections of §20.2032–1. Generally,paragraph (c)(1)(i) identifies transactionsthat constitute distributions, sales, ex-changes, or dispositions of property. Ifan estate’s (or other holder’s) property issubject to such a transaction during thealternate valuation period, the estate mustvalue that property on the transaction date.The value included in the gross estate isthe fair market value of that property onthe date of and immediately prior to thetransaction. The term “property” refers tothe property includible in the decedent’sgross estate under section 2033.

Sections 20.2032–1(c)(1)(ii) and(c)(1)(iii)(A) identify two exceptions tothe rule in §20.2032–1(c)(1)(i). If ei-ther exception applies, the estate mayuse the 6-month date and value the prop-erty held on that date. The exceptionin §20.2032–1(c)(1)(ii) applies only totransactions in which an interest in acorporation, partnership, or other entity(entity) includible in the decedent’s grossestate is exchanged for one or more dif-ferent interests (for example, a differentclass of stock) in the same entity or inan acquiring or resulting entity or enti-ties during the alternate valuation period.Such transactions may include, withoutlimitation, reorganizations, recapitaliza-tions, mergers, or similar transactions.This exception substitutes a fair marketvalue test for the corporate provisions inthe current regulations. Specifically, thisparagraph proposes that, if, during thealternate valuation period, the interest inan entity includible in the gross estate isexchanged for a different interest in thesame entity, or in an acquiring or resultingentity or entities, and if the fair marketvalue of the interest on the date of theexchange equals the fair market value ofthe property for which it was exchanged,then the transaction will not be treatedas an exchange for purposes of section2032(a)(1). As a result, the estate may usethe 6-month date to value the interest in thesame entity or in the acquiring or resultingentity or entities received in the exchange.For this purpose, the fair market valuesof the surrendered property and receivedinterest are deemed to be equal if the dif-ference between the fair market values ofthe surrendered property and the received

interest does not exceed 5 percent of thefair market value of the surrendered prop-erty as of the transaction date. This sectionhas no effect on any other provision of theCode that is applicable to the transaction.For example, the provisions of chapter 14may apply even if the transaction does notresult in a deemed exchange for section2032 purposes as a result of satisfying theprovisions of §20.2032–1(c)(1)(ii).

Section 20.2032–1(c)(1)(iii)(A) pro-poses that, if, during the alternate valuationperiod, an estate (or other holder) receivesa distribution from a business entity, bankaccount, or retirement trust (entity) andan interest in that entity is includible inthe decedent’s gross estate, the estate mayuse the 6-month date to value the propertyheld in the estate if the following require-ment is satisfied. The fair market valueof the interest in the entity includible inthe gross estate immediately before thedistribution must equal the sum of the fairmarket value of the distributed propertyon the date of the distribution and the fairmarket value of the interest in the entityincludible in the gross estate immediatelyafter the distribution. If this requirementis not satisfied, the estate must use the fairmarket value as of the distribution dateand immediately prior to the distributionof the entire interest in the entity includi-ble in the gross estate. For purposes ofthis section, any distribution is deemed toconsist first of excluded property (as de-fined in §20.2032–1(d)), if any, and thenof included property.

Section 20.2032–1(c)(1)(iv) proposesan aggregation rule to use in calculatingthe fair market value of each portion ofproperty that is, or is deemed to be dis-tributed, sold, exchanged, or otherwisedisposed of during the alternate valuationperiod, and that remains in the gross estateon the 6-month date.

Section 20.2032–1(c)(iii)(B) provides aspecial rule to use in determining the por-tion of a trust includible, by reason of aretained interest, in the decedent’s grossestate under section 2036 as of the alter-nate valuation date. An example is addedto §20.2032–1(e) to illustrate this specialrule and the effect of the provisions of§20.2032–1(d) and §20.2032–1(f)(2)(i) onthis calculation.

Section 20.2032–1(c)(2) is amended toclarify when property, the title to whichpasses by contract or by operation of law, is

December 19, 2011 866 2011–51 I.R.B.

deemed to be distributed, sold, exchanged,or otherwise disposed of for section 2032purposes. Section 20.2032–1(c)(3) isamended to clarify the person or entity thatwill be treated as having sold, exchanged,or otherwise disposed of the property forsection 2032 purposes.

Section 20.2032–1(c)(4) is added toprovide that if Congress, by statute, hasdeemed that a post-death event has oc-curred on the decedent’s date of death, thepost-death event will not result in a distri-bution, sale, exchange, or other dispositionof the property for section 2032 purposes.To date, the only post-death event thatsatisfies this exception is the grant, dur-ing the alternate valuation period, of aconservation easement in accordance withsection 2031(c). With respect to such agrant, for section 2032 purposes, the estatemust determine the fair market value ofthe property as of the date of death and asof the alternate valuation date, taking intoaccount the effect of the easement on eachof those valuation dates.

Section 20.2032–1(c)(5) provides ex-amples, not intended to be exclusive, illus-trating the provisions of §20.2032–1(c).

Section 20.2032–1(f) is revised to clar-ify the types of factors that impact the fairmarket value of property and the effectof which will be recognized under section2032. This paragraph also explains and il-lustrates these rules.

Proposed Effective/Applicability Date

Section 20.2032–1(c)(2) exceptthe second sentence of the intro-ductory text, §20.2032–1(c)(3) ex-cept §20.2032–1(c)(3)(i)(C), the chartin Example 1 of §20.2032–1(e),§20.2032–1(f)(2) except the last sen-tence, and the first and third sentencesin §20.2032–1(f)(2)(ii) are applicableto decedents dying after August 16,1954. Sections 20.2032–1(a) introductorytext, 20.2032–1(a)(1), 20.2032–1(a)(2),20.2032–1(c)(1)(i), (c)(1)(ii), (c)(1)(iii),(c)(1)(iv), (c)(3)(i)(C), (c)(4), (c)(5),(f)(1), (f)(2)(i), and (f)(3), the sec-ond sentence in §20.2032–1(c)(2) in-troductory text, §20.2032–1(e) exceptthe chart in Example 1, the last sen-tence in §20.2032–1(f)(2) introduc-

tory text, and the second sentence in§20.2032–1(f)(2)(ii) are applicable to es-tates of decedents dying on or after thedate of publication of the Treasury deci-sion adopting these rules as final in theFederal Register.

Special Analyses

It has been determined that this pro-posed regulation is not a significant regu-latory action as defined in Executive Or-der 12866, as supplemented by ExecutiveOrder 13563. Therefore, a regulatory as-sessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulationsand, because these regulations do not im-pose on small entities a collection of infor-mation requirement, the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) does notapply. Therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

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 Treasury Department also 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 has been scheduled forMarch 9, 2012 at 10:00 a.m. in Audito-rium, Internal Revenue Building. Due tobuilding security procedures, visitors mustuse the main building entrance 1111 Con-stitution Avenue NW, Washington, DC. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 30 minutes beforethe hearing starts. For more information

about having your name placed on the listto attend the hearing, see the “FOR FUR-THER INFORMATION CONTACT” sec-tion of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written (a signed original and eight(8) copies) or electronic comments by Feb-ruary 16, 2012 and an outline of the topicsto be discussed and the time to be devotedto each topic by February 17, 2012. A pe-riod of 10 minutes will be allotted to eachperson for making comments. An agendashowing the scheduling of the speakerswill be prepared after the deadline for re-ceiving outlines has passed. Copies of theagenda will be available free of charge atthe hearing.


The principal author of these proposedregulations is Theresa M. Melchiorre,Office of Associate Chief Counsel(Passthroughs and Special Industries).

* * * * *

Withdrawal of Notice of ProposedRulemaking

Under the authority of 26 U.S.C.7805, the notice of proposed rulemaking(REG–112196–07) that was published inthe Federal Register on April 25, 2008(73 FR 22300) is withdrawn.

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 20 is pro-posed to be amended as follows:

PART 20—ESTATE TAX; ESTATESOF DECEDENTS DYING AFTERAUGUST 16, 1954


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

§20.2032–1[AMENDED]

Par. 2. For each entry in the table, eachparagraph in the “Old Paragraph” columnis redesignated as indicated in the “NewParagraph” column:

2011–51 I.R.B. 867 December 19, 2011

Old Paragraph New Paragraph

20.2032–1(c)(1) 20.2032–1(c)(1)(i)

20.2032–1(c)(3) 20.2032–1(c)(3)(i)

20.2032–1(c)(3)(i) 20.2032–1(c)(3)(i)(A)

20.2032–1(c)(3)(ii) 20.2032–1(c)(3)(i)(B)

20.2032–1(c)(3)(iii) 20.2032–1(c)(3)(i)(C)

20.2032–1(c)(3)(iv) 20.2032–1(c)(3)(i)(D)

20.2032–1(c)(3)(v) 20.2032–1(c)(3)(i)(E)

20.2032–1(f) 20.2032–1(f)(2)

20.2032–1(f)(1) 20.2032–1(f)(2)(i)

20.2032–1(f)(2) 20.2032–1(f)(2)(ii)

Par. 3. Section 20.2032–1 is amendedby:

1. Revising paragraph (a) introductorytext.

2. Revising paragraphs (a)(1) and(a)(2).

3. Revising newly-designated para-graph (c)(1)(i), newly-designated para-graph (c)(3)(i)(C), paragraph (e) intro-ductory text, the introductory text ofparagraph (e) Example 1 preceding thetable, the last sentence in newly-desig-nated paragraph (f)(2) introductory text,newly-designated paragraph (f)(2)(i), andthe second sentence in newly-designatedparagraph (f)(2)(ii).

4. Adding new paragraphs (c)(1)(ii),(c)(1)(iii), (c)(1)(iv), (c)(4), (c)(5), (f)(1),and (f)(3).

5. Adding a paragraph heading and anew second sentence in paragraph (c)(2)introductory text.

6. Adding a paragraph heading to para-graph (c)(3).

7. Designating the undesignated lan-guage following newly-designated para-graph (c)(3)(i)(E) as paragraph (c)(3)(ii)and adding a paragraph heading to thisparagraph.

8. Designating the table in paragraph(e) as Example 1 and adding paragraph (e)Example 2 following the table.

9. Revising the paragraph heading andadding two sentences at the end of para-graph (h).

The additions and revisions read as fol-lows.

§20.2032–1 Alternate valuation.

(a) In general. — In general, section2032 provides for the valuation of a dece-dent’s gross estate at a date (alternatevaluation date) other than the date of thedecedent’s death. More specifically, ifan executor elects the alternate valuationmethod under section 2032, the propertyincludible in the decedent’s gross estateon the date of death (decedent’s interest)is valued as of whichever of the followingdates is applicable:

(1) Any property distributed, sold, ex-changed, or otherwise disposed of within 6months (1 year, if the decedent died on orbefore December 31, 1970) after the dece-dent’s death (alternate valuation period) isvalued as of the date on which it is firstdistributed, sold, exchanged, or otherwisedisposed of (transaction date).

(2) Any property not distributed, sold,exchanged, or otherwise disposed of dur-ing the alternate valuation period is val-ued as of the date 6 months (1 year, if thedecedent died on or before December 31,1970) after the date of the decedent’s death(6-month date).

* * * * *(c) Meaning of “distributed, sold, ex-

changed, or otherwise disposed of”—(1)In general.

(i) Transactions included. The phrase“distributed, sold, exchanged, or otherwisedisposed of” comprehends all possibleways by which property ceases to forma part of the gross estate. This phraseincludes, but is not limited to:

(A) The use of money on hand at thedate of the decedent’s death to pay funeralor other expenses of the decedent’s estate;

(B) The use of money on hand at thedate of the decedent’s death to invest inother property;

(C) The exercise of employee stock op-tions;

(D) The surrender of stock for corporateassets in partial or complete liquidation ofa corporation, and similar transactions in-volving partnerships or other entities;

(E) The distribution by the estate (orother holder) of included property as de-fined in paragraph (d) of this section;

(F) The transfer or exchange of propertyfor other property, whether or not gain orloss is currently recognized for income taxpurposes;

(G) The contribution of cash or otherproperty to a corporation, partnership, orother entity, whether or not gain or loss iscurrently recognized for income tax pur-poses;

(H) The exchange of interests in a cor-poration, partnership, or other entity (en-tity) for one or more different interests (forexample, a different class of stock) in thesame entity or in an acquiring or resultingentity or entities (see, however, paragraph(c)(1)(ii) of this section); and

(I) Any other change in the ownershipstructure or interests in, or in the assetsof, a corporation, partnership, or other en-tity, an interest in which is includible in thegross estate, such that the included prop-erty after the change does not reasonablyrepresent the included property at the dece-dent’s date of death (see, however, para-graph (c)(1)(iii)(A) of this section). Such achange in the ownership structure or inter-

December 19, 2011 868 2011–51 I.R.B.

ests in or in the assets of an entity includes,without limitation—

(1) The dilution of the decedent’s own-ership interest in the entity due to the is-suance of additional ownership interests inthat entity;

(2) An increase in the decedent’s own-ership interest in the entity due to the en-tity’s redemption of the interest of a differ-ent owner;

(3) A reinvestment of the entity’s assets;and

(4) A distribution or disbursement ofproperty (other than excluded property asdefined in paragraph (d) of this section)by the entity (other than expenses, suchas rents and salaries, paid in the ordinarycourse of the entity’s business), with theeffect that the fair market value of the en-tity before the occurrence does not equalthe fair market value of the entity immedi-ately thereafter.

(ii) Exchange of an interest in an ex-isting corporation, partnership, or otherentity includible in the gross estate. Ifan interest in a corporation, partnership,or other entity (entity) is includible inthe gross estate at death and that interestis exchanged as described in paragraph(c)(1)(i)(H) of this section for one or moredifferent interests in the same entity orin an acquiring or resulting entity or en-tities, the transaction does not result inan exchange or disposition under section2032(a)(1) and paragraph (c)(1)(i)(H) ofthis section if, on the date of the exchange,the fair market value of the interest inthe entity equals the fair market value ofthe interest(s) in the same entity or theacquiring or resulting entity or entities.Such transactions may include, withoutlimitation, reorganizations, recapitaliza-tions, mergers, or similar transactions. Indetermining whether the exchanged prop-erties have the same fair market value, adifference in value equal to or less than5 percent of the fair market value, as ofthe transaction date, of the property in-terest includible in the gross estate on thedecedent’s date of death is ignored. If thetransaction satisfies the requirements ofthis paragraph, the property to be valuedon the 6-month date (or on the transactiondate, if any, subsequent to this transaction)is the property received in the exchange,rather than the property includible in thedecedent’s gross estate at the date of death.This paragraph has no effect on any other

provision of the Internal Revenue Codethat is applicable to the transaction. Forexample, even if the transaction does notresult in a deemed exchange as a result ofsatisfying the requirements of this para-graph, the provisions of chapter 14 may beapplicable to determine fair market valuefor Federal estate tax purposes.

(iii) Distributions from an account orentity in which the decedent held an inter-est at death.

(A) In general. If during the alternatevaluation period, an estate (or other holderof the decedent’s interest) receives a dis-tribution or disbursement (to the extentthe distribution or disbursement consistsof included property, as defined in para-graph (d) of this section) (payment) froma partnership, corporation, trust (includingan IRA, Roth IRA, 403(b), 401(k), ThriftSavings Plan, etc.), bank account or sim-ilar asset, or other entity (entity), and aninterest in that entity is includible in thegross estate, the payment does not result ina distribution under paragraph (c)(1)(i)(I)of this section. However, this rule appliesonly if, on the date of the payment, the fairmarket value of the decedent’s interest inthe entity before the payment equals thesum of the fair market value of the pay-ment made to the estate (or other holder ofthe decedent’s interest in the entity) and thefair market value of the decedent’s interestin the entity, not including any excludedproperty, after the payment. In this case,the alternate valuation date of the paymentis the date of the payment, and the alternatevaluation date of the decedent’s remaininginterest in the entity, if any, is the 6-monthdate (or the transaction date, if any, sub-sequent to this payment). If this require-ment is not met, the payment is a distribu-tion under paragraph (c)(1)(i) of this sec-tion, and the alternate valuation date of thedecedent’s entire interest in the entity is thedate of the payment. For purposes of thissection, a distribution or disbursement isdeemed to consist first of excluded prop-erty, if any, and then of included property,as those terms are defined in paragraph (d)of this section.

(B) Special rule. If the decedent’s in-terest in an entity that is includible in thegross estate consists of the amount neededto produce an annuity, unitrust, remain-der, or other such payment valued undersection 2036, then assuming the distribu-tion satisfies the general rule set forth in

paragraph (c)(1)(iii)(A) of this section, thevalue of each distribution (to the extent itis deemed to consist of included property)payable (whether or not actually paid) dur-ing the alternate valuation period shall beadded to the value of the entity on the al-ternate valuation date. The sum of the fairmarket value of these distributions whenmade and the fair market value of the en-tity on the alternate valuation date shall beused as the fair market value of the entity incomputing the amount, valued as of the al-ternate valuation date, to be included in thedecedent’s gross estate under section 2036.See Example 2 of paragraph (e) of this sec-tion.

(iv) Aggregation. For purposes of thissection, a special aggregation rule appliesin two situations to determine the value tobe included in the gross estate pursuant toan alternate valuation election. Those twosituations arise when, during the alternatevaluation period, less than all of the inter-est includible in the decedent’s gross es-tate in a particular property is the subjectof a transaction described in paragraphs(c)(1)(i), (c)(1)(ii), (c)(1)(iii), or (c)(2) ofthis section. In one situation, one or moreportions of the includible interest are sub-ject to such a transaction and a portionis still held on the 6-month date. In theother situation, the entire interest includi-ble in the gross estate is disposed of in twoor more such transactions during the alter-nate valuation period, so that no part ofthat interest remains on the 6-month date.In both of these situations, the fair mar-ket value of each portion of the interest in-cludible in the gross estate is to be deter-mined as follows. The fair market valueof each portion subject to such a transac-tion, and the portion remaining, if any, onthe 6-month date, is the fair market value,as of the transaction date, or the 6-monthdate for any remaining portion, of the en-tire interest includible in the gross estateon the decedent’s date of death, multipliedby a fraction. The numerator of that frac-tion is the portion of the interest subject tothat transaction, or the portion remainingon the 6-month date, and the denominatoris the entire interest includible in the grossestate at the decedent’s date of death.

(2) Property distributed. * * * Propertyis not considered “distributed” merely be-cause property passes directly at death as aresult of a beneficiary designation or other

2011–51 I.R.B. 869 December 19, 2011

contractual arrangement or by operation oflaw. * * *

(3) Person able to sell, exchange, orotherwise dispose of property includible inthe gross estate. (i) * * *

(A) * * *(B) * * *(C) An heir, devisee, or other person to

whom title to property passes directly ondeath by reason of a beneficiary designa-tion or other contractual arrangement or byoperation of law;

(D) * * *(E) * * *(ii) Binding contracts.* * *(4) Certain post-death events. If the

effect of any other provision of the In-ternal Revenue Code is that a post-deathevent is deemed to have occurred on thedate of death, the post-death event willnot be considered a transaction describedin paragraph (c)(1)(i) of this section. Forexample, the grant, during the alternatevaluation period, of a qualified conserva-tion easement in accordance with section2031(c) is not a transaction described inparagraph (c)(1)(i) of this section. Pur-suant to section 2031(c), the post-deathgrant of the easement is effective for Fed-eral estate tax purposes as of the date of thedecedent’s death. As a result, for purposesof determining both the estate’s eligibil-ity to make an election under this sectionand the value of the property on the alter-nate valuation date, the fair market valueof the property as of the date of death mustbe compared to the fair market value ofthat property as of the alternate valuationdate, in each case as that value is adjustedby reason of the existence of the section2031(c) qualified easement.

(5) Examples. The application of para-graph (c) of this section is illustrated inthe following examples. In each example,decedent’s (D’s) estate elects to value D’sgross estate under the alternate valuationmethod, so that the alternate valuation dateof the property includible in the gross es-tate on D’s date of death is either the trans-action date or the 6-month date. In eachexample, assume that the only factors af-fecting value during the alternate valuationperiod, and the only occurrences describedin paragraphs (c)(1)(i) and (c)(2) of thissection, are those described in the exam-ple.

Example 1. At D’s death, D owned propertywith a fair market value of $100X. Two months after

D’s death (Date 1), D’s executor and D’s familymembers formed a limited partnership. D’s executorcontributed all of the property to the partnership andreceived an interest in the partnership in exchange.The investment of the property in the partnership is atransaction described in paragraph (c)(1)(i)(F) and/or(G) of this section. As a result, the alternate valuationdate of the property is the date of its contribution andthe value to be included in D’s gross estate is the fairmarket value of the property immediately prior toits contribution to the partnership. The result wouldbe the same if D’s estate instead had contributedproperty to a limited partnership formed prior to D’sdeath by D and/or other parties, related or unrelatedto D. Further, the result would be the same if D’sestate had contributed the property to a corporation,publicly traded or otherwise, or other entity after D’sdeath and prior to the 6-month date.

Example 2. At D’s death, D held incentive stockoptions that were qualified under section 422. D’sexecutor exercised all of the stock options prior tothe 6-month date. The exercise of the stock optionsis a transaction described in paragraph (c)(1)(i)(C) ofthis section. Thus, the alternate valuation date of thestock options is the date of their exercise and the valueto be included in D’s gross estate is the fair marketvalue of the stock options immediately prior to theirexercise. The result would be the same if the stockoptions were not qualified under section 422 and weretaxable under section 83 upon exercise.

Example 3. D’s gross estate includes a control-ling interest in Y, a corporation. During the alternatevaluation period, Y issued additional shares of stockand awarded them to certain key employees. D’s in-terest in Y was diluted to a non-controlling interestby Y’s issuance of the additional stock. Y’s issuanceof the stock is a transaction described in paragraph(c)(1)(i)(I) of this section. The value to be included inD’s gross estate is the fair market value of D’s stockimmediately prior to Y’s issuance of the additionalstock. The result would be the same if D’s estate in-cluded a minority interest in Y on the date of deathand that interest became a controlling interest duringthe alternate valuation period as the result of Y’s re-demption of the shares of another shareholder.

Example 4. At D’s death, D owned stock in Y,a corporation. During the alternate valuation period,the Board of Directors of Y contributed all of Y’s as-sets to a partnership in exchange for interests therein.The contribution is a transaction described in para-graph (c)(1)(i)(I)(3) of this section. Therefore, the al-ternate valuation date of D’s stock in Y is the date ofthe reinvestment of Y’s assets and the value to be in-cluded in D’s gross estate is the fair market value ofD’s stock in Y immediately prior to the reinvestment.The result would be the same even if the Board of Di-rectors had contributed only a portion of Y’s assets tothe partnership during the alternate valuation period.

Example 5. (i) At D’s death, D owned commonstock in Y, a corporation. Two months after D’s death(Date 1), there was a reorganization of Y. In the reor-ganization, D’s estate exchanged all of its stock for anew class of stock in X. On the date of the reorgani-zation, the difference between the fair market valueof the stock D’s estate received and the fair marketvalue on that date of the stock includible in D’s grossestate at death was greater than 5% of the fair marketvalue, as of the date of the reorganization, of the stockD held at death. The reorganization is a transaction

described in paragraph (c)(1)(i)(H) of this section anddoes not satisfy the exception described in paragraph(c)(1)(ii) of this section. Thus, the alternate valuationdate is the date of the reorganization and the value tobe included in D’s gross estate is the fair market valueof the stock immediately prior to the reorganization.This result is not affected by whether or not the re-organization is a tax-free reorganization for Federalincome tax purposes. The result would be the same ifthe stock had been held, for example, in an IRA withdesignated beneficiaries. See paragraph (c)(3)(i)(C)of this section.

(ii) If, instead, the difference between the twofair market values as of the date of the reorganiza-tion was equal to or less than 5% of the fair marketvalue, as of the date of the reorganization, of the stockD held at death, the reorganization would satisfy theexception provided in paragraph (c)(1)(ii) of this sec-tion. Thus, the alternate valuation date would be the6-month date. The value to be included in D’s grossestate would be the fair market value, determined asof the 6-month date, of the new class of stock in Ythat D’s estate received in the reorganization.

Example 6. (i) At D’s death, D owned an inter-est in Partnership X that is includible in D’s gross es-tate. During the alternate valuation period, X made acash distribution to each of the partners. The distribu-tion consists entirely of included property as definedin paragraph (d) of this section. The distribution isa transaction described in paragraph (c)(1)(i)(I)(4) ofthis section. On the date of the distribution, the fairmarket value of D’s interest in X before the distribu-tion equaled the sum of the distribution paid to D’sestate and the fair market value of D’s interest in Ximmediately after the distribution. Thus, pursuant toparagraph (c)(1)(iii)(A) of this section, the alternatevaluation date of the property distributed is the dateof the distribution, and the alternate valuation date ofD’s interest in X is the 6-month date.

(ii) If, instead, the fair market value of D’s inter-est in X before the distribution did not equal the sumof the distribution paid to D’s estate and the fair mar-ket value of D’s interest in X (not including any ex-cluded property) immediately after the distribution,then pursuant to paragraph (c)(1)(i)(I)(4) of this sec-tion, the alternate valuation date of D’s entire interestin X would be the date of the distribution.

Example 7. D died owning 100% of Blackacre.D’s will directs that an undivided 70% interest inBlackacre is to pass to Trust A for the benefit of D’ssurviving spouse, and an undivided 30% interest is topass to Trust B for the benefit of D’s surviving child.Three months after D’s death (Date 1), the executorof D’s estate distributed a 70% interest in Blackacreto Trust A. Four months after D’s death (Date 2), theexecutor of D’s estate distributed a 30% interest inBlackacre to Trust B. The following values are in-cludible in D’s gross estate pursuant to paragraphs(c)(1)(i)(E) and (c)(1)(iv): the fair market value ofthe 70% interest in Blackacre, determined by calcu-lating 70% of the fair market value of all (100%) ofBlackacre as of Date 1; and the fair market value ofthe 30% interest in Blackacre, determined by calcu-lating 30% of the fair market value of all (100%) ofBlackacre as of Date 2.

Example 8. At D’s death, D owned 100% ofthe units of a limited liability company (LLC). Twomonths after D’s death (Date 1), D’s executor sold20% of the LLC units to an unrelated third party.

December 19, 2011 870 2011–51 I.R.B.

Three months after D’s death (Date 2), D’s execu-tor sold 40% of the LLC units to D’s child. On the6-month date, the estate held the remaining 40% ofthe units in the LLC. The alternate valuation date ofthe units sold is their sale date (Date 1 and Date 2, re-spectively) pursuant to paragraph (a) of this section.The alternate valuation date of the units remainingin the estate is the 6-month date, as these units havenot been distributed, sold, exchanged, or otherwisedisposed of in a transaction described in paragraphs(c)(1)(i) or (c)(2) of this section prior to this date. Pur-suant to paragraph (c)(1)(iv) of this section, the valueof the units disposed of on Date 1 and Date 2 is thefair market value of the 20% and 40% interests, de-termined by calculating 20% and 40% of the fair mar-ket value as of Date 1 and Date 2, respectively, of allthe units (100%) includible in the gross estate at D’sdeath. Similarly, the value of the units held on the6-month date to be included in D’s gross estate is thefair market value of those units, determined by taking40% of the fair market value on the 6-month date ofall of the units (100%) includible in the gross estate atD’s death. As a result, the fact that the partial sales re-sulted in the creation of three minority interests is nottaken into account in valuing under section 2032 anyportion of the LLC interests held by D at D’s death.

Example 9. Husband died owning an interest ina brokerage account titled in the names of Husbandand Wife with rights of survivorship. On Husband’sdeath, the account held marketable securities, corpo-rate bonds, municipal bonds, certificates of deposit,and cash. During the alternate valuation period,Wife’s stockbroker advised her that the accountcould not be held under the social security number ofa deceased individual. Accordingly, approximatelyone month after Husband’s death, Wife directed thestockbroker to transfer the account into an accounttitled in Wife’s sole name. Because title to the jointaccount passes to Wife at the moment of Husband’sdeath by operation of law, the transfer of the jointaccount into an account in Wife’s sole name is nota transaction described in paragraph (c)(1)(i) of thissection. Accordingly, the value of the assets held inWife’s solely owned account will be includible inHusband’s gross estate at their fair market value onthe 6-month date. The result would be the same ifthe brokerage firm automatically transferred title tothe account into Wife’s name, or if Wife changedthe beneficiary designation for the account. Finally,the result would be the same if, instead of an ac-count with a brokerage firm, the assets were held inHusband’s retirement account (IRA or similar trustsuch as a Roth IRA, 403(b) plan, or 401(k) plan) orWife’s ownership of the account was the result of acontract (a beneficiary designation form) rather thanoperation of law.

Example 10. Assume the same facts as in Exam-ple 9 except that, during the alternate valuation pe-riod, Wife directed the stockbroker to sell a bond inthe account. The sale is a transaction described inparagraph (c)(1)(i)(I)(4) of this section. Wife is anindividual described in paragraph (c)(3)(i)(D) of thissection. Thus, the alternate valuation date of the bondis the date of its sale. The values to be included inD’s gross estate are the fair market value of the bondon date of its sale, and the fair market value of thebalance of the account on the 6-month date. The re-sult would be the same if the bond had matured andwas retired during the alternate valuation period. The

result also would be the same if the bond was heldwithin a retirement account (IRA or similar trust suchas a Roth IRA, 403(b) plan, or 401(k) plan).

Example 11. Assume the same facts as in Exam-ple 9 except that, during the alternate valuation pe-riod, Wife withdrew cash from the account or oth-erwise received income or other disbursements fromthe account. Each such withdrawal or disbursementfrom the account (to the extent it consists of includedproperty as defined in paragraph (d) of this section)is a distribution described in paragraph (c)(1)(i)(I)(4)of this section. Provided that, on the date of eachdistribution, the fair market value of the account be-fore the distribution (not including excluded prop-erty) equals the sum of the included property dis-tributed and the fair market value of the includedproperty in the account immediately after the distri-bution in accordance with paragraph (c)(1)(iii)(A) ofthis section, the alternate valuation date for each dis-tribution is the date of the distribution and the alter-nate valuation date for the account is the 6-monthdate. The value to be included in the gross estateis the fair market value of each distribution of in-cluded property (determined as of the date of distri-bution) and the fair market value of the account onthe 6-month date. The result would be the same if theassets were held in an IRA or similar trust, such as aRoth IRA, 403(b) plan, or 401(k) plan.

Example 12. Husband died with a retirement ac-count, having named his three children, in specifiedshares totaling 100%, as the designated beneficiariesof that account. During the alternate valuation period,the account was divided into three separate retirementaccounts, each in the name of a different child andfunded with that child’s designated share. The divi-sion of the retirement account is not a transaction de-scribed in paragraph (c)(1)(i) of this section by rea-son of paragraph (c)(2) of this section, so the alter-nate valuation date for each of the new accounts isthe 6-month date.

Example 13. (i) D’s gross estate includes realproperty. During the alternate valuation period, D’sexecutor grants a conservation easement that restrictsthe property’s use under local law but does not sat-isfy the requirements of section 2031(c). The ease-ment reduces the fair market value of the property.The executor’s grant of the conservation easement is atransaction described in paragraph (c)(1)(i)(E) of thissection and does not satisfy the exception describedin paragraph (c)(4) of this section. Therefore, the al-ternate valuation date for the property is the date theeasement was granted, and the value to be included inD’s gross estate is the fair market value of the prop-erty immediately prior to the grant.

(ii) Assume, instead, that the easement satisfiedthe requirements of section 2031(c) and, thus, satis-fied the exception described in paragraph (c)(4) ofthis section. Pursuant to paragraph (c)(4), for pur-poses of determining both the estate’s eligibility tomake an election under section 2032 and the value ofthe property on the 6-month date, the section 2031(c)qualified easement is taken into account in determin-ing both the fair market value of the property on D’sdate of death and the fair market value of the propertyon the 6-month date.

* * * * *(e) Examples. — The application of

paragraph (d) of this section regarding “in-

cluded property” and “excluded property”is illustrated by the following examples.

Example 1. Assume that the decedent (D) died onJanuary 1, 1955: * * *

Example 2. (i) At death, D held a qualified in-terest described in section 2702(b) in the form of anannuity in a grantor retained annuity trust (GRAT)D had created and funded with $150,000. The trustagreement provides for an annual annuity payment of$12,000 per year to D or D’s estate for a term of 10years. At the expiration of the 10-year term, the re-mainder is to be distributed to D’s child. D dies priorto the expiration of the 10-year term. On D’s dateof death, the fair market value of the property in theGRAT is $325,000.

(ii) The only assets in the GRAT are an apart-ment building and a bank account. Three months af-ter D’s date of death, an annuity payment of $12,000is paid in cash to D’s estate. The monthly rents fromthe apartment building total $500. After the date ofdeath and prior to the payment date, the GRAT re-ceived $1,500 in excluded property in the form ofrent. Pursuant to paragraph (c)(1)(iii)(A) of this sec-tion, $1,500 of the $12,000 distributed is deemed tobe excluded property for purposes of section 2032.The distribution is a transaction described in para-graph (c)(1)(i)(I)(4) of this section. On the date ofthe distribution, the fair market value of D’s interestin the GRAT before the distribution equals the sumof the distribution paid to D’s estate and the fair mar-ket value of D’s interest in the GRAT immediatelyafter the distribution. Thus, pursuant to paragraph(c)(1)(iii)(A) of this section, the alternate valuationdate for the $10,500 cash distribution, which is in-cluded property, is the date of its distribution, and thealternate valuation date of the GRAT is the 6-monthdate.

(iii) The calculation of the value of D’s interest inthe GRAT includible in D’s gross estate at D’s deathpursuant to section 2036 must be computed underthe special rule of paragraph (c)(1)(iii)(B) of thissection as a result of the estate’s election to use thealternate valuation method under section 2032. Onthe 6-month date, the section 7520 interest rate is 6%and the fair market value of the property in the GRATis $289,500. Pursuant to paragraph (c)(1)(iii)(B)of this section, the fair market value of the GRATproperty deemed to be included property is $300,000($289,500 plus $10,500). Accordingly, for purposesof determining the fair market value of the corpus in-cludible in D’s gross estate under section 2036(a)(1)as of the 6-month date, see §20.2036–1(c)(2), usinga GRAT corpus of $300,000 and, pursuant to para-graph (f)(2)(i) of this section, a section 7520 rate of6%.

(f) Post-death factors and occur-rences.—(1) In general. The election touse the alternate valuation method undersection 2032 permits property includiblein the gross estate on the decedent’s dateof death to be valued on the 6-month date,rather than on the date of death. Thus,the election permits a valuation for Fed-eral estate tax purposes that reflects theimpact of factors such as economic ormarket conditions, occurrences described

2011–51 I.R.B. 871 December 19, 2011

in section 2054 (to the extent not compen-sated by insurance or otherwise, and notdeducted under that section), and otherfactors or occurrences during the alternatevaluation period, as set forth in guidanceissued by the Secretary. Those factors andoccurrences do not include the mere lapseof time described in paragraph (f)(2) ofthis section, or transactions described inparagraph (c)(1)(i) or (c)(2) of this sectionthat are not excluded under paragraphs(c)(1)(ii), (c)(1)(iii)(A), and (c)(4) of thissection. Generally, management decisionsmade in the ordinary course of operat-ing a business, such as a corporation, apartnership, or other business entity, aretaken into account under this section asoccurrences related to economic or marketconditions. To the extent, however, thatthese decisions change the ownership orcontrol structure of the business entity,or otherwise are included in paragraph(c)(1)(i) or (c)(2) of this section and arenot excluded by paragraphs (c)(1)(ii),(c)(1)(iii)(A), or (c)(4) of this section, theywill be treated as described in paragraph(c)(1)(i) of this section.

(2) Mere lapse of time. * * * The ap-plication of this paragraph is illustrated inparagraphs (f)(2)(i) and (f)(2)(ii) of thissection:

(i) Life estates, remainders, and similarinterests. (A) The fair market value ofa life estate, remainder, term interest orsimilar interest as of the alternate valu-ation date is determined by applying themethodology prescribed in §20.2031–7,subject to the following two sentences.The age of each person whose life ex-pectancy may affect the fair market valueof the interest shall be determined as ofthe date of the decedent’s death. The fairmarket value of the property and the appli-cable interest rate under section 7520 shallbe determined using values applicable onthe alternate valuation date.

(B) Examples. The application of para-graph (f)(2)(i)(A) of this section is illus-trated in the following examples.

Example 1. Assume that the decedent (D) or D’sestate was entitled to receive certain property uponthe death of A, who was entitled to the income fromthe property for life. At the time of D’s death afterApril 30, 2009, the fair market value of the prop-erty was $50,000, and A was 47 years and 5 monthsold. In the month in which D died, the section 7520rate was 6.2%, but rose to 7.4% on the 6-month date.The fair market value of D’s remainder interest as of

D’s date of death was $9,336.00 ($50,000 x 0.18672,the single life remainder factor from Table S for a 47year old at a 6.2% interest rate), as illustrated in Ex-ample 1 of §20.2031–7T(d)(5). If, because of eco-nomic conditions, the property declined in value dur-ing the alternate valuation period and was worth only$40,000 on the 6-month date, the fair market valueof the remainder interest would be $5,827 ($40,000X 0.14568, the Table S value for a 47 year old at a7.4% interest rate), even though A would have been48 years old on the 6-month date.

Example 2. D created an intervivos charitable re-mainder annuity trust (CRAT) described in section664(d)(1). The trust instrument directs the trustee tohold, invest, and reinvest the corpus of the trust andto pay to D for D’s life, and then to D’s child (C) forC’s life, an amount each year equal to 6% of the ini-tial fair market value of the trust. At the terminationof the trust, the corpus, together with the accumu-lated income, is to be distributed to N, a charitable or-ganization described in sections 170(c), 2055(a), and2522(a). D died, survived by C. D’s estate is entitledto a charitable deduction under section 2055 for thepresent value of N’s remainder interest in the CRAT.Pursuant to §1.664–2(c) and §20.7520–2, in deter-mining the fair market value of the remainder interestas of the alternate valuation date, D’s executor mayelect to use the section 7520 rate in effect for eitherof the two months immediately preceding the monthin which the alternate valuation date occurs. Regard-less of the section 7520 rate selected, however, thefactor to be used to value the remainder interest is theappropriate factor for C’s age on the date of D’s death.

(2)(ii) Patents. * * * Six months afterthe date of the decedent’s death, the patentwas sold for its then fair market value thathad decreased to $60,000 because of thelapse of time. * * *

(3) Examples. The following examplesillustrate the application of this paragraph(f). In each example, decedent’s (D’s) es-tate elects to value D’s gross estate underthe alternate valuation method, so that thealternate valuation date of the property in-cludible in the gross estate on D’s date ofdeath is either the transaction date or the6-month date. In each example, assumethat the only factors affecting value, andthe only occurrences described in para-graph (c)(1)(i) or (c)(2) of this section, tak-ing place during the alternate valuation pe-riod are those described in the example.

Example 1. At D’s death, D’s gross estate in-cludes a residence. During the alternate valuation pe-riod, the fair market value of the residence (as wellas the residential market in the area generally) de-clines due to a reduction in the availability of creditthroughout the United States and, consequently, a de-cline in the availability of mortgages. The decline inthe availability of mortgages is an economic or mar-ket condition. Therefore, in valuing the residence onthe 6-month date, the effect of this decline on the fairmarket value of the residence is to be taken into ac-count.

Example 2. (i) At D’s death, D is the sole share-holder of corporation Y, a manufacturing company.Four months after D’s death, Y’s physical plant isdestroyed as a result of a natural disaster. The dis-aster affects a large geographic area and, as a result,the economy of that area is negatively affected. Fivemonths after D’s death, Y’s Board of Directors votesto liquidate and dissolve Y. The liquidation and disso-lution proceeding is not completed as of the 6-monthdate. The natural disaster is a factor that affects eco-nomic and market conditions. Therefore, the disaster,to the extent not compensated by insurance or other-wise, is taken into account in valuing the Y stock onthe 6-month date.

(ii) Assume instead that Y’s plant is severely dam-aged due to flooding from the failure of pipes in thefacility. The damage is an occurrence described insection 2054. Therefore, the damage, to the extentnot compensated by insurance or otherwise, is takeninto account in valuing the property on the 6-monthdate.

Example 3. At D’s death, D has an interest in an Scorporation, W. During the alternate valuation period,it is discovered that an employee of W has embezzledsignificant assets from W. W does not reasonably ex-pect to recover the funds or any damages from theemployee, and insurance proceeds are not sufficientto cover the loss. The theft is an occurrence describedin section 2054. Therefore, the theft, to the extent notcompensated by insurance or otherwise, is taken intoaccount in valuing D’s interest in W on the 6-monthdate.

(h) Effective/applicability date. * * *All of paragraph (c)(2) of this section ex-cept the second sentence of the introduc-tory text, all of paragraph (c)(3) of this sec-tion except paragraph (c)(3)(i)(C) of thissection, the chart in Example 1 of para-graph (e) of this section, all of paragraph(f)(2) of this section except the last sen-tence, and the first and third sentences inparagraph (f)(2)(ii) of this section are ap-plicable to decedents dying after August16, 1954. All of paragraphs (a) introduc-tory text, (a)(1), (a)(2), (c)(1)(i), (c)(1)(ii),(c)(1)(iii), (c)(1)(iv), (c)(3)(i)(C), (c)(4),(c)(5), (f)(1), (f)(2)(i), and (f)(3) of thissection, the second sentence of the intro-ductory text in paragraph (c)(2) of this sec-tion, all of paragraph (e) of this section ex-cept the chart in Example 1, the last sen-tence in the introductory text of paragraph(f)(2) of this section, and the second sen-tence in paragraph (f)(2)(ii) of this sectionare applicable to estates of decedents dy-ing on or after the date of publication ofthe Treasury decision adopting these rulesas final in the Federal Register.


December 19, 2011 872 2011–51 I.R.B.


Notice of ProposedRulemaking by CrossReference to TemporaryRegulation

Corporate Reorganizations;Allocation of Basis in “All CashD” Reorganizations

REG–101273–10


ACTION: Notice of proposed rule mak-ing by cross-reference to temporary regu-lations.

SUMMARY: In this issue of the Bulletin,the IRS is issuing temporary regulations(T.D. 9558) that provide guidance regard-ing the determination of the basis of stockor securities in a reorganization where nostock or securities of the issuing corpora-tion is issued and distributed in the trans-action. These regulations clarify that, incertain reorganizations where no stock orsecurities of the issuing corporation is is-sued and distributed in the transaction, theability to designate the share of stock of theissuing corporation to which the basis, ifany, of the stock or securities surrenderedwill attach applies only to a shareholderthat owns actual shares in the issuing cor-poration. These regulations affect corpo-rations engaging in such transactions andtheir shareholders. The text of those tem-porary regulations published in this issueof the Bulletin also serves as the text ofthese proposed regulations.

DATE: Written or electronic commentsand requests for a public hearing must bereceived by February 21, 2012.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–101273–10), In-ternal Revenue Service, PO Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered orsent electronically, via the Federal eRule-making Portal at www.regulations.gov(IRS REG–101273–10).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, Lisa A. Fuller, (202) 622–7550;concerning submission of comments,Oluwafunmilayo Taylor, (202) 622–7180(not toll-free numbers).


Background

Temporary regulations in this issue ofthe Bulletin amend 26 CFR part 1. Thetemporary regulations provide guidanceregarding the determination of the basisof stock or securities in a reorganizationwhere no stock or securities of the issuingcorporation is issued and distributed in thetransaction. The text of those regulationsalso serves as the text of these proposedregulations. The preamble to the tempo-rary regulations explains the amendments.


These temporary regulations clarifythat, in certain reorganizations where nostock or securities of the issuing corpo-ration is issued and distributed in thetransaction, the ability to designate theshare of stock of the issuing corporationto which the basis, if any, of the stock orsecurities surrendered will attach appliesonly to a shareholder that owns actualshares in the issuing corporation.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866, as defined in Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has been deter-mined that section 553(b) of the Adminis-trative Procedure Act (5 U.S.C. chapter 5)does not apply to these regulations, and be-cause the regulation does not impose a col-lection of information on small entities, theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to section7805(f) of the Internal Revenue Code, thisnotice of proposed rulemaking has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (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 will be scheduledif requested in writing by any person thattimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Bulletin.


The principal author of these regula-tions is Lisa A. Fuller, Office of AssociateChief Counsel (Corporate). However,other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *


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


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.358–2 also issued under

26 U.S.C. 358(b)(1).Par. 2. Section 1.358–2 is amended by:1. Revising paragraph (a)(2)(iii).2. Adding a new Example 15 and Ex-

ample 16 to paragraph (c).3. Revising paragraph (d).The revision and addition reads as fol-

lows:

§1.358–2 Allocation of basis amongnonrecognition property.

(a) * * *(2) * * *(iii) [The text of this proposed amend-

ments to §1.358–2(a)(2)(iii) is the same as

2011–51 I.R.B. 873 December 19, 2011

the text of §1.358–2T(a)(2)(iii) publishedelsewhere in this issue of the Bulletin]

* * * * *(c) Examples * * *[The text of this proposed amendments

to §1.358–2, Examples 15 and 16 are thesame as the text of Examples 15 and 16in §1.358–2T published elsewhere in thisissue of the Bulletin].

* * * * *(d) [The text of this proposed amend-

ment to §1.358–2(d) is the same as thetext of §1.358–2T(d) published elsewherein this issue of the Bulletin].



Change of Address forthe Centralized InsolvencyOperation and FurtherInformation ConcerningAdditional Requirements forthe Filing of Requests fora Prompt Determination ofUnpaid Tax Liability

Announcement 2011–77

This announcement informs bank-ruptcy trustees (or debtors-in-possession)of a change of address for the Central-ized Insolvency Operation that should beused for the submission of requests fortax refunds under section 505(a) of theBankruptcy Code or requests for promptdeterminations of any unpaid tax liabilityof the estate incurred during the bank-ruptcy case under section 505(b) of theBankruptcy Code. This announcementalso describes where further informationconcerning additional requirements forfiling those requests may be found.

Rev. Proc. 2010–27, 2010–31 I.R.B.183, informs bankruptcy trustees (ordebtors-in-possession) of the applicationprocedure to be followed to properly re-quest a tax refund from the Service undersection 505(a) of the Bankruptcy Code.Rev. Proc. 2006–24, 2006–1 C.B. 943,

establishes the procedure by which bank-ruptcy trustees (or debtors-in-possession)may request from the Service a prompt de-termination of any unpaid tax liability ofthe estate incurred during the bankruptcycase under section 505(b) of the Bank-ruptcy Code. Both Rev. Proc. 2010–27and Rev. Proc. 2006–24 provide that re-quests must be filed with the CentralizedInsolvency Operation. The new address,effective immediately, is: CentralizedInsolvency Operation, P.O. Box 7346,Philadelphia, PA 19101–7346.

Further information concerning addi-tional requirements, including updatedaddress information for service of re-quests, may be found on a webpage on theIRS’s website, www.IRS.gov. To accessthis webpage, type http://www.irs.gov/into the address box on your internetbrowser. Once the webpage opens, type“IRS Tips for Bankruptcy Trustees” intothe search field in the top right hand cor-ner of the webpage. Then click on theresult with that heading. Or you may typehttp://www.irs.gov/businesses/small/arti-cle/0,,id=240599,00.html into the addressbox on your internet browser.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2010–27, 2010–31 I.R.B.183, and Rev. Proc. 2006–24, 2006–1C.B. 943, are modified.

The principal author of this announce-ment is Tammie A. Geier of the Officeof Associate Chief Counsel (Procedureand Administration). For further informa-tion regarding this announcement, contactTammie A. Geier at (202) 622–3620 (nota toll-free call).

Determination ofGovernmental Plan Status


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

ACTION: Advance notice of proposedrulemaking.

SUMMARY: The Treasury Departmentand IRS anticipate issuing regulations un-der section 414(d) of the Internal RevenueCode (Code) to define the term “govern-mental plan.” This document describes the

rules that the Treasury Department andIRS are considering proposing relating tothe determination of whether a plan is agovernmental plan within the meaning ofsection 414(d) and contains an appendixthat includes a draft notice of proposedrulemaking on which the Treasury Depart-ment and IRS invite comments from thepublic. This document applies to spon-sors of, and participants and beneficiariesin, employee benefit plans that are deter-mined to be governmental plans.

DATE: Written or electronic commentsmust be received by February 6, 2012.

ADDRESSES: Send submissions re-lating to the section 414(d) draft gen-eral regulations to: CC:PA:LPD:PR(REG–157714–06), room 5203, Inter-nal Revenue Service, PO Box 7604, BenFranklin Station, Washington DC, 20044.Submissions may be hand delivered Mon-day through Friday, between the hoursof 8 a.m. and 4 p.m. to CC:PA:LPD:PR(REG–157714–06), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC.

Alternately, taxpayers may sub-mit comments relating to the sec-tion 414(d) draft general regulationselectronically via the Federal eRule-making Portal at www.regulations.gov(IRS-REG–157714–06).

FOR FURTHER INFORMATIONCONTACT: Concerning the AN-PRM, Pamela R. Kinard, at (202)622–6060; concerning submissionof comments, Richard A. Hurst, [email protected] orat (202) 622–7180 (not toll-free numbers).


Background

This document describes rules that theTreasury Department and IRS are consid-ering proposing and contains a draft noticeof proposed rulemaking (in the Appendixto this ANPRM) under section 414(d) ofthe Internal Revenue Code (Code). Underthe draft notice of proposed rulemaking (inthe Appendix to this ANPRM), the ruleswould provide general guidance relating tothe determination of whether a retirementplan is a governmental plan within themeaning of section 414(d) (section 414(d)

December 19, 2011 874 2011–51 I.R.B.

draft general regulations). The principlesdescribed in this ANPRM could also ap-ply for purposes of certain parallel termsin sections 403(b) and 457 of the Code.

Section 414(d) of the Code providesthat the term “governmental plan” gener-ally means a plan established and main-tained for its employees by the Govern-ment of the United States, by the gov-ernment of any State or political subdivi-sion thereof, or by any agency or instru-mentality of any of the foregoing. Seesections 3(32) and 4021(b)(2) of the Em-ployee Retirement Income Security Actof 1974 (ERISA) for definitions of theterm “governmental plan,” which governrespectively for purposes of title I and titleIV of ERISA1.

The term “governmental plan” also in-cludes any plan to which the Railroad Re-tirement Act of 1935 or 1937 (49 Stat.967, as amended by 50 Stat. 307) ap-plies and which is financed by contribu-tions required under that Act and any planof an international organization which isexempt from taxation by reason of the In-ternational Organizations Immunities Act(59 Stat. 669). See section 414(d)(2) ofthe Code.

Section 414(d) was amended by thePension Protection Act of 2006, PublicLaw 109–280 (120 Stat. 780) (PPA ’06)to include certain plans of Indian tribalgovernments and related entities.2 Section906(a)(1) of PPA ’06 provides that theterm “governmental plan” includes a planwhich is established and maintained byan Indian tribal government (as defined insection 7701(a)(40)), a subdivision of anIndian tribal government (determined inaccordance with section 7871(d)), or anagency or instrumentality of either (ITG),and all the participants of which are em-ployees of such entity substantially all ofwhose services as such an employee are inthe performance of essential governmentalfunctions but not in the performance of

commercial activities (whether or not anessential governmental function).

Neither section 414(d) of the Code,section 3(32) of ERISA, nor section4021(b)(2) of ERISA define key termsrelating to governmental plans, includingthe terms “established and maintained,”“political subdivision,” “agency,” and“instrumentality.” Currently, there are noregulations interpreting section 414(d).Revenue Ruling 89–49, 1989–1 C.B. 117,see §601.601(d)(2), sets forth a facts andcircumstances analysis for determiningwhether a retirement plan is a govern-mental plan within the meaning of section414(d).3 This analysis is used by the IRSin issuing letter rulings.

Governmental plans are subject to dif-ferent rules than retirement plans of non-governmental employers. Governmentalplans are excluded from the provisions oftitles I and IV of ERISA. In addition, gov-ernmental plans receive special treatmentunder the Code. These plans are exemptfrom certain qualification requirementsand they are deemed to satisfy certain otherqualification requirements under certainconditions. As a result, the principal qual-ification requirements for a tax-qualifiedgovernmental plan4 are that the plan—

• Be established and maintained by theemployer for the exclusive benefit ofthe employer’s employees or their ben-eficiaries;

• Provide definitely determinable bene-fits;

• Be operated pursuant to its terms;• Satisfy the direct rollover rules of sec-

tion 401(a)(31);• Satisfy the section 401(a)(17) limita-

tion on compensation;• Comply with the statutory minimum

required distribution rules under sec-tion 401(a)(9);

• Satisfy the pre-ERISA vesting require-ments under section 411(e)(2);5

• Satisfy the section 415 limitations onbenefits, as applicable to governmentalplans; and

• Satisfy the prohibited transaction rulesin section 503.

State and local governments, politicalsubdivisions thereof, and agencies or in-strumentalities thereof are generally notpermitted to offer cash or deferred arrange-ments under section 401(k). However, anITG is permitted to offer a cash or deferredarrangement under section 401(k).

For further background, see the “Back-ground” section of the preamble in the sec-tion 414(d) draft general regulations in theAppendix to this ANPRM under the head-ings, “Exclusion of Governmental Plansfrom ERISA,” “Exemption of Govern-mental Plans from Certain Qualified PlanRules,” and “Exemption of GovernmentalPlans from Other Employee Benefit RulesRelating to Retirement Plans.”

Over the past several years, the IRS hasbeen coordinating with the Department ofLabor (DOL) and Pension Benefit Guar-anty Corporation (PBGC) (the “Agen-cies”) on governmental plan determina-tions. Although the anticipated proposedregulations would only be applicable forpurposes of section 414(d), the DOL andPBGC were consulted when drafting thisproposal. DOL and PBGC agreed that itwould be advantageous for the Agenciesand the regulated community for there tobe coordinated criteria for determiningwhether a plan is a governmental planwithin the meaning of section 414(d) ofthe Code, section 3(32) of ERISA, andsection 4021(b)(2) of ERISA. See the“Background” section of the preamble inthe section 414(d) draft general regulationsin the Appendix to this ANPRM under theheading, “Interagency Coordination onGovernmental Plan Determinations.”

The Treasury Department and the IRShave determined to seek public commenton the draft proposed regulations in the

1 The three definitions of the term “governmental plan” are essentially the same. The only difference is that, in defining the term “governmental plan,” section 3(32) of ERISA uses the phrase“established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use the term “established and maintained.”

2 Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b)(2) of ERISA.

3 See also Rev. Rul. 57–128, 1957–1 C.B. 311, see § 601.601(d)(2), which provides guidance on determining when an entity is a governmental instrumentality for purposes of the exemptionfrom employment taxes under section 3121(b)(7) and 3306(c)(7).

4 A special rule applies to contributory plans of certain governmental entities. Section 414(h)(2) provides that, for a qualified plan established by a State government or political subdivisionthereof, or by any agency or instrumentality of the foregoing, where the contributions of the governmental employer are designated as employee contributions under section 414(h)(1) but thegovernmental employer picks up the contributions, the contributions picked up will be treated as employer contributions.

5 Section 411(e)(2) states that a plan described in section 411(e)(1) is treated as meeting the requirements of section 411 if the plan meets the vesting requirements resulting from the applicationof section 401(a)(4) and (a)(7) as in effect on September 1, 1974.

2011–51 I.R.B. 875 December 19, 2011

Appendix to this ANPRM in advance of is-suing a notice of proposed rulemaking. Inlight of the interaction of the governmentalplan definitions in the Code and ERISA, acopy of the comments will be forwarded toDOL and PBGC.


Attached to the Appendix to thisANPRM is a draft notice of proposedrulemaking. The draft regulations includeproposed rules, a preamble, and a requestfor comments. The Treasury Departmentand IRS invite the public to comment onthe rules that the Treasury Departmentand IRS are considering proposing,which would generally define the term“governmental plan” within the meaningof section 414(d), as well as other keyrelated terms, including “State,” “politicalsubdivision of a State,” and “agency orinstrumentality of a State or politicalsubdivision of a State.”

In determining whether an entity is anagency or instrumentality of the UnitedStates or an agency or instrumentality of aState or political subdivision of a State, theanticipated guidance would provide a factsand circumstances analysis. The factorsused in these analyses are drawn from thefactors historically used in governmentalplan determinations, including Rev. Ruls.57–128 and 89–49. The anticipated guid-ance would provide several examples il-lustrating the application of the facts andcircumstances tests. See the “Explanationof Provisions” section in the section 414(d)draft general regulations in the Appendixto this ANPRM under the headings, “Def-initions of the United States and agency orinstrumentality of the United States” and“Definition of agency or instrumentalityof a State or a political subdivision of aState.” See §601.601(d)(2).

The anticipated proposed regulationswould include numerous factors for de-termining whether an entity is an agencyor instrumentality of a State or a politicalsubdivision of a State. The section 414(d)draft proposed regulations in the Appendixto this ANPRM would categorize thesefactors into major factors and other factors.The section 414(d) draft general regula-tions would also request comments fromthe public on whether the final regulationsshould eliminate the distinction betweenmain and other factors. In addition, the

section 414(d) draft general regulationswould request comments on the orderingand application of main and other factors;for example, whether, as an alternativeto the ranking of major factors and otherfactors, the regulations could provide asafe harbor standard focusing on controland fiscal responsibility under which theentity would be treated as an agency orinstrumentality of a State or a politicalsubdivision of a State. For further expla-nation of the safe harbor standard, see the“Comments and Public Hearing” sectionin the preamble of the section 414(d) draftgeneral regulations, which is located inthe Appendix to this ANPRM.

The anticipated proposed regulationsdo not address the special rules that applyin determining whether a plan of an In-dian tribal government is a governmentalplan within the meaning of section 414(d).That topic would be reserved in the pro-posed regulations and is addressed in anANPRM (REG–133223–08) that is beingpublished elsewhere in this issue of theBulletin.

The anticipated proposed regulationswould provide rules for determiningwhether a governmental entity has estab-lished and maintained a plan for purposesof section 414(d). The anticipated pro-posed regulations might provide that aplan is established and maintained forthe employees of a governmental entityif: (1) the plan is established and main-tained by an employer within the meaningof §1.401–1(a)(2), (2) the employer isa governmental entity, and (3) the onlyparticipants covered by the plan are em-ployees of that governmental entity. Theanticipated proposed regulations mightalso provide rules covering circumstancesinvolving a change in status of an entity(that is, when a private entity becomes agovernmental entity or when a govern-mental entity becomes a private entity) dueto an acquisition or asset transfer. See the“Explanation of Provisions” section in thesection 414(d) draft general regulations inthe Appendix to this ANPRM under theheading, “Requirements for establishingand maintaining a section 414(d) govern-mental plan.”

Recognizing that the guidance might af-fect numerous governmental plan partic-ipants and their beneficiaries, the antici-pated proposed regulations request com-ments on transition rules, including tran-

sitional relief for governmental plans thatpermitted participation of a small numberof former employees in their plans. Seethe “Comments and Public Hearing” sec-tion in the preamble of the section 414(d)draft general regulations that is located inthe Appendix to this ANPRM.

Request for Comments

Before the notice of proposed rulemak-ing is issued, consideration will be givento any written comments that are submit-ted timely (preferably a signed original andeight (8) copies) to the IRS. All commentswill be available for public inspection andcopying. Copies of the comments will beprovided to the DOL and PBGC.

The IRS and Department of Treasuryplan to schedule a public hearing on theANPRM. That hearing will be scheduledand announced at a later date. In ad-dition to a public hearing, the TreasuryDepartment and IRS anticipate sched-uling “Town Hall” meetings in order toobtain comments from the public on thesection 414(d) draft general regulations.It is expected that these “Town Hall”meetings will take place in different lo-cations across the country. Participantswill be encouraged to pre-register forthe meetings. Information relating tothese “Town Hall” meetings, includingdates, times, locations, registration, andthe procedures for submitting written andoral comments, will be available on theIRS website relating to governmentalplans at http://www.irs.gov/retirement/ar-ticle/0,,id=181779,00.html.


The principal author of this advance no-tice of proposed rulemaking is Pamela R.Kinard, Office of the Chief Counsel (Tax-exempt and Government Entities), how-ever, other personnel from the IRS andTreasury Department participated in its de-velopment.


APPENDIX

The following is draft language for anotice of proposed rulemaking that wouldset forth rules relating to the determination

December 19, 2011 876 2011–51 I.R.B.

of whether a plan is a governmental planwithin the meaning of section 414(d). TheIRS and Treasury release this draft lan-guage in order to solicit comments fromthe governmental plans community:

Background

This document contains proposed regu-lations under section 414(d) of the InternalRevenue Code (Code). These regulations,when finalized, would provide guidancerelating to the determination of whethera retirement plan is a governmental planwithin the meaning of section 414(d). Thedefinition of a governmental plan undersection 414(d) applies for purposes of PartI of Subchapter D of Chapter 1 of SubtitleA (Income Taxes) of the Code (sections401 through 420) and certain other Codeprovisions that refer to section 414(d)(such as sections 72(t)(10), 501(c)(25)(C),4975(g)(2), 4980B(d)(2), 9831(a)(1), and9832(d)(1)). It is expected that the prin-ciples set forth in these regulations wouldgenerally also apply for purposes of sec-tions 403(b) and 457.

Statutory Definition of GovernmentalPlan

Both the Code and the Employee Re-tirement Income Security Act of 1974(ERISA) define the term “governmen-tal plan.” Section 414(d) of the Codeprovides that the term “governmentalplan” generally means a plan establishedand maintained for its employees by theGovernment of the United States, by thegovernment of any State or political sub-division thereof, or by any agency or in-strumentality of any of the foregoing. Seesections 3(32) and 4021(b)(2) of ERISAfor parallel definitions of the term govern-mental plan, discussed under the heading,“Exclusion of Governmental Plans fromERISA.”

The term “governmental plan” also in-cludes any plan to which the Railroad Re-tirement Act of 1935 or 1937 (49 Stat.967, as amended by 50 Stat. 307) ap-plies and which is financed by contribu-

tions required under that Act and any planof an international organization which isexempt from taxation by reason of the In-ternational Organizations Immunities Act,Public Law 79–291 (59 Stat. 669). Section414(d) was amended by the Pension Pro-tection Act of 2006, Public Law 109–280(120 Stat. 780) (PPA ’06) to include cer-tain plans of Indian tribal governments.6

See Notice 2006–89, 2006–2 C.B. 772,see §601.601(d)(2), for guidance relatingto plans established and maintained by In-dian tribal governments.7 These proposedregulations do not provide any guidanceconcerning the special provisions in sec-tion 414(d) relating to the Railroad Retire-ment Act of 1935 or 1937, the InternationalOrganizations Immunities Act, or Indiantribal governments.

Application of Section 414(d)

These proposed regulations are only ap-plicable for purposes of section 414(d),and not for any other purpose under theCode.8 However, the section 414(d) defi-nition of “governmental plan” applies forother sections of the Code, including:

• Section 72(t)(10)(A) (exception to theearly withdrawal tax for certain distri-butions from a defined benefit govern-mental plan);

• Section 457(e)(17) (special rules for:(1) direct trustee-to-trustee transfersfrom a section 457 deferred compen-sation plan to a section 414(d) gov-ernmental plan in order to purchasepermissive service credit under section414(n)(3)(A) or (2) the repayments ofcashouts under governmental plans);

• Section 501(c)(25)(C)(ii) (exemptingsection 414(d) governmental plansfrom taxation);

• Section 503(a)(1) (applying the pro-hibited transaction rules in section 503to governmental plans as defined insection 4975(g)(2));

• Section 818(a)(6)(A) (defining theterm “pension plan contract”);

• Section 1400Q(d)(2)(A)(ii) (specialtiming rule for section 414(d) govern-

mental plans to make certain conform-ing amendments);

• Section 4972(d)(1)(B) (exempting sec-tion 414(d) governmental plans fromthe excise tax on nondeductible contri-butions to a qualified employer plan);

• Section 4975(g)(2) (exempting section414(d) governmental plans from theprohibited transaction rules of section4975);

• Section 4980(c)(1)(B) (exempting sec-tion 414(d) governmental plans fromthe tax on the reversion of qualifiedplan assets to an employer under sec-tion 4980);

• Section 4980B(d)(2) (exempting sec-tion 414(d) governmental plans fromthe COBRA requirements under sec-tion 4980B);

• Section 4980F(f)(2) (exempting sec-tion 414(d) governmental plans fromthe requirement to provide a no-tice required under section 204(h) ofERISA);

• Section 6057(c)(2) (providing rules re-lating to the voluntary submission ofannual registration statements by sec-tion 414(d) governmental plans); and,

• Sections 9831(a)(1) and 9832(d)(2)(exempting section 414(d) govern-mental plans from the group healthplan requirements).

The definitions and rules also apply forpurposes of section 101(h)(1)(A) (specialrule exempting governmental plan sur-vivor benefits attributable to service of apublic safety officer killed in the line ofduty).

Currently, there are no regulations in-terpreting section 414(d). Neither section414(d) of the Code nor ERISA defines keyterms relating to governmental plans, in-cluding the terms “established and main-tained,” “political subdivision,” “agency,”and “instrumentality.”

Executive Order 13132

Executive Order 13132 requires thatFederal departments and agencies engagein consultation procedures in certain cir-

6 Section 906(a)(1) of PPA ’06 provides that the term “governmental plan” includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)),a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all the participants of which are employees of suchentity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or notan essential government function). Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b) of ERISA.

7 See also Notice 2007–67, 2007–2 C.B. 467), see §601.601(d)(2) (extending transitional relief for plans of Indian tribal governments to comply with the requirements of section 906 of PPA’06).

8 However, as indicated earlier, it is expected that the principles set forth in these regulations would also be taken into account for purposes of sections 403(b) and 457.

2011–51 I.R.B. 877 December 19, 2011

cumstances where regulations are issuedwhich have a substantial direct effect onStates. While these regulations when is-sued as final regulations would not havesuch a substantial direct effect, the IRSand Treasury Department have followedsimilar procedures, including issuance notonly of these proposed regulations, butalso an advance notice of these regulationswhich was published (date to be provided)in the Federal Register.

Judicial Determinations of GovernmentalEntity Status

Historically, courts have used the testin NLRB v. Natural Gas Utility Districtof Hawkins County, Tennessee, 402 U.S.600 (1971), in determining whether anentity is an agency or instrumentality of aState or a political subdivision of a State.In Hawkins County, the Supreme Courtinterpreted the term “political subdivi-sion” for purposes of 29 U.S.C. 152(2)(section 2(2) of the National Labor Re-lations Act (NLRA), as amended by theLabor-Management Relations Act).9 Al-though the Supreme Court in HawkinsCounty analyzed whether the employer atissue was a political subdivision for pur-poses of the NLRA, courts use the sameanalysis for determining whether an entityis an agency or instrumentality of a Stateor a political subdivision of a State forpurposes of ERISA.10 The two-prong testin Hawkins County analyzes whether theentity has been “(1) created directly bythe state, so as to constitute departmentsor administrative arms of the government,or (2) administered by individuals whoare responsible to public officials or tothe general electorate.” Hawkins County,402 U.S. at 604–05. In addition to thistwo-prong test, the Supreme Court alsoanalyzed other factors, including: whetherthe utility had broad powers to accomplishits public purpose; whether the utility’s

property and revenue were exempt fromstate and local taxes (as well as whetherits bonds were tax-exempt); whether theutility had the power of eminent domain;whether the utility was required to main-tain public records; whether the utility’scommissioners were appointed by anelected county judge; and whether thecommissioners could be removed by theState of Tennessee pursuant to State pro-cedures for removal of public officials.Many of these factors are similar to thefactors used in determining whether anentity is an agency or instrumentality of aState or a political subdivision of a Stateunder these proposed regulations.

In determining whether an entity is anagency or instrumentality of the UnitedStates, courts either apply a facts and cir-cumstances analysis or look to the rela-tionship between the entity and its employ-ees. In Alley v. Resolution Trust Corpo-ration, 984 F.2d 1201 (D.C.Cir. 1993),in analyzing whether the Federal AssetDisposition Association (FADA), a sav-ings and loan association established bythe Federal Home Loan Bank Board, wasa Federal instrumentality for governmen-tal plan purposes, the court focused onthe employment relationship between theentity and its employees.11 In looking atthe employer-employee relationship, theAlley court concluded that FADA func-tioned more like a private enterprise thana governmental agency in the area of itsemployment relations. “Measured by theterms and conditions of their employment,FADA personnel far more closely resem-bled private sector employees than theydid government workers. Like employeesof ’ordinary’ Federally chartered S&Ls,FADA’s employees were outside the civilservice system, and were not subject to thepersonnel rules or restrictions on salariesand benefits imposed generally on Federalemployees.”12

However, in Berini v. Federal ReserveBank of St. Louis, Eighth District, 420F.Supp.2d 1021 (E.D. Mo. 2005), thecourt reviewed administrative and judi-cial authority in determining whether anentity is a Federal agency or instrumen-tality and applied a multi-factor test indetermining whether the employee benefitplans maintained by the Federal ReserveSystem are governmental plans within themeaning of section 3(32) of ERISA. TheBerini test was based on the six factorsin Rev. Rul. 57–128, 1957–1 C.B. 311,see §601.601(d)(2), which was also thetest applied by the court in Rose v. LongIsland Railroad Pension Plan, 828 F.2d910, 918 (2nd Cir. 1987), cert. denied,485 U.S. 936 (1988). Factors weighed bythe Berini court included that the Federalreserve banks were established directlyby Congressional legislation to performan important governmental function (toincrease control of the nation’s currencyand banking system), the banks exist onlyby an enabling statute, they possess onlythe powers granted by the legislation, theprivate interests involved do not have thetypical interests of an owner, and the banksare controlled by the Federal ReserveBoard of Governors, which is a govern-mental agency.13

Agency Guidance RegardingGovernmental Entity Status

Revenue Ruling 57–128 provides guid-ance on when an entity is a governmentalinstrumentality for purposes of the ex-emption from employment taxes undersections 3121(b)(7) and 3306(c)(7). Therevenue ruling lists the following factorsto be considered in determining whetheran organization is an instrumentality ofone or more States or political subdivi-sions thereof: (1) whether the organizationis used for a governmental purpose andperforms a governmental function; (2)

9 29 U.S.C. 152(2) provides that the term “employer” includes any person acting as an agent of an employer, directly or indirectly, but shall not include the United States or any wholly ownedGovernment corporation, or any Federal Reserve Bank, or any State or political subdivision thereof, or any person subject to the Railway Labor Act, as amended from time to time, or anylabor organization (other than when acting as an employer), or anyone acting in the capacity of officer or agent of such labor organization.

10 “The NLRB guidelines are a useful aid in interpreting ERISA’s governmental exemption, because ERISA, like the National Labor Relations Act, ‘represent[s] an effort to strike an ap-propriate balance between the interests of employers and labor organizations.’” Rose v. Long Island Railroad Pension Plan, 828 F.2d 910, 916 (2nd Cir. 1987), cert. denied, 485 U.S. 936(1988) (quoting H.R. Rep. No. 533, reprinted in 1974 USCCAN at 4647). See also, Shannon v. Shannon, 965 F.2d 542, 547 (7th Cir. 1992), cert. denied, 506 U.S. 1028 (1992) (stating thatthe proper test for determining whether an entity is an agency or instrumentality of a State or political subdivision for purposes of ERISA is the Hawkins test), Koval v. Washington CountyRedevelopment Authority, 574 F.3d 238, 242 (3rd Cir. 2009) (stating that the Hawkins test is the most fitting analysis for determining whether an entity is a political subdivision), and Brooksv. Chicago Housing Authority, No. 89–C–9304, 1990 WL 103572 at 1, 1990 U.S. Dist. LEXIS 8233 at 3 (N.D. Ill. July 5, 1990) (applying the Hawkins test).

11 “We focus our attention . . . on what should be the core concern for ERISA purposes—the nature of an entity’s relationship to and governance of its employees.” Alley v. Resolution TrustCorporation, 984 F.2d at 1206, n. 11.

12 Alley v. Resolution Trust Corporation, 984 F.2d at 1206.

13 Berini v. Federal Reserve Bank of St. Louis, 420 F.Supp.2d at 1026–29.

December 19, 2011 878 2011–51 I.R.B.

whether performance of its function is onbehalf of one or more States or politicalsubdivisions; (3) whether there are anyprivate interests involved, or whether theStates or political subdivisions involvedhave the powers and interests of an owner;(4) whether control and supervision of theorganization is vested in public authorityor authorities; (5) whether express or im-plied statutory authority or other authorityis necessary for the creation and/or use ofsuch an instrumentality, and whether suchauthority exists; and (6) the degree of theorganization’s financial autonomy and thesource of its operating expenses.

Revenue Ruling 89–49, 1989–1 C.B.117, see §601.601(d)(2), provides guid-ance for determining whether a retirementplan maintained by an organization is agovernmental plan within the meaning ofsection 414(d). The revenue ruling listsseveral factors for determining whethera sponsoring organization is an agencyor instrumentality of the United States orany State or political subdivision thereof.While the factors in Rev. Rul. 89–49 aresimilar to the factors listed in Rev. Rul.57–128, Rev. Rul. 89–49 focuses more onthe degree of control that the Federal orState government has over the organiza-tion’s everyday operations. Other factorsconsidered include: whether there is spe-cific legislation creating the organization;the source of funds for the organization;the manner in which the organization’strustees or operating board are selected;and whether the applicable governmentunit considers the employees of the organ-ization to be employees of the applicablegovernment unit. Rev. Rul. 89–49 pro-vides that satisfaction of one or all of thefactors is not necessarily determinative ofwhether an organization is a governmentalentity. See §601.601(d)(2)(ii)(b).

In Rev. Rul. 89–49, citizens of a mu-nicipality organized a volunteer fire com-pany. The company was incorporated un-der its State laws as a nonprofit corpora-tion, and the company was managed underthe exclusive control of a board of trusteeselected by the volunteer firefighters. Areamunicipalities, including the municipality

that created the company, entered into con-tracts with the company to receive fire pro-tection services. Under the contracts, itwas agreed that the operations of the vol-unteer fire company would be under theexclusive control of the board of trustees.While the municipalities made paymentsfor fire protection services to the volun-teer fire company pursuant to these con-tracts, the municipalities did not contributeto the company’s retirement plan, and theemployees of the company were not con-sidered employees of the State or any ofthe participating municipalities. The rul-ing concludes that the retirement plan es-tablished and maintained by the volunteerfire company is not a governmental planwithin the meaning of section 414(d) be-cause the degree of control that the partici-pating municipalities exert over the volun-teer fire company is minimal.

Exclusion of Governmental Plans fromERISA

Section 4(b)(1) of ERISA provides thattitle I of ERISA does not apply to an em-ployee benefit plan that is a governmentalplan as defined in section 3(32) of ERISA.Section 3(32) of ERISA generally pro-vides that the term “governmental plan”means a plan established or maintained forits employees by the Government of theUnited States, by the government of anyState or political subdivision thereof, orby any agency or instrumentality of any ofthe foregoing.14 The ERISA section 3(32)definition of a governmental plan alsoincludes any plan to which the RailroadRetirement Act of 1935 or 1937 applies,and which is financed by contributionsrequired under that Act and any plan of aninternational organization which is exemptfrom taxation under the provisions of theInternational Organizations ImmunitiesAct. Section 906 of PPA ’06 amendedsection 3(32) of ERISA to include in thedefinition of governmental plan a planwhich is established and maintained byan Indian tribal government (as defined insection 7701(a)(40)), a subdivision of anIndian tribal government (determined inaccordance with section 7871(d)), or an

agency or instrumentality of either. Underthis definition, all of the participants ofwhich are employees of such entity sub-stantially all of whose services as such anemployee are in the performance of es-sential governmental functions but not inthe performance of commercial activities(whether or not an essential governmentfunction).

Section 4021(b)(2) of ERISA providesthat title IV of ERISA does not apply toany plan established and maintained forits employees by the Government of theUnited States, by the government of anyState or political subdivision thereof, orby any agency or instrumentality of anyof the foregoing, or to which the RailroadRetirement Act of 1935 or 1937 appliesand which is financed by contributions re-quired under that Act. Similar to section3(32) of ERISA, section 4021(b) of ERISAwas amended by section 906 of PPA ’06 toinclude certain plans of Indian tribal gov-ernments in the definition of governmen-tal plan for purposes of section 4021(b) ofERISA.

Neither the DOL nor the PBGC hasissued regulations interpreting the termsof sections 3(32) and 4021(b) of ERISA.Both agencies have, however, providedguidance for specific entities in the form ofadministrative determinations, and advi-sory opinions or other opinion letters. TheIRS, the Department of Labor (DOL), andthe Pension Benefit Guaranty Corporation(PBGC) have generally applied a facts andcircumstances approach in providing gov-ernmental plan determinations.15 For ex-ample, the IRS issues private letter rulingsrelating to governmental plan status usinga facts and circumstances analysis.

Exemption of Governmental Plans fromCertain Qualified Plan Rules

Governmental plans under Code sec-tion 414(d) are exempt from certain qual-ification requirements and are deemedto satisfy certain other qualification re-quirements under certain conditions. Forexample, the nondiscrimination and min-imum participation rules do not apply togovernmental plans. Section 1505 of the

14 In defining the term “governmental plan,” section 3(32) of ERISA uses the phrase “established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use theterm “established and maintained.” For further discussion, see the Explanation of Provisions section of the preamble under the heading, “Requirements for establishing and maintaining asection 414(d) governmental plan.”

15 The DOL issues advisory opinions. The PBGC issues administrative determinations and opinion letters. The IRS issues letter rulings relating to section 414(d) governmental plans. Forthis purpose, a letter ruling is a written statement issued to a taxpayer by the IRS that interprets and applies tax laws or any nontax laws applicable to employee benefit plans to the taxpayer’sspecific set of facts. See section 3.02 of Rev. Proc. 2011–4, 2011–1 I.R.B. 123, 127), see §601.601(d)(2).

2011–51 I.R.B. 879 December 19, 2011

Taxpayer Relief Act of 1997, Public Law105–34 (111 Stat. 788, 1063) (TRA ’97),amended sections 401(a)(5)(G) and401(a)(26)(G) of the Code to provide thatthe minimum participation standards andnondiscrimination requirements of section410 and the additional participationrequirements under section 401(a)(26)(G)do not apply to State or local governmentalplans.16 Section 1505 of TRA ’97 alsoamended section 401(k)(3)(G) of the Codeto provide that certain State and localgovernmental plans are treated as meetingthe requirements of the average deferralpercentage test of section 401(k)(3) andthe average contribution percentage test ofsection 401(m)(2).17

Section 861 of PPA ’06 exempts allgovernmental plans (as defined in section414(d)) from the nondiscrimination andminimum participation requirements ofsections 401(a)(5)(G) and 401(a)(26)(G)of the Code, as well as the nondiscrim-ination and participation requirementsapplicable to qualified cash or deferredarrangements under section 401(k)(3)(G)of the Code.

In addition to the nondiscrimination re-quirements, the Code provides other ex-emptions for governmental plans:

• Section 401(a)(10)(B)(iii), which pro-vides that the top heavy requirementsof section 416 do not apply to a gov-ernmental plan.

• Section 410(c)(1)(A), which providesthat the minimum participation provi-sions of section 410 do not apply to agovernmental plan.

• Section 411(e), which provides that agovernmental plan is treated as satis-fying the requirements of section 411if the plan meets the pre-ERISA vest-ing requirements.

• Section 412(e)(2)(C), which providesthat the minimum funding standards ofsection 412 do not apply to a govern-mental plan.

• Section 417, which provides rules re-lating to qualified joint and survivorannuities and qualified preretirementsurvivor annuities.

Section 415 also provides a number ofspecial rules for governmental plans. Thespecial rules include section 415(b)(11)(the 100 percent of a participant’s averagehigh 3 compensation limitation does notapply), section 415(b)(2)(C) (the reducedlimitation to the annual benefit payablebeginning before age 62 and the reductionin the dollar limitation to the annual bene-fit payable for participation or services ofless than 10 years do not apply to disabilityor survivor benefits received from a gov-ernmental plan), section 415(m) (benefitsprovided under a qualified governmentalexcess benefit arrangement are not takeninto account in determining the section415 benefit limitations under a section414(d) governmental plan), and section415(n) (permissive service credit).18

As a result, the principal qualificationrequirements for a tax-qualified govern-mental plan19 are the requirements that theplan —

• Be established and maintained by theemployer for the exclusive benefit ofthe employer’s employees or their ben-eficiaries,

• Provide definitely determinable bene-fits,

• Satisfy the direct rollover rules of sec-tions 401(a)(31) and 402(f),

• Be operated pursuant to its terms,• Satisfy the section 401(a)(17) limita-

tion on compensation,• Comply with the statutory minimum

required distribution rules under sec-tion 401(a)(9),

• Satisfy the pre-ERISA vesting require-ments under section 411(e)(2),

• Satisfy the section 415 limitations onbenefits, as applicable to governmentalplans, and


State and local governments, politicalsubdivisions thereof, and agencies or in-strumentalities thereof are generally notpermitted to offer cash or deferred arrange-ments under section 401(k). Instead, theycan offer a somewhat similar elective con-tribution program through an eligible gov-ernmental section 457(b) plan to whichsection 457(g) applies. In addition, sec-tion 403(b) includes special rules for planscovering public school teachers, includingrules under which, in conjunction with aneligible governmental section 457(b) plan,the maximum dollar amount of the electivecontribution for a public school teacher isin effect double the maximum for otherpublic or private employees.

Exemption of Governmental Plans fromOther Employee Benefit Rules Relating toRetirement Plans

The Code and regulations also providethat plans of governmental entities aretreated differently than plans of non-gov-ernmental entities with respect to certainrequirements for section 403(b) plans andeligible section 457(b) plans, including:

• Section 403(b)(1)(A)(ii), which pro-vides that the exclusion allowance un-der section 403(b)(1) applies to em-ployees who perform services for apublic school of a State, a political sub-division of a State, or an agency or in-strumentality of any one or more of theforegoing.

• Section 403(b)(12)(C), which providesthat the nondiscrimination require-ments of section 403(b)(12) (otherthan the compensation limitations ofsection 401(a)(17)) do not apply toa State or local governmental planwithin the meaning of section 414(d).

• Section 457(f)(2)(E), under whichsection 457(f) (relating to nonquali-fied deferred compensation) does not

16 In addition, section 1505(a)(3) of TRA ’97 amended section 410(c)(2) to provide that all governmental plans within the meaning of section 414(d) are treated as satisfying the nondiscrim-ination requirements of section 410.

17 A State or local government, political subdivision, or agency or instrumentality thereof, is not permitted to establish and maintain a section 401(k) plan. See section 401(k)(4)(B)(ii). Thereis an exception for a grandfathered section 401(k) plan, which is generally a plan established by a governmental unit (a State or local government or political subdivision thereof) beforeMay 7, 1986. See §1.401(k)–1(e)(4).

18 See also Notice 89–23, 1989–1 C.B. 654, and Notice 96–64, 1996–2 C.B. 229, see § 601.601(d)(2), for guidance relating to the nondiscrimination rules that apply to qualified plansmaintained by governments.


December 19, 2011 880 2011–51 I.R.B.

apply to a qualified governmental ex-cess benefit arrangement under section415(m).

• Section 457(e)(1)(B), which includesas an eligible employer a State, polit-ical subdivision, or agency or instru-mentality thereof and any tax-exemptorganization other than a governmen-tal unit.

• Section 457(g), which provides thata deferred compensation plan main-tained by a State, political subdivisionof a State, or any agency or instrumen-tality thereof is not treated as an eligi-ble section 457(b) plan unless the as-sets and income of the plan are held intrust for the exclusive benefit of planparticipants and beneficiaries.

• Section 402(c)(8)(B)(v), which pro-vides that an eligible section 457(b)governmental plan is an eligible retire-ment plan for purposes of the rolloverrules under section 402(c), so that pay-ments from an eligible section 457(b)governmental plan can be rolled overto another eligible retirement plan,such as a qualified plan or an IRA, andpayments from an eligible retirementplan can be rolled over into an eligiblesection 457(b) governmental plan.20

An eligible section 457(b) plan of anongovernmental tax-exempt entity isnot eligible for this rollover treatment.

Legislative History of ERISA

The legislative history of ERISA andits predecessor bills indicate that therewere two reasons for the governmentalplan exemption: (1) federalism concerns;and (2) the taxing power of State andlocal governments was thought to offersufficient protection for participants inpublic plans.21 In a summary of ERISA’spredecessor bill, Senator Lloyd Bentsencommented that “State and local govern-ments must be allowed to make their owndetermination of the best method to pro-tect the pension rights of municipal andstate employees. These are questions of

state and local sovereignty and the FederalGovernment should not interfere.”22

While Congress was concerned aboutpension protection for public as well as pri-vate employees, governmental plans havebeen excluded from many of the qualifi-cation requirements because, in additionto federalism concerns, Congress believedthat “the ability of governmental bodiesto fulfill their obligations to employeesthrough their taxing powers is an adequatesubstitute for termination insurance.”23 Asa result, ERISA includes exclusions forgovernmental plans under titles I and IVof ERISA and an exemption for govern-mental plans from most of the qualifica-tion requirements under the Code that wereadded under title II of ERISA (as describedin this preamble under the heading, “Ex-emption of Governmental Plans from Cer-tain Qualified Plan Rules”).

Interagency Coordination onGovernmental Plan Determinations

Historically, the IRS, DOL, and PBGC(the Agencies) have informally conferredprior to making determinations on gov-ernmental plan status in individual cases.In Notice 2005–58, 2005–2 C.B. 295, see§601.601(d)(2), the Treasury Departmentand the IRS stated their intention of pub-lishing guidance regarding governmentalplans under section 414(d). The Agencieshave become increasingly concerned withthe growing number of requests for gov-ernmental plan determinations from plansponsors whose relationships to States orpolitical subdivisions thereof are increas-ingly remote and whose arguments forconcluding that their plans are govern-mental plans raise novel issues. The useof differing approaches by the courts andthe Agencies has resulted in uncertaintyas entities with organizational, regulatory,and contractual connections with States orpolitical subdivisions of States try to as-certain which statutory and regulatory re-quirements apply to their retirement plans.These proposed regulations are intendedto address this issue by establishing coor-

dinated criteria for determining whethera plan is a governmental plan within themeaning of section 414(d) of the Code.Although these proposed regulations areonly applicable for purposes of section414(d), the DOL and the PBGC were con-sulted in developing this proposal. TheDOL and the PBGC agreed that it wouldbe advantageous for the Agencies andother affected parties to have coordinatedcriteria for determining whether a plan is agovernmental plan within the meaning ofsection 414(d) of the Code, section 3(32)of title I of ERISA, and section 4021(b)of title IV of ERISA. In that regard, com-ments are requested on any issues arisingfrom these proposed regulations in light ofthe interaction of the governmental plandefinition in the Code with the govern-mental plan definitions in section 3(32) oftitle I of ERISA and section 4021(b) of ti-tle IV of ERISA. Copies of the commentson these regulations will be forwarded tothe DOL and the PBGC.


I. Overview

A. In general.

These proposed regulations would gen-erally define the term “governmental plan”within the meaning of section 414(d) of theCode. These proposed regulations wouldalso define other key terms relating to thegeneral definition of “governmental plan,”including the definitions of “State,” “polit-ical subdivision of a State,” and “agency orinstrumentality of a State or political sub-division of a State.” While these terms arecommonly used in other Code sections, thedefinitions in these proposed regulationsare only applicable for purposes of section414(d), and not for any other purpose un-der the Code. For example, the definitionof the term “instrumentality” under theseproposed regulations may be different forother purposes under the Code.

As stated, the regulations under section414(d) would only define the term “agency

20 Section 402(c)(8)(B) defines an eligible retirement plan as an individual retirement account under section 408(a), an individual retirement annuity under section 408(b), a qualified plan, asection 403(a) annuity, a section 403(b) plan, and an eligible section 457(b) governmental plan.

21 ERISA included a directive for the Committee on Education and Labor and the Committee on Ways and Means of the House of Representatives and the Committees on Finance and onLabor and Public Welfare of the Senate to study pension retirement plans sponsored by Federal, State, and local governments and analyze: (1) the adequacy of existing levels of participation,vesting and financing arrangements; (2) existing fiduciary standards; and (3) the necessity for Federal legislation and standards with respect to such plans. See Staff of House Comm. OnEducation and Labor, 95

thCong., 2d Sess., Pension Task Force Report on Public Employee Retirement Systems (Comm. Print 1978).

22 Staff of the Senate Comm. on Labor and Public Welfare, 94th

Cong., Legislative History of the Employee Retirement Income Security Act of 1974, Vol. I 220 (Comm. Print 1976).

23 S. Rep. No. 93–383, at 81 (1973). See also H.R. Rep. No. 93–807, at 164–5 (1974).

2011–51 I.R.B. 881 December 19, 2011

or instrumentality of the United States”and “agency or instrumentality of a Stateor political subdivision of a State” for pur-poses of determining whether a plan is agovernmental plan under section 414(d).Thus, the rules in these proposed regu-lations would not apply for purposes ofdefining the term “instrumentality,” underany other provisions of the Code.

In addition, these regulations do not ad-dress certain issues relating to governmen-tal entities, including when an entity is soclosely related to a State that it constitutesan “integral part” of a State.24 The criteriafor treating an entity as an “integral part”of a State will be the subject of a separateguidance project. Such guidance defining“integral part” may include stricter crite-ria than would apply under these proposedregulations for determining whether an en-tity is an agency or instrumentality of aState.

B. Definition of governmental plan.

These proposed regulations reflect thestatutory definition of the term “gov-ernmental plan” as a plan establishedand maintained for its employees by theGovernment of the United States, by thegovernment of any State or political sub-division thereof, or by any agency orinstrumentality of the foregoing. Withinthis definition, there are several key termsrelating to governmental plans, the def-initions of which are set forth in theseproposed regulations. As mentioned inthe “Background” section of this pream-ble, section 414(d) also includes specialrules relating to the Railroad RetirementAct of 1935 or 1937, the InternationalOrganizations Immunities Act, and plansof Indian tribal governments. These pro-posed regulations do not address the term“governmental plan” as it relates to thespecial provisions in section 414(d) re-lating to the Railroad Retirement Act of1935 or 1937, or the International Organi-zations Immunities Act. The special rulesfor Indian tribal governments are reservedin these proposed regulations and are in a

separate notice of proposed rulemaking,which is being published elsewhere in thisissue of the Bulletin.

C. Definitions of the United States andagency or instrumentality of the UnitedStates.

These proposed regulations would de-fine the term “United States,” for purposesof the governmental plan definition un-der section 414(d), as having the samemeaning set forth in section 7701(a)(9).Section 7701(a)(9) provides that the term“United States,” when used in a geograph-ical sense, includes only the States and theDistrict of Columbia.

Whether an entity is an “agency or in-strumentality of the United States” is de-termined based on the specific purpose forwhich the designation is sought and is de-cided by determining if Congress intendedthe entity to be treated as a Federal entityfor the specific purpose.25 The proposedregulations would define the term “agencyor instrumentality of the United States” asan entity that satisfies the facts and circum-stances test as set forth in these regulations.The facts and circumstances test, similar tothe factors weighed by the Berini court, fo-cuses on the “degree to which the entity isconnected with the . . . federal govern-ment.”26 The factors in this test are a com-pilation of various different tests used forgovernmental plan determinations, includ-ing factors in the Berini and Rose cases,as well as Rev. Ruls. 57–128 and 89–49.The facts and circumstances test is simi-lar to that proposed for agencies and in-strumentalities of a State or political subdi-vision thereof, (which is described in thispreamble under the heading, “Definition ofagency or instrumentality of a State or po-litical subdivision of a State”) but modi-fied to reflect that this definition does notimplicate the federalism concerns presentin making determinations relating to agen-cies and instrumentalities of a State or po-litical subdivision thereof.

The proposed regulations provide that,in making a determination of whether an

entity is an “agency or instrumentality ofthe United States,” the factors to be con-sidered include whether:

• The entity performs or assists in theperformance of a governmental func-tion.

• There are no private interests involved,or the Government of the United Stateshas all of the powers and interests of anowner. In determining whether an en-tity that holds stock has a private in-terest, stock will not be considered aprivate interest if the stock of the cor-poration is not acquired for investmentpurposes or for purposes of control.27

• The control and supervision of the en-tity is vested in the Government of theUnited States. Control must be morethan the government’s extensive Fed-eral regulation of an industry.

• The entity is exempt from Federal,State, and local tax by an Act of Con-gress.

• The entity is created by the UnitedStates Government pursuant to a spe-cific enabling statute that prescribesthe purposes, powers, and manner inwhich the entity is to be establishedand operated.

• The entity receives financial assistancefrom the Government of the UnitedStates. However, an entity is not a gov-ernmental entity merely because it re-ceives funds from the Government ofthe United States under a contract toprovide a governmental service.

• The entity is determined to be anagency or instrumentality of the UnitedStates by a Federal court.

• Other governmental entities recognizeand rely on the entity as an arm of theGovernment of the United States.

• The entity’s employees are treated inthe same manner as Federal employeesfor purposes other than providing em-ployee benefits (for example, the en-tity’s employees are granted civil ser-vice protection).

24 Over the years, the IRS has extended the income tax exemption it provides to states and political subdivisions to entities it regards as their “integral parts.” See Rev. Rul. 87–2, 1987–1C.B. 18; see also Treas. Reg. § 301.7701–1(a)(3).

25 See Berini v. Federal Reserve Bank of St. Louis, 420 F.Supp.2d at 1025.

26 Id.

27 The Department of Treasury and the IRS recognize that an entity may hold stock for purposes other than investment and control. For example, the federal reserve banks are required tohold stock in the Federal Reserve Bank of its district because ownership is a condition of being a member in the Federal Reserve System. Unlike stock in a private corporation, this stock isnot acquired for investment purposes or for purposes of control. See Berini v. Federal Reserve Bank of St. Louis, 420 F. Supp. 2d at 1024, citing Lee Const. Co., Inc. v. Federal Reserve Bankof Richmond, 558 F.Supp. 165, 177 n.17 (D.Mich. 1982), citing 4 F. Solomon, W. Schlicting, T. Rice & J. Cooper, Banking Law, § 77.02, at 77–6 to 77–7 (1982).

December 19, 2011 882 2011–51 I.R.B.

These proposed regulations also pro-vide an example, illustrating the applica-tion of the facts and circumstances test to aparticular entity — a Federal credit union.As announced in previous guidance, onepurpose of these regulations is to addresswhether a Federal credit union is a gov-ernmental entity for purposes of determin-ing whether the Federal credit union canmaintain an eligible nonqualified deferredcompensation plan. Notice 2005–58 ad-dresses certain income tax issues with re-spect to nonqualified deferred compensa-tion plans maintained by Federal creditunions, including whether a Federal creditunion can maintain an eligible nonquali-fied deferred compensation plan describedin section 457(b). Under Notice 2005–58,a plan in effect on August 15, 2005, thatis maintained by a Federal credit unionand that is intended to be an eligible non-qualified deferred compensation plan ofa non-governmental tax-exempt employerwould not fail to be an eligible plan un-der section 457(b) solely because the em-ployer is a Federal credit union, providedthat certain conditions are satisfied (in-cluding the condition that the plan of theFederal credit union not have claimed to bea governmental plan for purposes of sec-tion 414(d) of the Code and section 3(32)of ERISA). The rule in Notice 2005–58only applies pending the issuance of futureguidance regarding section 414(d). See§601.601(d)(2)(ii)(b). Accordingly, uponadoption of these regulations as final reg-ulations, the special treatment provided inNotice 2005–58 for Federal credit unionswill no longer apply. However, after is-suance of these regulations as final regu-lations, a Federal credit union can be aneligible employer within the meaning ofsection 457(e)(1)(B) on the basis that Fed-eral credit unions are non-governmentaltax-exempt organizations.

D. Definitions of State and politicalsubdivision of a State.

The proposed regulations define theterm “State” as any State of the UnitedStates and the District of Columbia. This

definition, which is based on the definitionof “State” in section 7701(a)(10), is dif-ferent from the definition of “State” undersection 3(10) of ERISA, which defines,in relevant part, the term “State” as anyState of the United States, the District ofColumbia, Puerto Rico, the Virgin Islands,America Samoa, Guam, and Wake Island.

The term “political subdivision of aState” is defined in these proposed regu-lations as a regional, territorial, or localauthority, such as a county or municipality(including a municipal corporation), thatis created or recognized by State statuteto exercise sovereign powers.28 Examplesof sovereign powers include the power oftaxation, the power of eminent domain,and the police power. The definition of“political subdivision of a State” also pro-vides that the governing officers of theauthority must be appointed by State offi-cials or publicly elected.

The term “political subdivision of aState” has been used for purposes otherthan section 414(d), including the NLRAand section 103.29 The definition in theseproposed regulations of the term “politicalsubdivision of a State” applies only forpurposes of section 414(d), and not forany other purposes under the Code or anyother statute, including whether an entityis treated as a political subdivision forpurposes of the NLRA or section 103 ofthe Code.

E. Definition of agency or instrumentalityof a State or a political subdivision of aState.

These proposed regulations would pro-vide guidance on determining whether anentity is an “agency or instrumentality of aState or a political subdivision of a State.”These regulations would provide that thedetermination is based on a facts and cir-cumstances test. The proposed regulationsprovide that numerous factors have beenapplied by the IRS in determining whetheran entity is an agency or instrumentality ofa State or a political subdivision of a State.Satisfaction of one or more of the factorsis not necessarily determinative of whether

an organization is a governmental entity.One factor that is not weighed by the IRSis the way the entity refers to itself. For ex-ample, the mere fact that an entity is calledthe “Educational Service Agency of CityA” would not be a factor in determiningwhether the entity is an agency or instru-mentality of City A.

Major factors for determining whetheran entity is an agency or instrumentality ofa State or political subdivision of a Stateare whether:

• The entity’s governing board or body iscontrolled by a State or political subdi-vision.

• The members of the governing boardor body are publicly nominated andelected.

• The entity’s employees are treated inthe same manner as employees of theState (or political subdivision thereof)for purposes other than providing em-ployee benefits (for example, the en-tity’s employees are granted civil ser-vice protection).

• A State (or political subdivisionthereof) has fiscal responsibility forthe general debts and other liabilitiesof the entity (including funding re-sponsibility for the employee benefitsunder the entity’s plans).

• In the case of an entity that is not apolitical subdivision, the entity is dele-gated, pursuant to a statute of a State orpolitical subdivision, the authority toexercise sovereign powers of the Stateor political subdivision (such as, thepower of taxation, the power of emi-nent domain, and the police power).

It is expected that, in applying the fac-tor relating to whether the entity’s govern-ing board or body is controlled by a Stateor political subdivision, the control can-not be a mere legal possibility. Examplesof situations in which the control factormight be a mere legal possibility are casesin which there are a number of tiers of in-tervening corporations between the entityand the State, and cases in which the legalpower to control is shared among so many

28 For certain purposes, the effect of an entity being determined to be a political subdivision of a State may be similar to the entity being determined to be an agency or instrumentality ofa State or political subdivision and for other purposes the effects may be different. Examples in which it is relevant whether an entity is a political subdivision in contrast to an agency orinstrumentality of a State or political subdivision include the exclusion provided under section 402(l), the excise tax under section 4965, and the exception to the 10 percent additional taxunder section 72(t)(10).

29 Two court cases that have analyzed whether an entity is a “political subdivision of a State” for purposes of section 103 of the Code are Commissioner of Internal Revenue v. Shamberg’sEstate, 144 F.2d 998 (2

ndCir. 1944), cert. denied, 323 U.S. 792 (1945), and Commissioner of Internal Revenue v. White’s Estate, 144 F.2d 1019 (2

ndCir. 1944), cert. denied, 323 U.S. 792

(1945).

2011–51 I.R.B. 883 December 19, 2011

governing entities that none of them can besaid to be responsible in the event of a fail-ure to exercise control. In addition, sincethese two factors are interrelated, an entitythat would satisfy the control factor wouldnot be expected to satisfy the factor relat-ing to whether members of the governingboard or body are publicly elected or nom-inated. Alternatively, an entity that wouldsatisfy the factor relating to whether mem-bers of the governing board or body arepublicly elected or nominated would notbe expected to satisfy the control factor.

Other factors for determining whetheran entity is an agency or instrumentality ofa State or political subdivision of a Stateare whether:

• The entity is created by a State govern-ment or political subdivision pursuantto a specific enabling statute that pre-scribes the purposes and powers of theentity, and the manner in which the en-tity is to be established and operated.

• The entity is directly funded throughtax revenues or other public sources.

• The entity is treated as a governmen-tal entity for Federal employment taxor income tax purposes (for example,whether the entity has the authority toissue tax-exempt bonds under section103(a) of the Code) or under other Fed-eral laws.

• The entity’s operations are controlledby a State or political subdivision.

• The entity is determined to be anagency or instrumentality of a State orpolitical subdivision thereof for pur-poses of State law. For example, theentity is subject to open meetings lawsor the requirement to maintain publicrecords that apply only to govern-mental entities, or the State attorneygeneral represents the entity in courtunder a State statute that only permitsrepresentation of State entities.

• The entity is determined to be anagency or instrumentality of a State orpolitical subdivision thereof by a Stateor Federal court for purposes otherthan section 414(d).

There are two additional factors to beconsidered. First, if a party other than a

State (or political subdivision, agency, orinstrumentality thereof) has an ownershipinterest, or other similar interests, in theentity, this factor would indicate that theentity is not an agency or instrumentalityof a State or political subdivision thereof(however, an entity would not necessarilybe considered an agency or instrumentalityof a State or political subdivision thereofmerely because there is no private owner-ship in the entity or the entity serves a gov-ernmental purpose). Second, if an entitydoes not serve a governmental purpose,this factor would indicate that it is not anagency or instrumentality of a State (or po-litical subdivision thereof).

The proposed regulations include avariety of examples to illustrate whetheran entity is an agency or instrumentalityof a State or political subdivision thereof.Many of these examples are drawn fromprior judicial opinions, as well as theAgencies’ determinations.30 Within thedescription of particular factors, there aresome examples that illustrate whether aparticular factor is satisfied. However,the mere satisfaction of a particular factoris not conclusive in determining whetheran entity is an agency or instrumentalitywithin the meaning of these regulations.

F. Requirements for establishingand maintaining a section 414(d)governmental plan.

The proposed regulations would pro-vide that a plan is established and main-tained for the employees of a governmen-tal entity if the following requirementsare satisfied: (1) the plan is establishedand maintained by an employer within themeaning of §1.401–1(a)(2) of the IncomeTax Regulations;31 (2) the employer isa governmental entity; and (3) the onlyparticipants covered by the plan are em-ployees of the governmental entity. Forpurposes of determining whether employ-ees covered by a plan are employees ofa governmental entity, employee repre-sentatives described in section 413(b)(8)(including individuals who are employedby the plan) would be treated as employ-ees of the plan sponsor.32

The proposed regulations would pro-vide rules for changes in status of an en-tity from a private entity to a governmen-tal entity and from a governmental en-tity to a private entity. As mentioned inthe “Background” section of this pream-ble, the qualification requirements for aprivate qualified plan differ substantiallyfrom those of a governmental qualifiedplan. The issue of whether a plan of a pri-vate employer that later becomes a gov-ernmental entity can be a governmentalplan raises a question regarding the in-teraction among the three definitions ofthe term “governmental plan” in ERISA.Section 414(d) of the Code defines theterm “governmental plan” as “a plan es-tablished and maintained by the Govern-ment of the United States, by the govern-ment of any State or political subdivisionthereof, or by any agency or instrumental-ity of the foregoing.” In title IV of ERISA,section 4021(b)(2) provides that any plan“established and maintained for its em-ployees by the Government of the UnitedStates, by the government of any Stateor political subdivision thereof, or by anyagency or instrumentality of the forego-ing” is exempt from coverage by ERISA.In title I of ERISA, section 3(32) defines agovernmental plan as “a plan establishedor maintained by the Government of theUnited States, by the government of anyState or political subdivision thereof, orby any agency or instrumentality of theforegoing.” While the definitions in title IIof ERISA (Code) and title IV of ERISA(PBGC provisions) use the language “es-tablished and maintained” by a govern-mental employer, the title I definition usesthe language “established or maintained.”

This difference in statutory languagewas addressed in Rose v. Long Island Rail-road Pension Plan, 828 F.2d 910 (2nd Cir.1987), cert. denied, 485 U.S. 936 (1988).In Rose, the State of New York, throughthe Metropolitan Transportation Authority(MTA), acquired the Long Island RailroadCompany in 1966 (LIRR). The LIRR hadoriginally been chartered as a private stockcorporation. As part of the acquisition,the State also assumed sponsorship of theLong Island Railroad Pension Plan (LIRR

30 See, for example, Brock v. Chicago Zoological Society, 820 F.2d 909 (7th

Cir. 1987) and NLRB v. Parents & Friends of the Specialized Living Center, 879 F.2d 1442 (7th

Cir. 1989).

31 Section 1.401–1(a)(2) generally provides that a qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employeesand which is established and maintained by an employer.

32 See §1.413–1(i)(1) for rules for when an employee is an employee representative.

December 19, 2011 884 2011–51 I.R.B.

Pension Plan). After ERISA was enactedin 1974, the widow of a participant whodied in 1976 in the LIRR Pension Plansued the plan under title I of ERISA afterbeing denied survivorship benefits. TheRose court concluded that the LIRR Pen-sion Plan was a governmental plan withinthe meaning of section 3(32) of ERISAbecause the LIRR was an agency or in-strumentality of a political subdivision, theMTA.

The Rose court took the position thatif a private entity is acquired by a gov-ernmental entity which becomes the plansponsor, the plan can be established bythe governmental entity and, thus, be agovernmental plan. The court interpretedthe “established or maintained” languagein section 3(32) literally, but also noted thediscrepancy between the “established ormaintained” language in ERISA section3(32) and the “established and main-tained” language in Code section 414(d)and ERISA section 4021(b)(2) (emphasisadded). Despite this difference in the threestatutory definitions, Congress intendedall three definitions to be interpreted in asimilar manner. The Rose court reasonedthat:

“If a plan is required to have been bothestablished and maintained by a gov-ernmental entity in order to qualifyfor exemption, then a plan which wasestablished by a private entity but sub-sequently taken over by a governmentalbody would continue to be subject toERISA. This outcome conflicts withthe federalism-based concerns whichled Congress to exempt governmentalplans in the first place.” Rose v. LongIsland Railroad Pension Plan, 828 F.2dat 920.The Rose court stated that courts have

interpreted the word “and” as meaning“or” if such interpretation would reflectthe legislative intent of the statute.33 TheRose court noted that its conclusion wasconsistent with the approach taken by thePBGC in a similar matter involving anentity’s change to governmental status

prior to the enactment of ERISA wherethe PBGC stated that it would not imposethe “established” requirement when doingso would frustrate the congressional intentof section 4021(b)(2) of ERISA.34

The Rose court also noted that the LIRRPension Plan had been rewritten and sub-stantially funded by the State since its ac-quisition of the LIRR in 1966, and statedthat it would have reached the same con-clusion regarding the plan’s governmentalstatus even if the definition under section3(32) of ERISA used the phrase “estab-lished and maintained.”

“In any event, even if we agreed withRose that the correct interpretation of[section 3(32) of ERISA] was estab-lished and maintained, we would stillnot conclude that the LIRR Plan wascovered by ERISA, because the Planwas in fact established and maintainedby the LIRR.”Rose v. Long Island Railroad Pension

Plan, 828 F.2d at 920. See also Roy v.Teachers Insurance and Annuity Associa-tion, 878 F.2d 47 (2nd Cir. 1989).

The court concluded that a broad read-ing of the term “established”—wherebya plan not previously established underERISA may become a plan establishedunder ERISA without the preexisting onehaving been formally “terminated”—ismore consistent with the legislative intentbehind the governmental plan exemp-tion.35

For reasons similar to those presentedby the Rose court, but consistent with the“established and maintained” language insection 414(d), the proposed regulationswould set forth rules for employers chang-ing status from private to governmentalthat are consistent with the legislativeintent of the exemption of governmentalplans. The proposed regulations wouldprovide that if an employer becomes agovernmental entity or a governmentalentity becomes the employer under theplan (for example, in connection with anasset transfer), the plan will be treatedas a governmental plan established by a

governmental employer on the date of thechange (including all of the plan’s assetsand liabilities attributable to service beforeand after the date of the change). Thus,in such a case, under the proposed regula-tions, the plan would have to comply withall the requirements for a private plan upto the date of the change and then complywith the requirements for a governmentalplan after the date of the change. Thesesame rules would also apply if a portionof a private plan was spun off to a planmaintained by a governmental employer:that portion of the plan would cease tobe subject to Code rules applicable tonongovernmental employers, and insteadwould become part of a governmentalplan, while the remaining portion of theprivate plan that was not spun off wouldcontinue to be subject to the protectionand other rules applicable to private plans.These rules would provide standards fordetermining when the Code protectionsand other rules for a private plan cease toapply (and when the substantially differ-ent rules for a governmental plan begin toapply).

In the case of a change in status froma private plan to a governmental plan,comments are requested on whether, andif so how, these regulations should addressrights and obligations that accrued priorto the conversion to a governmental plan,including the responsibility of the formerprivate plan sponsor (or former privateplan) for benefits that accrued prior tothe conversion. Any comments that ad-dress the potential impact of the proposedregulation’s approach on rights and re-sponsibilities under title I and title IV ofERISA will be forwarded to the DOL andthe PBGC.

Similarly, the regulations would pro-vide that if a governmental employerceases to be a governmental entity, theplan will be treated as being establishedby a private employer thereafter (includ-ing all of the plan’s assets and liabilitiesattributable to service before and after thedate of the change). Such a change would

33 See Rose v. Long Island Railroad Pension Plan, 828 F.2d at 919.

34 The Rose court said that: “We find the PBGC’s approach to be a sensible one; the status of the entity which currently maintains a particular pension plan bears more relation to Congress’goals in enacting ERISA and its various exemptions, than does the status of the entity which established the plan.” Rose v. Long Island Railroad Pension Plan, 828 F.2d at 920. See PBGCOpinion Letter 75–44 (December 9, 1975).

35 But see Hightower v. Texas Hospital Association, 65 F.3d 443, 448 (5th

Cir. 1995), in which the Fifth Circuit held that if the plan was “established or maintained” for its employees by agovernmental employer, the plan was exempt from coverage under title I of ERISA, even if it was not exempt from coverage under the title IV “established and maintained” test. The Courtof Appeals held that the difference in statutory language between “established or maintained” and “established and maintained” had to be given some meaning, and held that for a plan to bea governmental plan under ERISA section 4021(b)(2), the plan had to be both established and maintained by the government. Id. at 450–51. The court did not discuss what, if any, actionswould be sufficient for an employer assuming sponsorship of an existing plan to be treated as having “established” the plan.

2011–51 I.R.B. 885 December 19, 2011

occur either where the employer entityceases to be a governmental entity (suchas a spin-off of a corporation) or wherethe employees become employees of adifferent entity (such as in an asset trans-fer). Thus, for example, the entity in eithercase would no longer satisfy the require-ment that the employer be a governmentalentity. If such a change occurs, the planmust comply with the requirements for agovernmental plan up to the change andthen comply with all the requirements fora private plan for periods after the date ofthe change. (See also the related discus-sion under the heading, “Comments andPublic Hearing.”)

In the case of a formerly governmentalplan becoming a private plan, the plan andplan sponsor may secure certain advan-tages, such as PBGC coverage or ERISApreemption, not available to governmentalplans and governmental sponsors. How-ever, nothing in these proposed income taxregulations should be construed to meanthat, with respect to a transaction such asan asset sale, in which assets and liabilitiesof a governmental plan are transferred to aprivate plan, the assumption of benefit lia-bilities accrued prior to the transfer to theprivate plan relieves the former govern-mental employer (or former governmentalplan) from responsibility for those bene-fits.

As previously stated, the proposedregulations would provide that if a gov-ernmental employer ceases to be a gov-ernmental entity, the plan will be treatedas being established by a private em-ployer on the date of the change. Theproposed regulations would provide anexception to this general rule when thereis a change in status from a governmen-tal entity to a private entity under certaincircumstances. Specifically, if a govern-mental plan ceases to be maintained by agovernmental employer, the plan will nev-ertheless be treated as continuing to be agovernmental plan if the benefits held un-der the governmental plan are frozen anda governmental entity assumes responsi-bility for the plan. While the frozen planwould continue to be treated as a govern-mental plan, the plan would be permitted(but not required) to provide participatingemployees with credit for service with the

new employer for purposes of vesting,final pay adjustments, entitlements to ben-efits such as early retirement benefits, andsimilar service credit other than benefitaccrual credit.

Further, certain types of plans are lim-ited under the Code to specific types ofemployers, including limitations that ap-ply differently depending on whether ornot the employer is or is not a governmen-tal entity. These limitations on employereligibility raise special problems for casesin which an entity becomes or ceases tobe a governmental employer. For exam-ple, because a qualified cash or deferredarrangement under section 401(k) gener-ally cannot be maintained by a State orlocal government or political subdivision,or any agency or instrumentality thereof,such a plan maintained by a private em-ployer cannot be continued if the employerlater becomes part of a State. Other spe-cial problems arise if a governmental em-ployer that is not a tax-exempt organiza-tion under section 501(c)(3) and that is nota public school attempts to become a spon-soring employer of a section 403(b) planof a tax-exempt organization under section501(c)(3). Likewise, a State entity cannotmaintain an unfunded section 457(b) planof a tax-exempt organization described insection 457(e)(1)(B). These proposed reg-ulations would not alter rules relating tothe eligibility of an employer to estab-lish or maintain a particular type of retire-ment plan. An employer that is consider-ing a change in its status should evaluatewhether it is eligible to sponsor any planthat it assumes, taking into account the em-ployer eligibility rules. Therefore, spon-sors should not assume from these pro-posed regulations that a change of sponsor-ship from a private to governmental em-ployer, or vice versa, will not result in anyadverse tax consequences. As emphasizedelsewhere in this preamble, the proposedregulations would provide that the estab-lished and maintained rules apply only forpurposes of section 414(d).

Proposed Effective Date

It is expected that these proposed reg-ulations would not be applicable earlierthan for plan years beginning after the dateof the publication of the Treasury deci-

sion adopting these rules as final regula-tions in the Federal Register. Generally,amendment of a State or local retirementplan requires enactment of State legisla-tion. The Department of Treasury andIRS intends to take into consideration thetime required to complete the State legisla-tive process when determining an effectivedate for these regulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. In addition, because no collectionof information is imposed on small enti-ties, the provisions of the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do not ap-ply, and therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theSmall Business Administration for com-ment on its impact on small business.


Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submittedtimely to the IRS. The Treasury Depart-ment and the IRS specifically request com-ments on the clarity of the proposed rulesand how they can be made easier to under-stand. All comments will be available forpublic inspection and copying.

These proposed regulations would pro-vide that a determination of whether an en-tity is an agency or instrumentality of aState or a political subdivision thereof isbased on a facts and circumstances anal-ysis. Under the proposed regulations, thefactors to be applied would be ranked intomain factors and other factors. 36 Com-ments are requested on whether the finalregulations should eliminate the distinc-tion between main and other factors. Com-ments are also requested on the ordering

36 For a list of the factors, see discussion under the heading Definition of Agency or Instrumentality of a State or a Political Subdivision of a State in the Explanation of Provisions of thispreamble.

December 19, 2011 886 2011–51 I.R.B.

and the application of the main and otherfactors; for example, whether the final reg-ulations should provide a list of factorswith a safe harbor standard under which,if an entity satisfies identified factors, theentity will be treated as an agency or in-strumentality of a State or political sub-division thereof, for purposes of section414(d). Comments are also requested onwhether the distinction between main andother factors should be retained, in addi-tion to providing a safe harbor standard.

The factors identified in this bright linetest might be whether: (1) a majority ofthe entity’s governing board or body are ei-ther controlled by a State or political subdi-vision thereof or elected through periodic,publicly held elections (with the nomineeselected by the voters); and (2) a State or po-litical subdivision thereof has the fiscal re-sponsibility for the general debts and otherliabilities of the entity, including the en-tity’s employee benefit plans. This stan-dard might be available only if the entitywas created by a State government or polit-ical subdivision pursuant to a specific en-abling statute that prescribes the purposes,powers, and manner in which the entity isto be established and operated.

Apart from the special rules relatingto plan coverage for employees of a la-bor union or plan under section 413(b)(8),these proposed regulations do not includespecial rules addressing existing practicesunder which a small number of private em-ployees participate in a plan that wouldotherwise constitute a governmental planunder section 414(d). Comments are re-quested on whether an exception shouldbe provided in such cases. Parametersthat could be taken into account for sucha special rule include the following: (1)whether the private employees were previ-ously employees of the sponsoring govern-mental entity; (2) whether the private em-ployees were previously participants in thegovernmental plan; (3) whether the num-ber or percentage of such former employ-ees who participate in the governmentalplan is de minimis (and, if so, what consti-tutes a de minimis number or percentage);(4) whether the coverage is pursuant topre-existing plan provisions; (5) whetherthe private employer performs a govern-mental function and has been officiallydesignated as a State entity for plan partic-ipation purposes; and (6) whether the em-

ployer is ineligible to sponsor the partic-ular type of governmental plan (for exam-ple, whether a private employer is a tax-ex-empt organization under section 501(c)(3)that can sponsor a section 403(b) plan,and whether the private employer spon-sors or has sponsored plans that cannotbe sponsored by a State governmental en-tity, such as a cash or deferred arrangementunder section 401(k) or an unfunded sec-tion 457(b) plan of a tax-exempt entity (de-scribed in section 457(e)(1)(B)).

If any special rule for such circum-stances were to be included in the finalregulation, there would be a number ofrelated issues. These issues would includehow to address the status of such a plan asa governmental multiple employer plan.Other issues might include how section414(h) governmental pick-up plans shouldbe treated, differences resulting from theapplication of federal employment taxesto a private employer participating in agovernmental multiple employer plan,the application of the minimum fundingrules with respect to a private employerparticipating in a governmental multi-ple employer plan, how the prohibitedtransaction rules of section 4975 wouldapply with respect to a private employerparticipating in a governmental multipleemployer plan, how the special benefitlimitation rules of section 415 would applyto private plan participants in the govern-mental plan, and what treatment shouldapply where the plan was previously afunded section 457(b) plan of a State orlocal government.

If the final regulations do not provideany special rule for cases in which a gov-ernmental plan continues to cover privateemployees who were formerly govern-mental employees, it is expected that areasonable transition period followingpublication of the final regulations willbe provided. Comments are requestedon what transitional relief should be pro-vided to a governmental plan that coversprivate employees who were formerlygovernmental employees and continue toparticipate in the plan that would other-wise constitute a governmental plan undersection 414(d) (such as the governmentalplan spinning off a portion of the assetsand liabilities of the plan with respectto the former employees as a separatenon-governmental plan). Comments are

also requested on whether this method ofcorrection might also be appropriate insituations such as described in Example 5in paragraph (k)(4) of the proposed regu-lations.

The final regulations may also providetransitional relief for entities that previ-ously operated as if they were governmen-tal entities eligible to participate or spon-sor governmental plans but later were de-termined to be private entities under theregulations. Comments are requested onwhat transitional relief should be providedto an entity that is later determined to bea private entity. The Treasury Departmentand the IRS anticipate that there will be areasonable transition period following thefinal regulations for a plan to revise its ar-rangements in order to avoid the adversetax consequences of failing to comply withall the requirements of a private retirementplan.

A public hearing has been scheduledfor (date to be provided when proposedregulations are published), beginning at10 a.m. in the Auditorium, Internal Rev-enue Building, 1111 Constitution Avenue,NW, Washington DC. Due to building se-curity procedures, visitors must enter atthe main entrance located at 1111 Constitu-tion Avenue, NW. In addition, all visitorsmust present photo identification to enterthe building. Because of access restric-tions, visitors will not be admitted beyondthe immediate entrance area more than 30minutes before the hearing starts. For in-formation about having your name placedon the building access list to attend thehearing, see the “FOR FURTHER INFOR-MATION CONTACT” portion of this pre-amble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments must submit writ-ten or electronic comments and an outlineof the topics to be discussed and time tobe devoted to each topic (signed originaland eight (8) copies) by (date to be pro-vided when proposed regulations are pub-lished). A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedul-ing of the speakers will be prepared afterthe deadline for receiving comments haspassed. Copies of the agenda will be avail-able free of charge at the hearing.

2011–51 I.R.B. 887 December 19, 2011


The principal author of these proposedregulations is Pamela R. Kinard, Office ofDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties), Internal Revenue Service. However,personnel from other offices of the IRSand Treasury participated in their develop-ment.

* * * * *





Authority: 26 U.S.C. 7805 * * *Par.2. Section 1.414(d)–1 is added to

read as follows:

§1.414(d)–1 Definition of governmentalplan.

(a) Definition of governmentalplan—(1) In general. In accordance withsection 414(d), for purposes of part I ofsubchapter D of chapter 1 of the InternalRevenue Code and the regulations, theterm governmental plan means a plan es-tablished and maintained for its employeesby the Government of the United States,by the government of any State or politicalsubdivision thereof, or by any agency orinstrumentality of the foregoing, as deter-mined pursuant to the requirements of thissection. The definitions set forth in thissection only apply for purposes of section414(d) and this section.

(2) Definition for plans subject to cer-tain statutes. For purposes of part I ofsubchapter D of chapter 1 of the Inter-nal Revenue Code and the regulations, theterm “governmental plan” also includesany plan to which the Railroad RetirementAct of 1935 or 1937 applies and which isfinanced by contributions required underthat Act and any plan of an internationalorganization which is exempt from taxa-tion by reason of the International Organi-zations Immunities Act (59 Stat. 669).

(3) Definition for certain plans of In-dian tribal governments. For purposes of

part I of subchapter D of chapter 1 of theInternal Revenue Code and the regula-tions, the term “governmental plan” alsoincludes a plan which is established andmaintained by an Indian tribal government(as defined in section 7701(a)(40)), a sub-division of an Indian tribal government(determined in accordance with section7871(d)), or an agency or instrumentalityof either, and all of the participants ofwhich are employees of such entity sub-stantially all of whose services as such anemployee are in the performance of es-sential governmental functions but not inthe performance of commercial activities(whether or not an essential governmentalfunction).

(b) Definition of United States. Theterm United States has the meaning setforth in section 7701(a)(9).

(c) Definition of agency or instrumen-tality of the United States—(1) Agency orinstrumentality of the United States. Forpurposes of the definition of “governmen-tal plan” in paragraph (a)(3) of this section,the term agency or instrumentality of theUnited States means an entity that satisfiesthe facts and circumstances test in para-graph (c)(2) of this section.

(2) Facts and circumstances test.Whether an entity is an agency or instru-mentality of the United States is based onfacts and circumstances. In making thisdetermination, the facts to be consideredinclude the following:

(i) The entity performs or assists in theperformance of a governmental function.

(ii) There are no private interests in-volved, or the Government of the UnitedStates has all of the powers and interests ofan owner. In determining whether an en-tity that holds stock has a private interest,stock will not be considered a private inter-est if the stock of the corporation is not ac-quired for investment purposes or for pur-poses of control.

(iii) The control and supervision of theentity is vested in the Government of theUnited States. Control must be more thanthe government’s extensive Federal regu-lation of an industry.

(iv) The entity is exempt from Federal,State, and Local tax by an Act of Congress.

(v) The entity is created by the UnitedStates Government pursuant to a specificenabling statute that prescribes the pur-poses, powers, and manner in which theentity is to be established and operated.

(vi) The entity receives financial assis-tance from the Government of the UnitedStates. However, an entity is not a govern-mental entity merely because it receivesfunds from the Government of the UnitedStates under a contract to provide a gov-ernmental service.

(vii) The entity is determined to be anagency or instrumentality of the UnitedStates by a Federal court.

(viii) Other governmental entities rec-ognize and rely on the entity as an arm ofthe Government of the United States.

(ix) The entity’s employees are treatedin the same manner as Federal employ-ees for purposes other than providing em-ployee benefits (for example, the entity’semployees are granted civil service protec-tion).

(3) Example. The following exampleillustrates the application of this paragraph(c):

Example. (i) Facts. Entity A is a Federal creditunion, which is created pursuant to the Federal CreditUnion Act, and is a tax-exempt organization undersection 501(c)(1)(A)(i). Membership in the Federalcredit union is not open to the general public but toindividuals who share a common bond, current or for-mer employees of specified employers. Entity A ismember-owned and is controlled by a board of di-rectors that is elected by its membership. Entity A,along with other Federal credit unions, is subject toregulation by the National Credit Union Administra-tion (NCUA), which is a Federal agency that chartersand regulates Federal credit unions.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (c)(2) of this sec-tion, Entity A is not an agency or instrumentality ofthe United States because its board of directors iselected by its own members and the directors are notresponsible to the United States, except to the limitedextent set forth in the Federal Credit Union Act andregulated by the NCUA. Thus, Entity A is not a gov-ernmental entity within the meaning of paragraph (c)of this section.

(d) Definition of State. The term Statemeans any State of the United States andthe District of Columbia.

(e) Definition of political subdivision ofa State. The term political subdivision ofa State means—

(1) A regional, territorial, or local au-thority, such as a county or municipality(such as, a municipal corporation), thatis created or recognized by State statuteto exercise sovereign powers (which gen-erally means the power of taxation, thepower of eminent domain, and the policepower); and

December 19, 2011 888 2011–51 I.R.B.

(2) The governing officers either areappointed by State officials or publiclyelected.

(f) Definition of agency or instrumen-tality of a State or political subdivisionof a State—(1) Agency or instrumental-ity of a State or political subdivision of aState. The term agency or instrumental-ity of a State or political subdivision of aState means an entity that satisfies the factsand circumstances test in paragraph (f)(2)of this section.

(2) Facts and circumstances test—(i)Factors to be considered. In making thedetermination of whether an entity is anagency or instrumentality of a State or po-litical subdivision of a State, the main fac-tors to be considered are—

(A) The entity’s governing board orbody is controlled by a State (or politicalsubdivision thereof). For example, anentity’s governing board or body is con-trolled by a State (or political subdivisionthereof) if the public officials of the State(or political subdivision thereof) have thepower to appoint, and to remove and re-place, a majority of the entity’s governingboard or body. This factor is not satisfiedif the power to control is materially re-stricted (for example, if any board memberof the entity can be replaced only with anindividual chosen from a list of designeesselected by the other members of the gov-erning board or body);

(B) The members of the governingboard or body are publicly nominated andelected;

(C) A State (or political subdivisionthereof) has fiscal responsibility for thegeneral debts and other liabilities of theentity, including responsibility for thefunding of benefits under the entity’s em-ployee benefit plans;

(D) The entity’s employees are treatedin the same manner as employees of theState (or political subdivision thereof) forpurposes other than providing employeebenefits (for example, the entity’s employ-ees are granted civil service protection);and

(E) In the case of an entity that is nota political subdivision, the entity is dele-gated the authority to exercise sovereignpowers (which generally means the powerof taxation, the power of eminent domain,and police powers) of the State (or politicalsubdivision thereof) and the delegation of

authority is pursuant to a statute of a State(or political subdivision thereof).

(ii) Other factors to be considered. Inmaking the determination of whether anentity is an agency or instrumentality of aState or a political subdivision of a State,other factors include—

(A) The entity’s operations are con-trolled by a State (or political subdivisionthereof);

(B) The entity is directly fundedthrough tax revenues or other publicsources. However, this factor is not sat-isfied if an entity that is not otherwisean agency or instrumentality is paid frompublic funds under a contract to provide agovernmental service or is funded throughgrants by the State or Federal government;

(C) The entity is created by a State gov-ernment or political subdivision of a Statepursuant to a specific enabling statute thatprescribes the purposes, powers, and man-ners in which the entity is to be establishedand operated. However, a nonprofit corpo-ration that is incorporated under a State’sgeneral corporation laws is not created un-der a specific enabling statute;

(D) The entity is treated as a govern-mental entity for Federal employment taxor income tax purposes (such as, the au-thority to issue tax-exempt bonds undersection 103(a)) or under other Federallaws;

(E) The entity is determined to be anagency or instrumentality of a State (or po-litical subdivision thereof) for purposes ofState laws. For example, the entity is sub-ject to open meetings laws or the require-ment to maintain public records that ap-ply only to governmental entities, or theState attorney general represents the entityin court under a State statute that only per-mits representation of State entities;

(F) The entity is determined to be anagency or instrumentality of a State (orpolitical subdivision thereof) by a State orFederal court;

(G) A State (or political subdivisionthereof) has the ownership interest in theentity and no private interests are involved;and

(H) The entity serves a governmentalpurpose.

(3) Examples. The following examplesillustrate the application of this paragraph(f). In each of these examples, unless oth-erwise stated, only facts that are relevantto the examples are included and it is as-

sumed that no party other than a State orpolitical subdivision thereof has an owner-ship interest in the entity and that the en-tity serves a governmental purpose. Theexamples are as follows:

Example 1. (i) Facts. Entity C is a utility com-pany located in County B of State A. Entity C is cre-ated pursuant to a State A statute by a petition of 25private citizens who are landowners, and approved byan order of a judge in County B. Entity C is adminis-tered by a board of commissioners named in the origi-nal petition, with vacancies to be filled by the incum-bents, but with State A having the right to removea board member for malfeasance. Entity C has thepower of eminent domain. In addition, the records ofEntity C are public records.

(ii) Conclusion. Based on the facts and circum-stances, Entity C is not an agency or instrumentalityof County B within the meaning of paragraph (f) ofthis section because it does not satisfy the control fac-tors described in paragraphs (f)(2)(i)(A) and (ii)(A)of this section because Entity C is under the controlof a self-perpetuating board of directors and becauseState A or its officials do not exercise control over thedirectors.

Example 2. (i) Facts. The facts are the same asin Example 1, except that Entity C is administered bya board of commissioners which is appointed by theGovernor of State A and is subject to removal pro-ceedings by the Governor of State A, the County Bprosecutor, or the general public in County B. Vacan-cies on Entity C’s district board are filled by popularelection or by appointment of the Governor of StateA. Entity C has the power of eminent domain. In ad-dition, the records of Entity C are public records.

(ii) Conclusion. Based on the facts and circum-stances, Entity C is an agency or instrumentality ofCounty B within the meaning of paragraph (f) of thissection.

Example 3. (i) Facts. Entity K is a non-profit cor-poration that operates a zoo in County J. Entity K isorganized under the laws of State L. Although En-tity K was not created by State law, the legislature ofState L authorized the State’s forest districts to con-tract with zoological societies for the creation, opera-tion, and maintenance of zoological parks. County Jentered into a contract with Entity K, giving Entity Kexclusive control and management authority over thezoo in County J. Entity K, through government con-tracts, receives over half of its revenues from taxesraised by County J. The remaining revenues are fromadmission and parking fees, concessions, souvenirs,and private donations. County J maintains a signifi-cant amount of control over the budget of Entity K,including overseeing the expenditures of nontax rev-enues generated by Entity K. The zoo is located onland owned by County J, and vehicles used at the zooare owned by County J and licensed as municipal ve-hicles. Entity K is managed by a 35-member boardof trustees. Only one member of the board of trusteesis a public official. Of the 240 members of Entity Kwho elect the board of trustees, only 4 members areCounty J public officials. In addition, County J has nodirect role in Entity K’s operation and maintenance ofthe zoo. Employees of Entity K are not treated in thesame manner as public employees and, thus, are notcovered under the civil service rules, pension plan, orworkers’ compensation funds of County J or State L.

2011–51 I.R.B. 889 December 19, 2011

(ii) Conclusion. Based on the facts and circum-stances, Entity K is not an agency or instrumentalityof County J or State L within the meaning of para-graph (f) of this section. Although Entity K is partlyfunded by County J, it receives those funds under acontract to provide governmental service and veryfew members of both the board of trustees and thegoverning members of Entity K are public officials.

Example 4. (i) Facts. Entity P is a non-profitcorporation that operates a 24-hour intermediate carefacility for mentally challenged adults located inState O. Entity P is licensed and regulated by StateO. While not created by statute, Entity P’s facilitywas built pursuant to statutory directives. Entity P ismanaged by a 9-member board of directors, whichconsists of parents of the patients at the facility andother volunteers. The directors are elected by EntityP’s corporate members. State O has no authority toappoint or remove directors. The facility is managedby an executive director who is hired by the boardwithout State approval. Pursuant to regulations,State O mandates certain personnel requirements,including staffing levels and minimum qualificationrequirements for staff members at the facility. How-ever, Entity P is responsible for hiring, firing, andother disciplinary decisions. State O prescribes anhourly mean wage for the employees of Entity P,which limits the total amount that Entity P can payits employees. In addition, State O imposes a ceilingon fringe benefits available to employees of Entity P,but Entity P is responsible for allocating the funds topay for the fringe benefits.

(ii) Conclusion. Based on the facts and circum-stances, Entity P is not an agency or instrumentalityof State O within the meaning of paragraph (f) of thissection. Although Entity P is directly funded by StateO, it receives those funds under a contract to provideservices to State O. Entity P does not satisfy the con-trol factors described in paragraphs (f)(2)(i)(A) and(ii)(A) of this section because Entity P is controlledby directors who are chosen by Entity P’s corporatemembers. While State O has some oversight controlover Entity P’s employees, through certification re-quirements and the imposition of limitations on payand fringe benefits, Entity P has control over mostemployment decisions, as well as setting policies forholidays, vacations, insurance, and retirement bene-fits.

Example 5. (i) Facts relating to University U.University U was created by the legislature of StateA and is an agency or instrumentality of State A un-der this paragraph (f). The board of trustees of Uni-versity U appoints the president of University U. Thepresident of University U appoints the chancellor ofthe medical school of University U. The chancellor ofthe medical school is also a vice-president of Univer-sity U. The chancellor of the medical school appointsthe various chairs of the clinical departments of themedical school.

(ii) Facts relating to the corporate structure ofEmployer M. The chairs of the clinical departments ofthe medical school have incorporated a separate en-tity, Employer M, under State A’s not-for-profit law.Employer M is an integrated group practice for man-aging the clinical practice activities of the medicalschool faculty and was established in order to ad-vance the purposes of the medical educational pro-gram and related activities of the medical school ofUniversity U. Under the by-laws of Employer M, any

physician employee of Employer M must be a fac-ulty member of the medical school (and if any physi-cian employee of Employer M leaves the faculty ofthe medical school, his or her employment with Em-ployer M terminates automatically).

(iii) Facts relating to the control of EmployerM. Employer M is governed by a board of trusteesconsisting of the chancellor of the medical school,the clinical department chairs, and full-time facultymembers appointed by two-thirds of the clinicaldepartment chairs. Performance of services as anemployee of Employer M is a condition of employ-ment for all full-time faculty members of the medicalschool. The faculty members are employees of Uni-versity U and, in the capacity of their employmentat University U, participate in the State A publicemployees’ pension plan. Employer M also employsadministrative and non-faculty employees who arenot treated in the same manner as employees of StateA (or University U). Employer M charges patientsfor the services provided by Employer M, and aportion of the fees collected are paid to University U.The compensation levels for employees of EmployerM are set by faculty members who serve on the boardof trustees of Employer M. The compensation paidto faculty members by Employer M is a substantialportion of the total compensation paid to them byUniversity U and Employer M. Audited financialrecords of Employer M are submitted annually to thepresident of University U.

(iv) Conclusion. Employer M does not satisfy anyof the factors listed in paragraphs (f)(2)(i)(B) through(E) of this section (that is, its trustees are not publiclynominated and elected, State A has no fiscal respon-sibility for Employer M, administrative and non-fac-ulty employees of Employer M are not treated in thesame manner as employees of State A, and EmployerM has no sovereign powers). Employer M also doesnot satisfy any of the additional factors listed in para-graphs (f)(2)(ii)(B) through (G) of this section, butdoes satisfy the governmental purpose factor in para-graph (f)(2)(ii)(H) of this section. With respect to thecontrol factors in paragraphs (f)(2)(i)(A) and (ii)(A)of this section, while all of Employer M’s trusteesare employees of University U, the majority of theboard of trustees is not controlled by University Ubut by clinical department chairs and full-time fac-ulty members of University U. Their service on theboard of trustees of Employer M is in their capacityas representatives of Employer M, not as representa-tives of University U or State A. Accordingly, basedon the facts and circumstances, including the lack ofinvolvement of University U in overseeing the con-duct of the board of trustees and the operations ofEmployer M beyond review of its audited financials,Employer M is not an agency or instrumentality ofState A within the meaning of paragraph (f) of thissection.

Example 6. (i) Facts. Entity W, a private foun-dation, provides public assistance to the indigent el-derly in a residence hall built on land privately do-nated to Entity W, located in City V. City V contractswith Entity W to provide elder care to residents ofCity V. Over the years, City V has regularly budgetedfor services provided by Entity W to its residents, in-cluding maintenance and upkeep of its facilities, andsalaries of employees. In 1970, Entity W and City Vtogether incorporated a non-profit organization, En-tity X, called “City V Eldercare Residence,” through

which Entity W would provide its services to the res-idents of City V. Under Entity X’s bylaws, Entity Xis governed by a board of directors, six of whom areappointed by the Mayor of City V, and six of whomare appointed by Entity W. Entity X’s employees areconsidered employees of Entity X and are not treatedin the same manner as municipal employees of CityV.

(ii) Conclusion. Although City V is a politicalsubdivision of a State within the meaning of para-graph (e)(1) of this section, Entity X is not an agencyor instrumentality of City V within the meaning ofparagraph (f) of this section. While Entity X sat-isfies the governmental purpose factor described inparagraph (f)(2)(ii)(H) of this section, it does not sat-isfy any other factor, including the control factors de-scribed in paragraphs (f)(2)(i)(A) and (ii)(A) of thissection or the employee factor described in paragraph(f)(2)(i)(D) of this section (because a majority of theboard is not appointed by City V and Entity X’s em-ployees are not treated in the same manner as employ-ees of City V).

Example 7. (i) Facts. Five States created Com-mission D as a body corporate of each compactingState and territory. Commission D was created toprovide services to the States on issues relating tohigher education. Each governor of the five States ap-points three persons to the governing board of Com-mission D, which is subject to the joint control ofthe five States. Commission D submits yearly re-ports and budgets to the governors of each of the fiveStates. Commission D’s operating costs are appor-tioned equally among the States. The IRS determinedin a ruling that Commission D was exempt from grossincome under section 115. The IRS also determinedthat Commission D was an instrumentality of each ofthe five States for employment tax purposes.

(ii) Conclusion. Based on the facts and circum-stances, Commission D is an agency or instrumental-ity of each of the five States within the meaning ofparagraph (f) of this section.

Example 8. (i) Facts. Entity S, incorporated un-der the laws of State T as a non-profit corporation, op-erates a hospital in City R. City R leases the hospitaland its entire operation to Entity S. The lease betweenCity R and Entity S requires Entity S to transfer its as-sets and liabilities back to the City upon expiration ofthe lease. City R created the first board of directorsfor the hospital, but it does not have the power to re-move or replace any board member. Only one of the13 board members of Entity S is a public official, anex officio voting member. In addition, the board of di-rectors is not elected by the general public of City R.To fund a subsequent expansion of the hospital facil-ity, City R issued tax-exempt bonds. Entity S does nothave the authority to issue tax-exempt bonds. EntityS does not exercise any sovereign powers. Employ-ees of Entity S are not treated in the same manner asemployees of City R. For example, Entity S and CityR maintain separate payrolls, health insurance plans,and pension plans.

(ii) Conclusion. Based on the facts and circum-stances, Entity S is not an agency or instrumentalityof City R within the meaning of paragraph (f) of thissection. Although City R had the power of the initialappointment of the board members, it cannot subse-quently appoint or remove any directors of Entity S,therefore, Entity S does not satisfy the control factordescribed in paragraph (f)(2)(i)(A) of this section.

December 19, 2011 890 2011–51 I.R.B.

(g) Special rules for plans of Indiantribal governments. [Reserved].

(h) Special rules for plans subject to theRailroad Retirement Act of 1935 or 1937.[Reserved].

(i) [Reserved].(j) Special rules for plans subject to

the International Organizations Immuni-ties Act. [Reserved].

(k) Established and maintained—(1) Ingeneral. For purposes of applying this sec-tion (and not for any other purpose) withrespect to a governmental entity (which isan entity defined in paragraph (b), (c), (d),(e), or (f) of this section), a plan is estab-lished and maintained for the employees ofa governmental entity if—

(i) The plan is established and main-tained for employees by an employer,within the meaning of §1.401–1(a)(2);

(ii) The employer is a governmental en-tity; and

(iii) The participants covered by theplan are employees of that governmentalentity.

(2) Changes in status—(i) Ceasing tobe a private entity. If an employer be-comes a governmental entity (for exam-ple, as a result of a stock acquisition) ora governmental entity becomes the em-ployer under the plan (for example, in con-nection with an asset transfer), the plan (in-cluding all of the plan’s assets and liabili-ties attributable to service before and afterthe date of the change) will be treated, forpurposes of paragraph (k)(1)(i) of this sec-tion, as being established by that govern-mental entity on the date of that change.

(ii) Ceasing to be a governmental en-tity—(A) General rule. Except as pro-vided in paragraph (k)(2)(ii)(B) of this sec-tion, if an employer that is a governmen-tal entity ceases to be a governmental en-tity (for example, as a result of a stock ac-quisition) or a private entity becomes theemployer under the plan (for example, inconnection with an asset transfer), the plan(including all of the plan’s assets and li-abilities attributable to service before andafter the date of the change) is treated, forpurposes of paragraph (k)(1)(ii) of this sec-tion, as being established by the non-gov-ernmental employer on the date of thatchange.

(B) Exception. If a plan is establishedand maintained for the employees of a gov-ernmental entity in accordance with para-graph (k)(1) of this section (without regard

to this paragraph (k)(2)(ii)) and, at a sub-sequent date, the employer ceases to be agovernmental entity (for example, as a re-sult of an assets transfer), the plan is treatedas continuing to be a governmental planif—

(1) A governmental entity continues tobe the plan sponsor after the change (forexample, a governmental entity assumesthe plan on or before the date on which theprivate entity becomes the employer (in-cluding becoming responsible for the em-ployer obligations with respect to the pay-ment of benefits under the plan)); and

(2) Benefits under the plan are frozen(with, if provided under the plan, partici-pating employees to receive credit for ser-vice with the new employer for purposes ofvesting, final pay adjustments, entitlementto benefits such as early retirement bene-fits, and similar service credit other thanbenefit accrual credit).

(C) Governmental liability for spun-offbenefits. In the case of a transaction suchas an asset sale in which assets and lia-bilities of a governmental plan are trans-ferred to a private plan, the private em-ployer would be responsible for satisfy-ing the minimum funding standards of sec-tion 412 (including with respect to bene-fits attributable to service performed be-fore the date of the change). However,nothing in this paragraph (k)(2)(ii) shouldbe construed to mean that, with respect tosuch a transaction, the assumption of ben-efit liabilities accrued prior to the trans-fer to the private plan would relieve theformer governmental employer (or formergovernmental plan) from responsibilitiesfor those benefits.

(3) Plan coverage for employees of a la-bor union or plan. For purposes of para-graph (k)(1)(iii) of this section, employeesof employee representatives described insection 413(b)(8) (including employees ofa plan) are treated as employees of the plansponsor. See §1.413–1(i).

(4) Examples. The following examplesillustrate the application of this paragraph(k):

Example 1. (i) Facts. Employer C, a non-profitcorporation whose principal place of business is lo-cated in City F, is not a governmental entity. Plan B,a retirement plan, is established and maintained byEmployer C. In a stock acquisition, City F acquiresall the shares of stock of Employer C and, as a result,Employer C becomes a governmental entity.

(ii) Conclusion. After the acquisition, Plan B isestablished and maintained by a governmental entity.

In addition, the employees covered by Plan B are em-ployees of a governmental entity. Thus, Plan B, in-cluding the assets and liabilities attributable to bene-fits accrued in Plan B prior to the date of the acqui-sition, is a governmental plan within the meaning ofsection 414(d) and this section.

Example 2. (i) Facts. Employer G is a hospitalthat is an agency or instrumentality of State A. PlanJ, a retirement plan, is established and maintained byEmployer G. Plan J satisfies the requirements of thisparagraph (k) and is a governmental plan within themeaning of section 414(d). The assets of Employer Gare transferred to a non-profit corporation, EmployerM, which is not a governmental entity. All employeesof Employer G become employees of Employer M.As part of the transaction, Employer M assumes PlanJ, with respect to benefits accrued for service bothbefore and after the transaction.

(ii) Conclusion. Plan J is no longer maintainedby a governmental entity. In addition, the employeescovered by Plan J are no longer employees of a gov-ernmental entity. Therefore, Plan J no longer consti-tutes a governmental plan within the meaning of sec-tion 414(d) and this section. In order for Plan J tocontinue to be a qualified plan, Plan J must satisfythe qualification requirements relating to non-gov-ernmental plans, including with respect to the assetsand liabilities attributable to benefits accrued in PlanJ prior to the date of the sale. The same conclusionwould apply if the transfer were a stock transaction.

Example 3. (i) Facts. Same facts as in Example2, except that, on the date of the sale, Employer Gfreezes Plan J, so that participants in Plan J are nolonger accruing benefits under the plan and all ac-crued benefits are limited to service before the sale.In addition, on the date of the acquisition, State Aassumes Plan J, including responsibility for the pay-ment of benefits previously accrued to participants inPlan J.

(ii) Conclusion. In accordance with paragraph(k)(2)(ii)(B) of this section, Plan J continues to bea governmental plan within the meaning of section414(d) and this section.

Example 4. (i) Facts. Pursuant to a State statute,State L permits local towns and villages to establishrecreational facility authorities to build and promoterecreational activities. Under Statute K, unincorpo-rated Townships M, N, and O (which are political sub-divisions of State L, within the meaning of paragraph(d) of this section) jointly establish a recreational fa-cility authority, Authority R. Financing for AuthorityF is through local taxes and fees. Authority R oper-ates under a three-person board of directors, one eachappointed by townships M, N, and O. Authority Rbuilt and operates a skating rink, Facility S, which islocated in Township O, but is open to the residents ofTownships M, N, and O. Facility S is wholly ownedand controlled by Townships M, N, and O. TownshipO maintains Pension Plan P for its seven employees,which is a governmental plan under section 414(d).Township O amends its plan to permit the three em-ployees of Facility S to participate. The employees ofFacility S are not employees of Township O and arenot employees of a labor union described in section413(b)(8).

(ii) Conclusion. The governmental plan status ofPension Plan P is not affected by the participation ofFacility S’s employees because Facility S is a govern-

2011–51 I.R.B. 891 December 19, 2011

mental entity within the meaning of section 414(d)and this section.

Example 5. (i) Facts. Same facts as Example4, except that Township O amends Plan P to permitparticipation by 10 employees of candy and soft drinkVendor T, a supplier for Facility S. Vendor T is not agovernmental entity.

(ii) Conclusion. Plan P is no longer a governmen-tal plan within the meaning of section 414(d) becauseit provides benefits to employees of a non-govern-mental employer, Vendor T.

(l) Employee. For purposes of this sec-tion, the term employee means a commonlaw employee of the employer (and therules in section 401(c) do not apply).

Indian Tribal GovernmentalPlans


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

ACTION: Advance notice of proposedrulemaking.

SUMMARY: The Treasury Departmentand IRS anticipate issuing regulations un-der section 414(d) of the Internal RevenueCode (Code) to define the term “govern-mental plan.” This document describes therules the Treasury Department and IRS areconsidering proposing relating to the de-termination of whether a plan of an Indiantribal government is a governmental planwithin the meaning of section 414(d) andcontains an appendix that includes a draftnotice of proposed rulemaking on whichthe Treasury Department and IRS invitecomments from the public. This documentapplies to sponsors of, and participants andbeneficiaries in, employee benefit plans ofIndian tribal governments.

DATE: Written or electronic commentsmust be received by February 6, 2012.

ADDRESSES: Send submissions relatingto the section 414(d) draft ITG regulationsto: CC:PA:LPD:PR (REG–133223–08),room 5203, Internal Revenue Service, POBox 7604, Ben Franklin Station, Wash-ington DC, 20044. Submissions may be

hand delivered Monday through Friday,between the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–133223–08),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC.

Alternately, taxpayers may sub-mit comments relating to the sec-tion 414(d) draft ITG regulations lo-cated in the Appendix to this ANPRMelectronically via the Federal eRule-making Portal at www.regulations.gov(IRS-REG–133223–08).

FOR FURTHER INFORMATIONCONTACT: Concerning the ANPRM,Pamela R. Kinard, at (202) 622–6060;concerning submission of comments,Richard Hurst, at (202) 622–7180 (nottoll-free numbers).


Background

This document describes rules that theTreasury Department and IRS are consid-ering proposing and contains a draft noticeof proposed rulemaking (in the Appendixto this ANPRM) under section 414(d) ofthe Internal Revenue Code (Code). Underthe draft notice of proposed rulemaking (inthe Appendix to this ANPRM), the ruleswould provide guidance relating to the de-termination of whether a plan of an Indiantribal government, a subdivision of an In-dian tribal government, or an agency or in-strumentality of either (ITG) is a govern-mental plan within the meaning of section414(d) of the Code (section 414(d) draftITG regulations).

Section 414(d) of the Code providesthat the term “governmental plan” gener-ally means a plan established and main-tained for its employees by the Govern-ment of the United States, by the gov-ernment of any State or political subdivi-sion thereof, or by any agency or instru-mentality of any of the foregoing. Seesections 3(32) and 4021(b)(2) of the Em-ployee Retirement Income Security Actof 1974 (ERISA) for definitions of theterm “governmental plan,” which govern

respectively for purposes of title I and titleIV of ERISA1.

The term “governmental plan” also in-cludes any plan to which the Railroad Re-tirement Act of 1935 or 1937 (49 Stat.967, as amended by 50 Stat. 307) ap-plies and which is financed by contribu-tions required under that Act and any planof an international organization which isexempt from taxation by reason of the In-ternational Organizations Immunities Act(59 Stat. 669). See section 414(d)(2) ofthe Code.

Section 414(d) was amended by thePension Protection Act of 2006, PublicLaw 109–280 (120 Stat. 780) (PPA ’06)to include certain plans of Indian tribalgovernments and related entities.2 Section906(a)(1) of PPA ’06 provides that theterm “governmental plan” includes a planwhich is established and maintained byan Indian tribal government (as defined insection 7701(a)(40)), a subdivision of anIndian tribal government (determined inaccordance with section 7871(d)), or anagency or instrumentality of either (ITG),and all the participants of which are em-ployees of such entity substantially all ofwhose services as such an employee are inthe performance of essential governmentalfunctions but not in the performance ofcommercial activities (whether or not anessential governmental function).

Neither section 414(d) of the Code,section 3(32) of ERISA, nor section4021(b)(2) of ERISA define key termsrelating to governmental plans, includingthe terms “established and maintained,”“political subdivision,” “agency,” and“instrumentality.” Currently, there are noregulations interpreting section 414(d).Revenue Ruling 89–49, 1989–1 C.B. 117,see §601.601(d)(2), sets forth a facts andcircumstances analysis for determiningwhether a retirement plan is a govern-mental plan within the meaning of section414(d).3 This analysis is used by the IRSin issuing letter rulings. In connectionwith this advanced notice of proposedrulemaking, an advance notice of pro-posed rulemaking is also being issuedwith respect to the general definition of a

1 The three definitions of the term “governmental plan” are essentially the same. The only difference is that, in defining the term “governmental plan,” section 3(32) of ERISA uses the phrase“established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use the term “established and maintained.”

2 Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b)(2) of ERISA.

3 See also Rev. Rul. 57–128, 1957–1 C.B. 311, see § 601.601(d)(2), which provides guidance on determining when an entity is a governmental instrumentality for purposes of the exemptionfrom employment taxes under section 3121(b)(7) and 3306(c)(7).

December 19, 2011 892 2011–51 I.R.B.

governmental plan (REG–157714–06 thatis being published elsewhere in this issueof the Bulletin).

Governmental plans are subject to dif-ferent rules than retirement plans of non-governmental employers. Governmentalplans are excluded from the provisions oftitles I and IV of ERISA. In addition, gov-ernmental plans receive special treatmentunder the Code. These plans are exemptfrom certain qualification requirementsand they are deemed to satisfy certain otherqualification requirements under certainconditions. As a result, the principal qual-ification requirements for a tax-qualifiedgovernmental plan4 are that the plan—

• Be established and maintained by theemployer for the exclusive benefit ofthe employer’s employees or their ben-eficiaries;



tion 401(a)(31);• Satisfy the section 401(a)(17) limita-






State and local governments, politicalsubdivisions thereof, and agencies or in-strumentalities thereof are generally notpermitted to offer cash or deferred arrange-ments under section 401(k). However, anITG is permitted to offer a cash or deferredarrangement under section 401(k).

Notice 2006–89, 2006–2 C.B. 772, andNotice 2007–67, 2007–2 C.B. 467, see§601.601(d)(2), summarize the changesmade by section 906(a)(1) of PPA ’06 andprovide transitional relief to ITGs undera reasonable and good faith standard tocomply with such changes. The notices

provide that until such guidance is issued,a plan established and maintained by anITG for its employees is treated as satisfy-ing the requirements of section 906(a)(1)of PPA ’06 to be a governmental planunder section 414(d) of the Code if it com-plies with those requirements based on areasonable and good faith interpretation ofsection 414(d). For further background,see the “Background” section of the pre-amble of the section 414(d) draft ITGregulations in the Appendix to this AN-PRM under the headings, “Notices Issuedby the IRS Relating to ITG RetirementPlans under PPA ’06.”

The Treasury Department and the IRSparticipated in a series of telephone listen-ing meetings with the ITG community fol-lowing the passage of PPA ’06. The at-tached draft notice of proposed rulemak-ing in the Appendix to this ANPRM takesinto account comments provided througha number of informative and cooperativecomments received in response to Notices2006–89 and 2007–67 and open and directconsultations with the Indian tribal com-munity. Those comments received fromNotices 2006–89 and 2007–67 and duringthe consultations were considered in draft-ing the proposed rulemaking.

The Treasury Department and the IRShave determined to seek public commentand consult with ITGs on the draft pro-posed regulations in advance of issuing anotice of proposed rulemaking. In lightof the interaction of the governmental plandefinitions in the Code and ERISA, a copyof the comments will be forwarded to DOLand PBGC.


Attached to the Appendix to thisANPRM is a draft notice of proposedrulemaking. These draft regulationsinclude proposed rules, a preamble, anda request for comments. The TreasuryDepartment and IRS invite the public tocomment on the rules that the TreasuryDepartment and IRS are consideringproposing, which would set forth specialrules relating to retirement plans of ITGs.

Section 414(d) Draft ITG regulations

A plan established and maintained byan ITG is a governmental plan under sec-tion 414(d), as amended by section 906of PPA ’06, only if all of its participantsare employees substantially all of whoseservices are in the performance of essen-tial governmental functions (but not inthe performance of commercial activitieswhether or not an essential governmentalfunction). Therefore, the rules under thesection 414(d) draft general regulations(in the Appendix to the ANPRM that isbeing published elsewhere in this issue ofthe Bulletin) would apply to ITG govern-mental plans, as well as the special rulesunder the attached section 414(d) draftITG regulations. The anticipated pro-posed regulations would use the broaderconcepts of governmental activity andcommercial activity, instead of the termsessential governmental function and com-mercial activity. See the “Explanation ofProvisions” section in the section 414(d)draft ITG regulations in the Appendix tothis ANPRM under the heading, “Determi-nation of Governmental and CommercialActivities.”

Under the section 414(d) draft ITG reg-ulations (in the Appendix to this ANPRM),whether a plan of an ITG is a governmentalplan or a nongovernmental plan within themeaning of section 414(d) would be based,in part, on: (1) a determination of whichactivities are commercial activities and (2)a determination of whether employees ofthe ITG covered by the plan are employeeswho perform substantial services in com-mercial activities of the ITG (and are thuscommercial employees).

The anticipated proposed regulationswould provide that certain specific ac-tivities are deemed to be governmentalor commercial for purposes of section414(d). Under the anticipated proposedregulations, commercial activities wouldbe operations involving a hotel, casino,service station, convenience store, or ma-rina. These activities are examples thatwere identified as commercial activitiesin Notices 2006–89 and 2007–67, as wellas in the Joint Committee on Taxation



2011–51 I.R.B. 893 December 19, 2011

Technical Explanation to section 906 ofPPA ’06. The section 414(d) draft ITGregulations in the Appendix to this AN-PRM would provide that governmentalactivities include activities related to thebuilding and maintenance of public roads,sidewalks, and buildings, activities relatedto public works projects (such as schoolsand government buildings), and activitiesthat are subject to a treaty or special rulesthat pertain to trust land ownership anduse. See §601.601(d)(2).

In addition to listing certain specifiedactivities, the anticipated proposed regu-lations would provide a facts and circum-stances test for determining whether anactivity is a governmental or commercialactivity. See the “Explanation of Provi-sions” section in the section 414(d) draftITG regulations in the Appendix to thisANPRM under the heading, “Governmen-tal and Commercial Activities.” The an-ticipated proposed regulations would alsoprovide examples illustrating the applica-tion of the facts and circumstances tests toparticular activities.

The anticipated proposed regulationswould also provide rules for determin-ing whether employees covered by anITG plan are employees who performsubstantial services in activities that aregovernmental. For this purpose, the de-termination of whether an employee’sservices are for governmental or commer-cial activities would generally be basedon the employee’s assigned duties andresponsibilities. See the “Explanation ofProvisions” section in the section 414(d)draft ITG regulations in the Appendix tothis ANPRM under the headings, “Deter-mination of Governmental ITG Employ-ees” and “Determination of CommercialITG Employees.”

The anticipated proposed regulationsdo not address the broader issue of whethera retirement plan is a governmental planwithin the meaning of section 414(d). Thattopic is addressed in the advance notice ofproposed rulemaking relating generally tothe definition of governmental plan that isbeing published elsewhere in this issue ofthe Bulletin.

Request for Comments

Before a notice of proposed rulemakingis issued, consideration will be given toany written comments that are submitted

timely (preferably a signed original andeight (8) copies) to the IRS. All commentswill be available for public inspection andcopying. Copies of the comments will beprovided to the DOL and PBGC.

Comments are also requested onwhether, as an alternative to issuing pro-posed regulations, the Department ofTreasury and IRS should publish a noticethat reflects some or all of the rules inthe draft proposed regulations and thatalso modifies the rule in Notice 2007–67concerning when a mixed ITG is requiredto be amended to be two different plans,one for governmental employees and an-other for commercial employees. If so, thenotice would include a significant transi-tional period for compliance similar to thetransition period that would be expectedto apply for regulations (such as not beingeffective until plan years that begin at least18 months after publication of the notice).The Department of Treasury and IRS in-vite comments on whether this methodof guidance would be preferable to theissuance of regulations.

The IRS and Department of Treasuryplan to schedule a public hearing on theANPRM. That hearing will be scheduledand announced at a later date. In ad-dition to a public hearing, the TreasuryDepartment and IRS anticipate schedul-ing consultation listening meetings in or-der to obtain comments from tribal gov-ernments on the section 414(d) draft ITGregulations. It is expected that these meet-ings will take place in different locationsacross the country. Participants will beencouraged to pre-register for the meet-ings. Information relating to these meet-ings, including dates, times, locations, reg-istration, and the procedures for submittingwritten and oral comments, will be avail-able on the IRS website relating to govern-mental plans at http://www.irs.gov/retire-ment/article/0,,id=181779,00.html.

EO 13175, Consultation andCoordination with Indian TribalGovernments

In the Appendix to this ANPRM isa draft notice of proposed rulemaking.These draft regulations include proposedrules, a preamble, and a request for com-ments. The Treasury Department and theIRS invite the public to comment on therules under consideration, which would

set forth special rules relating to retirementplans of ITGs. This solicitation of com-ments is in furtherance of the objectiveof Executive Order 13175 under whichTreasury consults with tribal officials inthe development of Federal policies thatmay have tribal implications. The IRS andTreasury Department will consult withIndian tribes through the normal commentprocess in the Federal Register, issuingthis advance notice of public rulemaking,and reaching out to Indian tribes through aseries of consultation listening meetings.


The principal author of this ad-vance notice of proposed rulemaking isPamela R. Kinard, Office of the ChiefCounsel (Tax-exempt and GovernmentEntities), however, other personnelfrom the IRS and Treasury Departmentparticipated in its development.



APPENDIX

The following is draft language for anotice of proposed rulemaking that wouldset forth rules relating to the determinationof whether a plan of an Indian tribal gov-ernment is a governmental plan within themeaning of section 414(d). The IRS andTreasury release this draft language in or-der to solicit comments from the govern-mental plans community:

Background

This document contains proposed regu-lations under section 414(d) of the InternalRevenue Code (Code). These regulations,when finalized, would provide guidancerelating to the determination of whethera plan of an Indian tribal government orother entities related to an Indian tribalgovernment is a governmental plan withinthe meaning of section 414(d). The defini-tion of a governmental plan under section414(d) applies for purposes of Part I ofSubchapter D of Chapter 1 of SubtitleA (Income Taxes) of the Code (sections401 through 420) and certain other Code

December 19, 2011 894 2011–51 I.R.B.

provisions that refer to section 414(d)(such as sections 72(t)(10), 501(c)(25)(C),4975(g)(2), 4980B(d)(2), 9831(a)(1), and9832(d)(1) of the Code).

Statutory Definition of GovernmentalPlan

Both the Code and the Employee Re-tirement Income Security Act of 1974(ERISA) define the term “governmen-tal plan.” Prior to the Pension ProtectionAct of 2006, Public Law 109–280 (120Stat. 780) (PPA ’06), section 414(d) ofthe Code provides that the term “govern-mental plan” means a plan establishedand maintained for its employees by theGovernment of the United States, by thegovernment of any State or political sub-division thereof, or by any agency orinstrumentality of any of the foregoing.Sections 3(32) and 4021(b)(2) of ERISAhave parallel definitions of the term “gov-ernmental plan.” The term “governmentalplan” also includes any plan to which theRailroad Retirement Act of 1935 or 1937(49 Stat. 967, as amended by 50 Stat. 307)applies and which is financed by contribu-tions required under that Act and any planof an international organization which isexempt from taxation by reason of the In-ternational Organizations Immunities ActPublic Law 79–291 (59 Stat. 669).

Section 906 of PPA ’06

Section 906(a) of PPA ’06 amendedsection 414(d) of the Code (and the par-allel provisions in sections 3(32) and4021(b)(2) of ERISA) to include in thedefinition of “governmental plan” cer-tain plans of an Indian tribal government,a subdivision of an Indian tribal gov-ernment, or an agency or instrumental-ity thereof. Specifically, under section906(a)(1) of PPA ’06, the term “govern-mental plan” includes a plan which isestablished and maintained for its em-ployees by an Indian tribal government(as defined in section 7701(a)(40)), a sub-division of an Indian tribal government

(determined in accordance with section7871(d)), or an agency or instrumentalityof either (ITG), and all of the participantsof which are employees of such entitysubstantially all of whose services assuch an employee are in the performanceof essential governmental functions butnot in the performance of commercialactivities (whether or not an essential gov-ernmental function). Section 906(c) ofPPA ’06 provides that the amendmentsmade by section 906 of PPA ’06 apply toany year beginning on or after the date ofenactment, which is August 17, 2006.

In its Technical Explanation6 to sec-tion 906 of PPA ’06, the Joint Commit-tee on Taxation refers to an employee sub-stantially all of whose services for an ITGare in the performance of essential govern-mental services and not in the performanceof commercial activities (whether or notsuch activities are an essential governmen-tal function) as a qualified employee whois eligible to participate in a governmentalplan as described in section 414(d). TheTechnical Explanation states, for example,that a governmental plan includes a planof an ITG, all of the participants of whichare teachers in tribal schools. However,the Technical Explanation also states thata governmental plan does not include aplan covering tribal employees who areemployed by a hotel, casino, service sta-tion, convenience store, or marina oper-ated by a tribal government.

Exemption of Governmental ITG Plansfrom Certain Qualified Plan Rules

Governmental plans under Code sec-tion 414(d), including governmental ITGplans, receive special treatment with re-spect to certain qualification rules. Suchplans are exempt from certain qualificationrequirements and are deemed to satisfycertain other qualification requirementsunder certain conditions. For example, thenondiscrimination and minimum partici-pation rules do not apply to governmentalplans.7 In addition, the Code provides

other exemptions for section 414(d) gov-ernmental plans:

• Section 401(a)(10)(B)(iii), which pro-vides that the top-heavy requirementsof section 416 do not apply to a gov-ernmental plan.

• Section 410(c)(1)(A), which providesthat the minimum participation provi-sions of section 410 do not apply to agovernmental plan.

• Section 411(e), which provides that agovernmental plan is treated as satis-fying the requirements of section 411if the plan meets the pre-ERISA vest-ing requirements.

• Section 412(e)(2)(C), which providesthat the minimum funding standards ofsection 412 do not apply to a govern-mental plan.

• Section 417, which provides rules re-lating to qualified joint and survivorannuities and qualified preretirementsurvivor annuities.

Section 415 also provides a number ofspecial rules for governmental plans. Thespecial rules include section 415(b)(11)(under which governmental pensions arenot limited to 100% of a participant’saverage high 3 compensation), section415(b)(2)(I) (the reduced limitation to theannual benefit payable beginning beforeage 62 and the reduction in the dollar lim-itation to the annual benefit payable forparticipation or services of less than 10years do not apply to disability or survivorbenefits received from a governmentalplan), section 415(m) (benefits providedunder a qualified governmental excessbenefit arrangement are not taken intoaccount in determining the section 415benefit limitations under a section 414(d)governmental plan), and section 415(n)(permissive service credit).

As a result, the principal qualificationrequirements for a tax-qualified govern-mental plan8 are that the plan—

• Be established and maintained by theemployer for the exclusive benefit of

6 Joint Committee on Taxation, Technical Explanation of H.R. 4, the “Pension Protection Act of 2006” as passed by the House on July 28, 2006, and considered by the Senate on August 3,2006 (JCX–38–06), August 3, 2006, 109th Cong., 2nd Sess. 244 (2006).

7 Section 861 of PPA ’06 amended sections 401(a)(5)(G) and 401(a)(26)(G) of the Code to provide that the minimum participation standards and nondiscrimination requirements of section410 and the additional participation requirements under section 401(a)(26) do not apply to governmental plans within the meaning of section 414(d) of the Code. Section 861 of PPA ’06 alsoexempts governmental plans from the nondiscrimination and participation requirements applicable to qualified cash or deferred arrangements under section 401(k)(3) of the Code.


2011–51 I.R.B. 895 December 19, 2011

the employer’s employees or their ben-eficiaries;



tions 401(a)(31) and 402(f);• Satisfy the section 401(a)(17) limita-






State and local governments, politicalsubdivisions thereof, and agencies or in-strumentalities thereof are generally notpermitted to offer cash or deferred arrange-ments under section 401(k).10 However,Indian tribal governments and their relatedentities are permitted to offer cash or de-ferred arrangements as part of a plan main-tained by an ITG.11

Rules Treating Indian Tribal Governmentsas States for Purposes of IssuingTax-Exempt Bonds

Section 7871 provides special rulesfor Indian tribal governments. Section7871(a)(4) provides that an Indian tribalgovernment is to be treated as a Statefor purposes of section 103, relating totax-exempt bonds.12 Section 7871(c)(1)generally provides that section 103(a) ap-plies to an obligation issued by an Indiantribal government only if such obligationis part of an issue substantially all of theproceeds of which are to be used in theexercise of any essential governmentalfunction.

On August 9, 2006, an advance no-tice of proposed rulemaking under section7871 was published in the Federal Regis-ter (71 FR 45474). The ANPRM describes

the rules that the Treasury Department andthe IRS anticipate proposing on the defini-tion of essential governmental function un-der section 7871(e). The rules would pro-vide that an activity is considered an es-sential governmental function that is cus-tomarily performed by State and local gov-ernments if: (1) there are numerous Stateand local governments with general tax-ing powers that have been conducting theactivity and financing it with tax-exemptgovernmental bonds; (2) State and localgovernments with general taxing powershave been conducting the activity and fi-nancing it with tax-exempt governmentalbonds for many years; and (3) the activityis not a commercial or industrial activity.The ANPRM provides examples of activ-ities customarily performed by State andlocal governments, including public worksprojects such as roads, schools, and gov-ernment buildings.

Notices Issued by the IRS Relating to ITGRetirement Plans under PPA ’06

Notice 2006–89, 2006–2 C.B. 772, andNotice 2007–67, 2007–2 C.B. 467, see§601.601(d)(2), summarize the changesmade by section 906(a)(1) of PPA ’06 andprovide transitional relief to ITGs undera reasonable and good faith standard tocomply with such changes. The noticesprovide that, until such guidance is is-sued, a plan established and maintainedby an ITG for its employees is treatedas satisfying the requirements of section906(a)(1) of PPA ’06 to be a governmentalplan under section 414(d) of the Code ifit complies with those requirements basedon a reasonable and good faith interpreta-tion of section 414(d). The notices furtherprovide that it is not a reasonable and goodfaith interpretation of section 414(d) foran ITG plan to claim to be a governmentalplan within the meaning of section 414(d)if employees participating in the plan per-form services for a hotel, casino, servicestation, convenience store, or marina op-erated by an ITG.

In Notices 2006–89 and 2007–67, theTreasury Department and IRS announcedthat regulations would be proposed to pro-vide guidance on section 414(d), includingchanges made to section 414(d) by section906 of PPA ’06, and to provide transitionalrelief pending the issuance of these regula-tions. Comments were requested on issuesrelating to section 906 of PPA ’06, includ-ing transitional issues not addressed in thenotice.

The transitional relief provided toplans of ITGs under Notices 2006–89 and2007–67 continues up to the date that issix months after the date that guidance isissued under section 414(d) of the Code,as amended by section 906 of PPA ’06 (ex-tended date). For ITG plans that providebenefits both to employees substantiallyall of whose work is in essential govern-mental functions that are not commercialactivities (governmental ITG employ-ees) and to employees who perform ser-vices substantially in the performance ofcommercial activities (commercial ITGemployees), the Notices provide that theITG plan will be treated as satisfying thereasonable, good faith standard if certainsteps are taken, which include adopting aseparate plan covering commercial ITGemployees effective as of the beginning ofthe first plan year beginning on or after Au-gust 17, 2006, the enactment of PPA ’06.The commercial ITG plan, beginning onthe same effective date, must comply withthe qualification requirements for plansthat are not governmental plans.

These proposed regulations would pro-vide guidance relating to ITG plans undersection 414(d). The transitional relief pro-vided under Notices 2006–89 and 2007–67would end six months after the effectivedate of the final regulations published inthe Federal Register.

The transitional relief in Notices2006–89 and 2007–67 is conditioned onthe ITG plans involved not being amended,for periods before the extended date, toreduce benefits unless the reduction doesnot distinguish between reductions for


10 Section 401(k)(4)(B)(ii) provides that a cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is part of a plan maintained by a State or localgovernment or political subdivision thereof, or any or agency or instrumentality thereof.

11 See section 401(k)(4)(B)(iii). For a general overview of the special rules relating to plans of ITGs, see the Joint Committee on Taxation, Overview of Federal Tax Provisions Relating toNative American Tribes and Their Members (JCX 61–08), July 18, 2008.

12 An Indian tribal government is treated in the same manner as a State for certain specified purposes under the Code, but not for purposes of section 414(d) (or any provision in sections 401through 424, other than sections 403(b)(1)(A)(ii)).

December 19, 2011 896 2011–51 I.R.B.

commercial ITG employees and govern-mental ITG employees or the reductionfor commercial ITG employees is the min-imum amount necessary to satisfy anyrequirement under the Code. If any re-duction occurs that does not satisfy theseconditions, the transitional relief providedunder Notices 2006–89 and 2007–67 endson the date that the reduction goes intoeffect.

Executive Order 13175

Executive Order 13175 requires thatFederal departments and agencies engagein consultation procedures in certain cir-cumstances where regulations are issuedwhich have substantial direct effects withrespect to the Federal government and In-dian tribes. While these regulations whenissued as final regulations would not havesuch substantial direct effects, the IRSand Treasury Department have followedsimilar procedures. Further, the TreasuryDepartment and the IRS participated ina series of telephone listening meetingswith the ITG community following thepassage of PPA ’06 and these proposedregulations also take into account the com-ments that were provided in response toNotices 2006–89 and 2007–67, includingthe related open and direct consultationswith the Indian tribal community.

Judicial Determinations

The few court cases that discuss section906 of PPA ’06 primarily relate to welfarebenefit plans. One reason for the legisla-tive change to section 414(d) of the Codeand section 3(32) of ERISA is “to clar-ify the legal ambiguity regarding the statusof employee benefit plans established andmaintained by tribal governments.”13 InBolssen v. Unum Life Insurance Companyof America, 629 F.Supp. 2d 878 (E.D.Wis. 2009), Mr. Bolssen sued the UnumLife Insurance Company for failing to pro-vide disability insurance benefits. He ar-gued that the case should be remandedto state court because the insurance plansponsored by his employer, an Indian tribalcasino, was a governmental plan within themeaning of section 3(32) of ERISA. In an-

alyzing whether the welfare benefit planwas a governmental plan, the Bolssen courtlooked to another case involving an Indiantribal casino, San Manuel Indian Bingo &Casino v. NLRB, 475 F.3d 1306 (D.C. Cir.2007). In San Manuel Indian Bingo &Casino, the court held that the NationalLabor Relations Act applied to an Indiantribal casino because the operation of thecasino was a commercial function. Thecourt reasoned that “it can be argued anyactivity of a tribal government is by def-inition ‘governmental,’ and even more soan activity aimed at raising revenue thatwill fund governmental functions. Here,though, we use the term ’governmental’ ina restrictive sense to distinguish betweenthe traditional acts governments performand collateral acts that, though perhaps insome way related to the foregoing, lie out-side their scope.”14

The court, in San Manuel Indian Bingo& Casino, held that operating a casino isnot a traditional act of government, butis commercial in nature.15 The court inBolssen applied the same reasoning to con-clude that disability plan of the casino wasnot a governmental plan within the mean-ing of section 3(32) of ERISA.


These proposed regulations wouldprovide special rules for purposes of thedefinition of a “governmental plan” undersection 414(d) of the Code, as it relates toplans of ITGs. The Treasury Departmentand IRS also expect to issue separate pro-posed regulations under section 414(d) todefine a governmental plan for purposesother than the special rules applicable toITGs. However, these proposed regu-lations relating to ITGs would provideIndian tribal governments with guidancein determining whether an ITG plan is agovernmental ITG plan or a commercialITG plan. As discussed in the backgroundof this preamble, under the heading “Ex-emption of Governmental ITG Plans fromCertain Qualified Plan Rules,” govern-mental plans receive special treatmentwith respect to certain qualification rules.Thus, the determination of whether anITG plan is a governmental ITG plan is

essential in ensuring compliance with thequalified plan rules because an ITG mustbe able to ascertain which of its plans aregovernmental plans under section 414(d)and which of its plans must comply withthe requirements for a plan that is nota governmental plan. These proposedregulations take into account commentsreceived in response to Notices 2006–89and 2007–67 and a number of open anddirect consultations with the Indian tribalcommunity. Those comments receivedfrom Notices 2006–89 and 2007–67 andduring the consultations were consideredin drafting these proposed regulations.

Determination of Governmental andCommercial Activities

As discussed earlier in the backgroundsection of this preamble, a governmentalplan, as it relates to ITGs, may includea plan established and maintained by anITG, but such a plan is a governmentalplan under section 414(d) only if all ofits participants are employees substantiallyall of whose services are in the perfor-mance of essential governmental functions(but not in the performance of commercialactivities whether or not an essential gov-ernmental function). Key to determiningwhether a plan of an ITG is a governmentalplan within the meaning of section 414(d)is the determination of the terms “essentialgovernmental function” and “commercialactivity.”

These proposed regulations would usethe concepts of “governmental activity”and “commercial activity,” instead of theterms “essential governmental function”and “commercial activity.” The terms“governmental activity” and “commercialactivity” would apply only for purposes ofthe governmental plan rules under section414(d) and not for any other purpose underthe Code, including section 7871. The useof these terms is meant to provide guidanceon the requirements of section 414(d) withrespect to ITG plans, while maintainingflexibility and without directly impactingfuture guidance on section 7871.

These proposed regulations would de-fine a governmental ITG plan as any planthat is established and maintained by an In-

13 See Dobbs v. Anthem Blue Cross & Blue Shield, 475 F.3d 1176, 1178 (10th Cir. 2007) (citing 150 Cong. Rec. S9526, 9533), rev’d in part 600 F.3d 1275 (2010). See also Bolssen v. UnumLife Insurance Company of America, 629 F.Supp. 2d 878, 881 (E.D. Wis. 2009).

14 San Manuel Indian Bingo & Casino, 475 F.3d at 1313.

15 Id. at 1315.

2011–51 I.R.B. 897 December 19, 2011

dian tribal government, a subdivision of anIndian tribal government, or an agency orinstrumentality of either, and all of its par-ticipants are employees substantially all ofwhose services are in the performance ofgovernmental activities. The regulationswould define a commercial ITG plan asa plan covering any ITG employees whoperform substantial services in a commer-cial activity, such as a hotel, casino, ser-vice station, convenience store, or marina,which are examples of commercial activi-ties that are listed in the Joint Committeeon Taxation Technical Explanation to sec-tion 906 of PPA ’06.16 A plan would alsobe a commercial plan if it covers any indi-vidual who is not an employee of an ITG.

Governmental and Commercial Activities

Under the proposed regulations,whether a plan of an ITG is a commercialplan or a governmental plan within themeaning of section 414(d) is based in parton (1) a determination of which activitiesare commercial activities and (2) a de-termination of whether employees of theIndian tribal government covered by theplan are employees who perform substan-tial services in commercial activities (andare thus commercial employees).

Under the first step, the proposed regu-lations would provide guidance for deter-mining whether an activity operated by anITG is a governmental activity or a com-mercial activity for purposes of section414(d). This is achieved by listing certainspecific activities that are deemed to begovernmental or commercial for purposesof section 414(d). Specific governmentalactivities would include the following: (1)activities that are related to public infra-structure, such as the building and main-taining of public roads and buildings; (2)activities that involve providing criminalprotection services to the public (such aspolice and fire departments) or providingcivil or public administrative service (suchas providing public housing and operat-ing public schools and hospitals, as wellas managing the ITG’s civil service sys-tem); and (3) activities subject to a treatyor special rules that pertain to trust landownership and use. Under the regulations,operations involving a hotel, casino, ser-vice station, convenience store, and ma-

rina would be commercial activities. Asdiscussed above, these activities are exam-ples that are identified as commercial ac-tivities in Notices 2006–89 and 2007–67,as well as in the Joint Committee on Taxa-tion Technical Explanation to section 906of PPA ’06.

In addition to listing certain specifiedactivities, the proposed regulations wouldprovide a facts and circumstances test fordetermining whether an activity is a gov-ernmental or commercial activity. Theproposed regulations provide that, in mak-ing a determination of whether an activityis a governmental activity, the factors to beconsidered include whether—

• The activity provides a public benefitto members of the Indian tribal gov-ernment (not treating the generation ofprofits from commercial acts as pro-viding a public benefit); and

• The absence of one or more of the rel-evant factors listed for a commercialactivity as provided in these proposedregulations.

The proposed regulations also providethat, in making a determination of whetheran activity is a commercial activity, thefactors to be considered include whether—

• The activity is a type of activity that isoperated to earn a profit;

• The activity is a type of activity thatis typically performed by private busi-nesses; and

• The activity is a type of activity wherethe customers are substantially fromoutside of the Indian tribal community,including whether the activity is lo-cated or conducted outside of Indiantribal land.

These proposed regulations also pro-vide examples illustrating the applicationof the facts and circumstances tests to par-ticular activities. Some examples of ac-tivities of an Indian tribal government thatare commercial might include: (1) oper-ating a bank for a profit, serving tribaland non-tribal customers; (2) operating atrucking business for a profit; and (3) op-erating a factory producing goods for saleprimarily to non-tribal customers. Con-versely, examples of activities of an Indian

tribal government that are governmentalcould include: (1) a community swimmingpool on tribal land used primarily by tribalmembers; and (2) the operation of a cul-tural center and a museum on tribal land.

The proposed regulations would alsodelegate to the Commissioner of InternalRevenue the authority to publish guid-ance under section 414(d) that the Com-missioner determines to be necessary orappropriate with respect to determiningwhether a plan of an Indian tribal govern-ment is a commercial ITG plan becausethe tribe’s employees are performing ser-vices in an activity that the Commissionerdetermines to be a commercial activity.Any such guidance would be publishedin the form of revenue rulings, notices, orother guidance published in the InternalRevenue Bulletin (see §601.601(d)(2)).

Determination of Governmental ITGEmployees

These proposed regulations would alsoprovide rules for the second step, namelydetermining whether employees coveredby an ITG plan are employees who per-form substantially all of their services inactivities that are governmental. For thispurpose, the determination of whether anemployee’s services are for governmentalor commercial activities would generallybe based on the employee’s assigned du-ties and responsibilities. In making thisdetermination, the rules in these regula-tions would not require that a plan keeptrack of the individual hours worked byany employee or that the compensation ofany particular employee be traced throughthe hours worked by that employee. Theproposed regulations would provide thatan employee whose assigned duties andresponsibilities are in the performance ofa governmental activity is treated as per-forming substantially all of his or her ser-vices in a governmental activity, and nottreated as performing services for a com-mercial activity, even though the perfor-mance of those services for the govern-mental activity may temporarily involvesignificant time working in the commer-cial activity. For example, the chief fi-nancial officer (CFO) for an ITG may beexpected to spend a substantial amountof time working on the financing for any

16 Joint Committee on Taxation, Technical Explanation of H.R. 4, the “Pension Protection Act of 2006” as passed by the House on July 28, 2006, and considered by the Senate on August 3,2006 (JCX–38–06), August 3, 2006, 109

thCong., 2

ndSess. 244 (2006).

December 19, 2011 898 2011–51 I.R.B.

casino, marina, or hotel to be built on theITG’s tribal lands, but, despite temporarilyworking in a commercial activity, the pro-posed regulations would provide that theCFO is a governmental employee of theITG all of whose services are in that ca-pacity.

Determination of Commercial ITGEmployees

The proposed regulations set forth rulesfor determining an employee’s assignedduties and responsibilities, and thus whenhis or her services are substantially in theperformance of a governmental or com-mercial activity. The analysis would startwith the location of the employee’s ser-vices in relation to the activity. The reg-ulations provide that if a commercial ac-tivity has a specific location that is identi-fiable and is not associated with a govern-mental activity, any employee performingservices at the location of activity is a com-mercial employee. One example is a secu-rity guard whose work is providing secu-rity services at a location which is an In-dian tribal casino. In the case of an em-ployee who works at a location other thana location where a commercial activity isbeing performed, the result would dependon the employee’s assigned duties and re-sponsibilities.

Another key part of the analysis is whopays the employee. If an employee is onthe payroll of an ITG entity that is en-gaged in a commercial activity, the em-ployee’s assigned duties and responsibil-ities are treated as being for a commer-cial activity and, thus, the employee is acommercial ITG employee. For example,if a cashier is on the payroll of a conve-nience store (which is a commercial activ-ity) owned by an ITG, the cashier is a com-mercial ITG employee. However, in thecase of an employee who is not on a payrollof an ITG that engages in a commercial ac-tivity, the result would depend on the em-ployee’s assigned duties and responsibili-ties.

Where an employee neither works ata location where a commercial activity isbeing performed nor is on the payroll ofa commercial entity, the result would de-pend on the employee’s assigned dutiesand responsibilities, taking into accountthe facts and circumstances. Thus, for ex-ample, a bookkeeper located in a govern-

mental building and paid through the gen-eral payroll of the ITG would neverthe-less be a commercial employee if the factsand circumstances indicate that his or herassigned duties and responsibilities are tomaintain the books and records for a hotelowned and operated by an ITG.

The statutory language in section414(d) makes it clear that a plan is not agovernmental ITG plan if it covers anyemployee who is a commercial ITG em-ployee. There is no de minimis exceptionrelating to this rule under section 414(d).In light of these circumstances, an ITGmay choose to use caution when coveringemployees in a governmental plan. If,after applying the rules, an ITG plan spon-sor is not certain whether an employee isa governmental ITG or commercial ITGemployee, the ITG may choose to providecoverage for the employee in its commer-cial ITG plan in order to ensure the preser-vation of the status of the governmentalITG plan. Coverage of a governmentalemployee in a commercial plan would notadversely affect the qualified status of thecommercial plan.

Reasonable, Good Faith Interpretation

The proposed regulations provide that,in general, an ITG plan will not be treatedas failing to satisfy the assignment of em-ployee rules if the plan complies with thoserules under a standard that constitutes areasonable, good faith interpretation of thestatute, taking into account the final regu-lations and any other published guidancethat relates to the application of section414(d) to ITGs. The reasonable, good faithinterpretation standard for the assignmentof employees to governmental and com-mercial plans would only apply if the ben-efit levels between the separate govern-mental and commercial plans are uniform.Thus, this reasonable, good faith interpre-tation standard would not apply if the ben-efit level for employees under a plan pur-porting to be a governmental plan is higherthan that of the benefit level under a sepa-rate plan covering employees who includecommercial employees.

Assignment of Shared Employees

Under these rules, there may be casesin which an employee is transferred fromone ITG employer to another. An em-ployee may also perform substantially all

of his or her services in the performance ofa governmental activity and later the em-ployee’s assigned duties and responsibili-ties may change, so that the employee issubsequently performing substantially allof his or her duties in the performance ofa commercial activity. In addition, an em-ployee may work two separate and distinctjobs, one in a commercial activity of anITG and another in a governmental activ-ity of an ITG (for example, an ITG em-ployee who works as a full-time police of-ficer and also works at the front desk inthe lobby of a hotel over the weekends).For all of these scenarios, assuming theITG maintains separate plans for its gov-ernmental and commercial employees, theITG should assign the employee to eitherplan based on prorating service credits andallocating compensation between the gov-ernmental and commercial activities.

Application of the Controlled Group Rulesto ITG Plans

These proposed regulations do notaddress the rules under which, for pur-poses of sections 401, 408(k), 408(p),410, 411, 415, and 416, all employeesof all corporations that are members ofa controlled group of corporations aretreated as employed by a single employerfor purposes of these controlled grouprules. Note that, under current guidance,a reasonable, good faith interpretationstandard applies with respect to govern-ments. See Notice 89–23, 1989–1 C.B.654, and Notice 96–64, 1996–2 C.B. 229,see §601.601(d)(2) of this chapter.

Proposed Effective Date

The proposed regulations would applyto plan years beginning 6 months afterpublication of these regulations as finalregulations. For plan years after the statu-tory effective date of the PPA ’06 amend-ment of section 414(d) and prior to theeffective date of these regulations as fi-nal regulations, a plan of an ITG wouldbe treated as a governmental plan for pur-poses of section 414(d), providing that areasonable, good faith effort is made toensure that the plan satisfy the conditionsfor being a governmental plan under sec-tion 414(d), taking into account relevantguidance, including Notices 2006–89 and2007–67. To the extent that a plan of an In-dian tribal government complies with the

2011–51 I.R.B. 899 December 19, 2011

requirements under either the notices orthe proposed regulations, the plan will betreated as making a reasonable, good faitheffort to satisfy the requirements of section414(d).

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. In addition, because no collectionof information is imposed on small enti-ties, the provisions of the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do not ap-ply, and therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theSmall Business Administration for com-ment on its impact on small business.


Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronic comments that are submittedtimely to the IRS. The Treasury Depart-ment and the IRS specifically requestcomments on the clarity of the proposedrules and how they can be made easier tounderstand. Comments are specificallyrequested on whether a correction mecha-nism under the Employee Plans Compli-ance Resolution System (EPCRS), as setforth in Rev. Proc. 2008–50, 2008–35I.R.B. 464, see §601.601(d)(2), might behelpful for cases in which an employeesubstantially all of whose services arenot in the performance of a governmen-tal activity has nevertheless inadvertentlybecome a participant in a plan purportingto be a governmental plan. For example,assuming the various conditions for selfcorrection have been satisfied (see sec-tion 4.09 of Rev. Proc. 2008–50, whichprovides that the failure must be an oper-ational failure which occurred by mistakeor oversight, even though the plan hadestablished practices and procedure to en-sure qualification, and which is promptly

corrected), the plan’s assets and liabili-ties with respect to the employee mightbe transferred to a similar plan coveringcommercial employees under which theemployee would accrue benefits up to thelevel that would have applied if he or shehad participated in that commercial planduring the period when he or she wasa commercial employee. All commentswill be available for public inspection andcopying.

A public hearing has been scheduledfor (date to be provided when proposedregulations are published), beginning at10 a.m. in the Auditorium, Internal Rev-enue Building, 1111 Constitution Avenue,NW, Washington DC. Due to building se-curity procedures, visitors must enter at themain entrance, located at 1111 Constitu-tion Avenue, NW. In addition, all visitorsmust present photo identification to enterthe building. Because of access restric-tions, visitors will not be admitted beyondthe immediate entrance area more than 30minutes before the hearing starts. For in-formation about having your name placedon the building access list to attend thehearing, see the “FOR FURTHER INFOR-MATION CONTACT” portion of this pre-amble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments must submit writ-ten or electronic comments and an outlineof the topics to be discussed and time tobe devoted to each topic (signed originaland eight (8) copies) by (date to be pro-vided when proposed regulations are pub-lished). A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedul-ing of the speakers will be prepared afterthe deadline for receiving comments haspassed. Copies of the agenda will be avail-able free of charge at the hearing.


The principal author of these proposedregulations is Pamela R. Kinard, Officeof Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities), Internal Revenue Service.However, personnel from other officesof the IRS and Treasury Departmentparticipated in their development.

* * * * *




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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.414(d)–1 is amended

by adding paragraph (g) to read as follows:

§1.414(d)–1 Definition of governmentalplan.

* * * * *(g) Special rules for plans of Indian

tribal governments—(1) Definition of gov-ernmental plan as it relates to Indian tribalgovernments. For purposes of applyingparagraph (a)(3) of this section, a govern-mental plan as it relates to an Indian tribalgovernment is a plan that is established andmaintained for its employees by an Indiantribal government, a subdivision of an In-dian tribal government, or an agency or in-strumentality of either (ITG), provided thatthe employees covered under the plan pro-vide substantially all of their services in theperformance of governmental activities asdetermined in paragraph (g)(6) of this sec-tion.

(2) Definition of commercial ITG plans.For purposes of paragraph (g) of this sec-tion, the term commercial ITG plan meansa plan of an ITG that covers any ITG em-ployee who is not a governmental ITG em-ployee under paragraph (g)(8) of this sec-tion or that covers any individual who isnot an employee of an ITG.

(3) Definition of an Indian tribal gov-ernment. For purposes of this paragraph(g), the term Indian tribal governmenthas the meaning set forth in section7701(a)(40).

(4) Definition of subdivision of an In-dian tribal government. For purposes ofthis paragraph (g), the term subdivision ofan Indian tribal government has the mean-ing set forth in section 7871(d).

(5) Definition of agency or instrumen-tality of an Indian tribal government orsubdivision of an Indian tribal govern-ment. For purposes of this paragraph (g),the term agency or instrumentality of anIndian tribal government or subdivision

December 19, 2011 900 2011–51 I.R.B.

of an Indian tribal government means anentity that would be treated as an “agencyor instrumentality of a State or politicalsubdivision of a State” under paragraph (f)of this section if the related Indian tribalgovernment or subdivision of an Indiantribal government were treated as a Stateor political subdivision of a State, respec-tively.

(6) Definition of governmental activi-ties—(i) In general. The following activ-ities are governmental activities for pur-poses of paragraph (g)(1) of this section:

(A) Activities that are related to thebuilding and maintaining of public roads;public sidewalks, public buildings, and re-lated areas, such as parking lots.

(B) Activities that are related to publicsewer and drainage facilities, and relatedfacilities such as a waste-water treatmentplant.

(C) Activities relating to public worksprojects, such as schools and governmentbuildings.

(D) Activities relating to public utili-ties, such as electricity and other powersources, including the development ofnewer and emerging technologies.

(E) Activities related to providingcriminal protection services, such as po-lice and fire departments, providing civiland public administrative services, suchas operating and managing public hous-ing, libraries, judiciary buildings, andadministrative buildings, teaching in andmanaging public schools, managing andproviding services at public hospitals andhealth clinics, operating the government’scivil service system, and other relatedpublic services.

(F) Activities subject to a treaty or spe-cial rules that pertain to trust land owner-ship and use.

(ii) Facts and circumstances test.Whether any other activity is a govern-mental activity for purposes of section414(d) is based on facts and circumstances.In making this determination, the facts tobe considered include the following:

(A) Whether the activity provides apublic benefit to members of the Indiantribal government; and

(B) Whether there is the absence of oneor more of the relevant factors listed fora commercial activity as provided in para-graph (g)(7) of this section.

(iii) Examples. The following examplesillustrate the application of this paragraph(g)(6):

Example 1. (i) Facts. Indian tribal governmentC owns and operates a community swimming poolon tribal land. Indian tribal members of Indian tribalgovernment C may use the pool for free. Other localcommunity members pay a fee to use the pool. Dueto its location, this pool is used primarily by tribalmembers of Indian tribal government C.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(6)(ii) of thissection, the operation of the community swimmingpool is a governmental activity of Indian tribal gov-ernment C because it is a type of activity that is op-erated on a nonprofit basis and is similar to an activ-ity that other non-tribal local governments operate fortheir communities. In addition, the pool is located in-side tribal land and provides recreational benefits totribal members.

Example 2. (i) Facts. Indian tribal government Downs and operates a cultural center and a museum ontribal land. The purpose of the cultural center andmuseum is to preserve and showcase items relatedto the culture of Indian tribal government D, includ-ing crafts and artistry. The center contains an exhibitarea, a lobby and reception area, a small gift shop, atheater and various activity rooms. A variety of civicfunctions are held in the activity rooms. The other ar-eas display and sell local handicraft items producedlocally by members of Indian tribal government D.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(6)(ii) of thissection, the operation of the cultural center and mu-seum is a governmental activity of Indian tribal gov-ernment D even though the majority of its visitors areindividuals who are not members of the tribe. Its pur-pose is to promote and display the culture of Indiantribal government D, which is a type of activity thatis generally operated on a nonprofit basis (similar tomunicipal museums operated by public authorities)and not by private businesses. In addition, the centerand museum are located inside tribal land and providea public benefit by educating the public and preserv-ing and highlighting the culture of the tribe.

(7) Definition of commercial activi-ties—(i) In general. The following activi-ties are commercial activities for purposesof paragraph (g)(2) of this section:

(A) Activities relating to the operationof a hotel.

(B) Activities relating to the operationof a casino.

(C) Activities relating to the operationof a service station.

(D) Activities relating to the operationof a convenience store.

(E) Activities relating to the operationof a marina.

(ii) Facts and circumstances test.Whether any other activity is a commer-cial activity for purposes of section 414(d)is based on facts and circumstances. Inmaking this determination, the facts to beconsidered include the following:

(A) Whether the activity is a type ofactivity that is operated to earn a profit.

(B) Whether the activity is a type of ac-tivity that is typically performed by privatebusinesses.

(C) Whether the activity is a type ofactivity where the customers are substan-tially from outside of the Indian tribalcommunity, including whether the activityis located or conducted outside of Indiantribal land.

(iii) Delegation of authority to the Com-missioner. Any activity that the Commis-sioner of the Internal Revenue Service de-termines is a commercial activity undersection 414(d), in revenue rulings, notices,or other guidance published in the Inter-nal Revenue Bulletin (see §601.601(d)(2)of this chapter).

(iv) Examples. The following examplesillustrate the application of this paragraph(g)(7)(ii):

Example 1. (i) Facts. Indian tribal governmentA owns and operates a recreational RV park andcampground facility, serving transient non-tribalcustomers, primarily tourists. Other RV parks andcampgrounds in the area operated by non-tribal pri-vate entities also attract the same type of customers.Very few, if any, tribal members of Indian tribalgovernment A use this RV park and campgroundfacility. Indian tribal government A charges a fee tocustomers to use the RV park and campground.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(7)(ii) of thissection, the operation of the recreational RV park andcampground facility is a commercial activity of In-dian tribal government A because it is the type of ac-tivity that is operated to earn a profit and is the type ofactivity that is performed by other private businesses.In addition, the facility includes customers who aresubstantially from outside of the Indian tribal com-munity.

Example 2. (i) Facts. Indian tribal governmentB owns and operates a bank. This bank serves bothtribal and non-tribal customers primarily living in thelocal area (either on or off the tribal land). No distinc-tion is made between the services and fees providedto any customer based on whether or not he or she isa tribal member of Indian tribal government B.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(7)(ii) of thissection, the operation of a bank is a commercial ac-tivity of Indian tribal government B because it is thetype of activity that is operated to earn a profit and isthe type of activity that is performed by other privatebusinesses.

Example 3. (i) Facts. Indian tribal governmentE entered into a lease with Company X, which is inthe trucking business. The lease provides that In-dian tribal government E will purchase tractors, trail-ers and other equipment and lease such equipment toCompany X on a long-term basis.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(7)(ii) of thissection, the leasing transactions relate to a commer-

2011–51 I.R.B. 901 December 19, 2011

cial activity of Indian tribal government E because itis the type of activity that is operated to earn a profitand is the type of activity that is performed by otherprivate businesses.

Example 4. (i) Facts. Indian tribal government Goperates a factory on tribal land that produces goodsfor sale primarily to non-tribal customers, intended toearn a profit.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(7)(ii) of thissection, this is a commercial activity of Indian tribalgovernment G because the activity is operated to earna profit and is the type of activity that is performedby private businesses. In addition, the customers aresubstantially from outside of the Indian tribal com-munity. The result could be different if the factoryproduced goods to promote and display the cultureof Indian tribal government G, even if non-tribal cus-tomers primarily purchase the goods. This could be agovernmental activity, depending on the factors.

(8) Determination of ITG employ-ees—(i) Governmental and commercialITG employees. This paragraph (g)(8) ap-plies to determine whether an employee isan employee substantially all of whose ser-vices are in the performance of a govern-mental activity of an ITG (a governmentalITG employee), or is instead an employeewho renders a significant portion of hisor her services in the performance of acommercial activity of an ITG (a commer-cial ITG employee), for purposes of thisparagraph (g). As provided in paragraph(g)(8)(iv) of this section, this determina-tion is based on the employee’s assignedduties and responsibilities.

(ii) Location of the activity. If a com-mercial activity (within the meaning ofparagraph (g)(7) of this section) of an ITGhas a specific location that is readily iden-tifiable and is not associated with a gov-ernmental activity, an employee perform-ing substantial services at such a locationis treated as having assigned duties andresponsibilities for that commercial activ-ity and, thus, the employee is a commer-cial ITG employee within the meaning ofparagraph (g)(8) of this section. For ex-ample, a guard who is assigned to providesecurity services for an Indian tribal gov-ernment at an Indian tribal casino (whichis a commercial activity under paragraph(g)(7)(i)(B) of this section) is a commer-cial ITG employee within the meaning ofparagraph (g)(8) of this section. However,where an employee is not on a payroll of anITG that engages in a commercial activity,the result would depend on the other rulesin this paragraph (g)(8).

(iii) Payroll records. If an employeeis on the payroll of an ITG entity that is

engaged in a commercial activity (withinthe meaning of paragraph (g)(7) of thissection), the employee’s assigned dutiesand responsibilities are being treated asfor the commercial activity and, thus,the employee is a commercial ITG em-ployee. For example, if a cashier is onthe payroll of a convenience store (whichis a commercial activity under paragraph(g)(7)(i)(D) of this section) owned by anITG, the cashier is a commercial ITG em-ployee within the meaning of paragraph(g)(8) of this section.

(iv) Duties and responsibilities. Sub-ject to the specific rules in paragraph(g)(8)(ii) or (iii) of this section, whetheran employee is a governmental or com-mercial ITG employee within the meaningof this paragraph (g)(8) is based on theemployee’s assigned duties and respon-sibilities, taking into account facts andcircumstances. Thus, whether an em-ployee is a governmental or commercialITG employee depends on whether thefacts and circumstances indicate that theemployee’s assigned duties and respon-sibilities are substantially in the perfor-mance of a governmental or commercialactivity. Thus, for example, a bookkeeperlocated in a governmental building andon the payroll of the general ITG govern-ment would nevertheless be a commercialemployee if the facts and circumstancesindicate that his or her assigned duties andresponsibilities are to maintain the booksand records for the hotel owned and op-erated by an ITG. However, an employeewhose assigned duties and responsibilitiesare in the performance of a governmentalactivity, based on all the facts and circum-stances, in accordance with the standardsset forth in this paragraph (g)(8), is nottreated as performing services for a com-mercial activity, even if the performanceof services for the governmental activ-ity may temporarily involve significanttime working in a commercial activityin furtherance of the employee’s dutiesand responsibilities for the governmen-tal activity. For example, although, overa six-month period, the chief financialofficer (CFO) for an ITG may spend asubstantial amount of time working on thefinancing for a casino to be built on theITG’s tribal lands, the CFO would not bea commercial employee within the mean-ing of this paragraph (g)(8) because the

CFO’s duties and responsibilities are for agovernmental activity.

(v) Reasonable, good faith interpreta-tion. Except as provided in paragraph(g)(8)(ii) and (iii) of this section, an ITGplan will not be treated as failing to satisfythe rules in this paragraph (g)(8) if it com-plies with those rules under a standard thatconstitutes a reasonable, good faith inter-pretation of the statute, taking into accountthe rules in this paragraph (g) and any otherpublished guidance that relates to the ap-plication of section 414(d) to ITGs. How-ever, this paragraph (g)(8)(v) applies withrespect to the assignment of employees togovernmental and commercial plans onlyif the benefit levels provided by the sep-arate governmental and commercial plansare uniform. Thus, this paragraph (g)(8)(v)would not apply if the benefit level for em-ployees under a plan purported to be a gov-ernmental plan is higher than that providedunder a separate plan which covers com-mercial ITG employees.

(vi) Examples. The following exam-ples further illustrate the application of thisparagraph (g)(8):

Example 1. (i) Facts. Employee A, who is anattorney, works at the Attorney General’s office ofIndian tribal government B. Employee A’s job loca-tion is in a government office building on tribal lands.The assigned duties and responsibilities of EmployeeA are principally to review the operations of marinaboat operators to ensure that they comply with tribalrules and regulations as applicable to marina boat op-erators. Employee A provides some services for themarina, such as speaking at conferences or meetingswith marina boat operators. Employee A’s area of ex-pertise is contract law.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(8)(ii) through(iv) of this section, Employee A is a governmentalITG employee within the meaning of this paragraph(g)(8). Employee A primarily performs services forIndian tribal government B at a government buildingwhich is a governmental location and Employee A ison the payroll of Indian tribal government B. In addi-tion, Employee A’s assigned duties and responsibil-ities are primarily to provide government oversightservices for Indian tribal government B.

Example 2. (i) Facts. Employee C is a police of-ficer providing services for Indian tribal governmentD. Employee C’s job location is the tribal police sta-tion located in a government building on tribal lands.The assigned duties and responsibilities of EmployeeC indicate that Employee C is expected to maintainpublic order, detect crime, and apprehend offenderson tribal lands of Indian tribal government D. Occa-sionally, while on patrol, Employee C must go to thecasino operated by Indian tribal government D to re-store order relating to a disturbance. Employee C’sarea of expertise is in general law enforcement.

(ii) Conclusion. Based on the facts and circum-stances and the factors in paragraph (g)(8)(ii) through

December 19, 2011 902 2011–51 I.R.B.

(iv) of this section, Employee C is a governmentalITG employee within the meaning of this paragraph(g)(8). Employee C primarily performs services forIndian tribal government D at either a governmentbuilding or while on patrol, even though EmployeeC’s patrol duties include providing law enforcementservices at the casino, which is a commercial activityunder paragraph (g)(7)(i)(B) of this section. In addi-tion, the assigned duties and responsibilities of Em-ployee C, as well as Employee C’s area of expertise,relate to general law enforcement and do not substan-tially relate to a commercial activity.

Extending Religious andFamily Member FICA and FUTAExceptions to DisregardedEntities; Correction



ACTION: Correcting amendment.

SUMMARY: This document describes acorrection to final and temporary regu-lations (T.D. 9554, 2011–50 I.R.B. 843)extending the exceptions from taxes un-der the Federal Insurance ContributionsAct (“FICA”) and the Federal Unemploy-ment Tax Act (“FUTA”) under sections3121(b)(3) (concerning individuals whowork for certain family members), 3127(concerning members of religious faiths),and 3306(c)(5) (concerning persons em-ployed by children and spouses and chil-dren under 21 employed by their parents)of the Internal Revenue Code (“Code”)to entities that are disregarded as separatefrom their owners for Federal tax pur-poses. The temporary regulations alsoclarify the existing rule that the owners ofdisregarded entities, except for qualifiedsubchapter S subsidiaries, are responsi-ble for backup withholding and relatedinformation reporting requirements undersection 3406. These regulations were pub-lished in the Federal Register on Tuesday,November 1, 2011 (76 FR 67363).

DATES: This correction is effective onDecember 6, 2011, and is applicable onNovember 1, 2011.

FOR FURTHER INFORMATIONCONTACT: Joseph Perera, (202)622–6040 (not a toll-free number).


Background

The final and temporary regulationsthat are the subject of this document areunder section 7701 of the Internal Rev-enue Code.

Need for Correction

As published, final and temporary reg-ulations (T.D. 9554) contain an error thatmay prove to be misleading and is in needof clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR 301 is cor-rected by making the following correctingamendment:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7701–2T is revised

to read as follows:§301.7701–2T Business entities;definitions (temporary).

(a) through (c)(2)(iv) [Reserved]. Forfurther guidance, see §301.7701–2(a)through (c)(2)(iv).

(A) In general. Section§301.7701–2(c)(2)(i) (relating to certainwholly owned entities) does not applyto taxes imposed under Subtitle C—Em-ployment Taxes and Collection of IncomeTax (Chapters 21, 22, 23, 23A, 24 and25 of the Internal Revenue Code). How-

ever, §301.7701–2(c)(2)(i) does applyto withholding requirements imposedunder section 3406 (backup withholding).The owner of a business entity that isdisregarded under §301.7701–2 is subjectto the withholding requirements imposedunder section 3406 (backup withholding).Section 301.7701–2(c)(2)(i) also appliesto taxes imposed under Subtitle A, includ-ing Chapter 2—Tax on Self EmploymentIncome. The owner of an entity thatis treated in the same manner as a soleproprietorship under §301.7701–2(a) willbe subject to tax on self-employmentincome.

(B) [Reserved]. For further guidance,see §301.7701–2(c)(2)(iv)(B).

(C) Exceptions. For exceptions to therule in §301.7701–2(c)(2)(iv)(B), see sec-tions 31.3121(b)(3)–1(d), 31.3127–1(c),and 31.3306(c)(5)–1(d).

(D) through (e)(4) [Re-served]. For further guidance, see§301.7701–2(c)(2)(iv)(D) through (e)(4).

(5) Paragraphs (c)(2)(iv)(A) and(c)(2)(iv)(C) of this section apply to wagespaid on or after December 6, 2011. Forrules that apply to paragraph (c)(2)(iv)(A)of this section before December 6, 2011,see 26 CFR part 301 revised as of April 1,2009. However, taxpayers may applyparagraphs (c)(2)(iv)(A) and (c)(2)(iv)(C)of this section to wages paid on or afterJanuary 1, 2009.

(e)(6) through (e)(7) [Reserved]. Forfurther guidance, see §301.7701–2(e)(6)through (e)(7).

(8) Expiration Date. The applica-bility of paragraphs (c)(2)(iv)(A) and(c)(2)(iv)(C) of this section expires on orbefore December 5, 2014.

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on December 5,2011, 8:45 a.m., and published in the issue of the FederalRegister for December 6, 2011, 76 F.R. 76037)

2011–51 I.R.B. 903 December 19, 2011

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.

December 19, 2011 i 2011–51 I.R.B.

Numerical Finding List1

Bulletins 2011–27 through 2011–51

Announcements:

2011-37, 2011-27 I.R.B. 37

2011-38, 2011-28 I.R.B. 45

2011-39, 2011-28 I.R.B. 46

2011-40, 2011-29 I.R.B. 56

2011-41, 2011-28 I.R.B. 47

2011-42, 2011-32 I.R.B. 138

2011-43, 2011-35 I.R.B. 198

2011-44, 2011-33 I.R.B. 164

2011-45, 2011-34 I.R.B. 178

2011-46, 2011-34 I.R.B. 178

2011-47, 2011-34 I.R.B. 178

2011-48, 2011-36 I.R.B. 874

2011-49, 2011-36 I.R.B. 228

2011-50, 2011-38 I.R.B. 409

2011-51, 2011-38 I.R.B. 409

2011-52, 2011-38 I.R.B. 409

2011-53, 2011-38 I.R.B. 409

2011-54, 2011-38 I.R.B. 409

2011-55, 2011-38 I.R.B. 409

2011-56, 2011-38 I.R.B. 409

2011-57, 2011-38 I.R.B. 409

2011-58, 2011-38 I.R.B. 410

2011-59, 2011-37 I.R.B. 335

2011-61, 2011-39 I.R.B. 453

2011-62, 2011-40 I.R.B. 483

2011-63, 2011-41 I.R.B. 503

2011-64, 2011-41 I.R.B. 503

2011-65, 2011-44 I.R.B. 691

2011-66, 2011-44 I.R.B. 691

2011-67, 2011-44 I.R.B. 691

2011-68, 2011-44 I.R.B. 691

2011-69, 2011-44 I.R.B. 691

2011-70, 2011-45 I.R.B. 715

2011-71, 2011-46 I.R.B. 770

2011-72, 2011-47 I.R.B. 796

2011-73, 2011-48 I.R.B. 822

2011-74, 2011-47 I.R.B. 796

2011-75, 2011-48 I.R.B. 823

2011-76, 2011-50 I.R.B. 854

2011-77, 2011-51 I.R.B. 874

2011-78, 2011-51 I.R.B. 874

2011-79, 2011-51 I.R.B. 892

2011-80, 2011-51 I.R.B. 903

Notices:

2011-47, 2011-27 I.R.B. 34

2011-50, 2011-27 I.R.B. 35

2011-51, 2011-27 I.R.B. 36

2011-52, 2011-30 I.R.B. 60

2011-53, 2011-32 I.R.B. 124

2011-54, 2011-29 I.R.B. 53

Notices— Continued:

2011-55, 2011-29 I.R.B. 53

2011-56, 2011-29 I.R.B. 54

2011-57, 2011-31 I.R.B. 84

2011-58, 2011-31 I.R.B. 85

2011-59, 2011-31 I.R.B. 86

2011-60, 2011-31 I.R.B. 90

2011-61, 2011-31 I.R.B. 91

2011-62, 2011-32 I.R.B. 126

2011-63, 2011-34 I.R.B. 172

2011-64, 2011-37 I.R.B. 231

2011-65, 2011-34 I.R.B. 173

2011-66, 2011-35 I.R.B. 184

2011-67, 2011-34 I.R.B. 174

2011-68, 2011-36 I.R.B. 205

2011-69, 2011-39 I.R.B. 445

2011-70, 2011-32 I.R.B. 135

2011-71, 2011-37 I.R.B. 233

2011-72, 2011-38 I.R.B. 407

2011-73, 2011-40 I.R.B. 474

2011-74, 2011-41 I.R.B. 496

2011-75, 2011-40 I.R.B. 475

2011-76, 2011-40 I.R.B. 479

2011-78, 2011-41 I.R.B. 497

2011-79, 2011-41 I.R.B. 498

2011-80, 2011-43 I.R.B. 591

2011-81, 2011-42 I.R.B. 513

2011-82, 2011-42 I.R.B. 516

2011-83, 2011-43 I.R.B. 593

2011-84, 2011-43 I.R.B. 595

2011-85, 2011-44 I.R.B. 605

2011-86, 2011-45 I.R.B. 698

2011-87, 2011-45 I.R.B. 699

2011-88, 2011-46 I.R.B. 748

2011-89, 2011-46 I.R.B. 748

2011-90, 2011-47 I.R.B. 791

2011-91, 2011-47 I.R.B. 792

2011-92, 2011-48 I.R.B. 809

2011-93, 2011-48 I.R.B. 810

2011-94, 2011-49 I.R.B. 834

2011-99, 2011-50 I.R.B. 847

Proposed Regulations:

REG-128224-06, 2011-42 I.R.B. 533

REG-146537-06, 2011-48 I.R.B. 813

REG-112196-07, 2011-51 I.R.B. 865

REG-137128-08, 2011-28 I.R.B. 43

REG-136565-09, 2011-50 I.R.B. 851

REG-140280-09, 2011-45 I.R.B. 709

REG-114749-09, 2011-48 I.R.B. 819

REG-146297-09, 2011-47 I.R.B. 795

REG-101273-10, 2011-51 I.R.B. 873

REG-109564-10, 2011-50 I.R.B. 852

REG-112805-10, 2011-40 I.R.B. 482

REG-120391-10, 2011-39 I.R.B. 451

REG-125592-10, 2011-32 I.R.B. 137

Proposed Regulations— Continued:

REG-125949-10, 2011-45 I.R.B. 712

REG-131491-10, 2011-36 I.R.B. 208

REG-133002-10, 2011-46 I.R.B. 766

REG-140038-10, 2011-42 I.R.B. 537

REG-109006-11, 2011-37 I.R.B. 334

REG-101352-11, 2011-30 I.R.B. 75

REG-111283-11, 2011-42 I.R.B. 573

REG-116284-11, 2011-43 I.R.B. 598

REG-118809-11, 2011-33 I.R.B. 162

REG-122813-11, 2011-35 I.R.B. 197

REG-126519-11, 2011-39 I.R.B. 452

Revenue Procedures:

2011-38, 2011-30 I.R.B. 66

2011-39, 2011-30 I.R.B. 68

2011-40, 2011-37 I.R.B. 235

2011-41, 2011-35 I.R.B. 188

2011-42, 2011-37 I.R.B. 318

2011-43, 2011-37 I.R.B. 326

2011-44, 2011-39 I.R.B. 446

2011-45, 2011-39 I.R.B. 449

2011-46, 2011-42 I.R.B. 518

2011-47, 2011-42 I.R.B. 520

2011-48, 2011-42 I.R.B. 527

2011-49, 2011-44 I.R.B. 608

2011-50, 2011-44 I.R.B. 628

2011-51, 2011-44 I.R.B. 669

2011-52, 2011-45 I.R.B. 701

2011-53, 2011-46 I.R.B. 749

2011-54, 2011-46 I.R.B. 759

2011-55, 2011-47 I.R.B. 793

2011-56, 2011-49 I.R.B. 834

2011-57, 2011-49 I.R.B. 836

2011-58, 2011-50 I.R.B. 849

Revenue Rulings:

2011-14, 2011-27 I.R.B. 31

2011-15, 2011-30 I.R.B. 57

2011-16, 2011-32 I.R.B. 93

2011-17, 2011-33 I.R.B. 160

2011-18, 2011-39 I.R.B. 428

2011-19, 2011-36 I.R.B. 199

2011-20, 2011-36 I.R.B. 202

2011-21, 2011-40 I.R.B. 458

2011-22, 2011-41 I.R.B. 489

2011-23, 2011-43 I.R.B. 585

2011-24, 2011-41 I.R.B. 485

2011-25, 2011-45 I.R.B. 695

2011-26, 2011-48 I.R.B. 803

2011-27, 2011-48 I.R.B. 805

2011-28, 2011-49 I.R.B. 830

2011-29, 2011-49 I.R.B. 824

2011-30, 2011-49 I.R.B. 826

2011-31, 2011-49 I.R.B. 829

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin2011–26, dated June 27, 2011.

2011–51 I.R.B. ii December 19, 2011

Treasury Decisions:

9527, 2011-27 I.R.B. 1

9528, 2011-28 I.R.B. 38

9529, 2011-30 I.R.B. 57

9530, 2011-31 I.R.B. 77

9531, 2011-31 I.R.B. 79

9532, 2011-32 I.R.B. 95

9533, 2011-33 I.R.B. 139

9534, 2011-33 I.R.B. 144

9535, 2011-39 I.R.B. 415

9536, 2011-39 I.R.B. 426

9537, 2011-35 I.R.B. 181

9538, 2011-37 I.R.B. 229

9539, 2011-35 I.R.B. 179

9540, 2011-38 I.R.B. 341

9541, 2011-39 I.R.B. 438

9542, 2011-39 I.R.B. 411

9543, 2011-40 I.R.B. 470

9544, 2011-40 I.R.B. 458

9545, 2011-41 I.R.B. 490

9546, 2011-42 I.R.B. 505

9547, 2011-43 I.R.B. 580

9548, 2011-46 I.R.B. 716

9549, 2011-46 I.R.B. 718

9550, 2011-47 I.R.B. 785

9551, 2011-47 I.R.B. 774

9552, 2011-47 I.R.B. 783

9553, 2011-48 I.R.B. 806

9554, 2011-50 I.R.B. 843

9555, 2011-50 I.R.B. 838

9556, 2011-51 I.R.B. 862

9557, 2011-51 I.R.B. 855

9558, 2011-51 I.R.B. 859

December 19, 2011 iii 2011–51 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2011–27 through 2011–51

Announcements:

2007-47

Updated and superseded by

Ann. 2011-59, 2011-37 I.R.B. 335

Notices:

2002-1

Amplified by

Notice 2011-86, 2011-45 I.R.B. 698

2006-101

Amplified and superseded by

Notice 2011-64, 2011-37 I.R.B. 231

2007-93

Obsoleted by

T.D. 9545, 2011-41 I.R.B. 490

2010-23

Modified and supplemented by

Notice 2011-54, 2011-29 I.R.B. 53

2010-77

Modified by

Notice 2011-85, 2011-44 I.R.B. 605

2010-81

Amended and supplemented by

Notice 2011-63, 2011-34 I.R.B. 172

2010-88

Modified by

Ann. 2011-40, 2011-29 I.R.B. 56

2010-90

Modified by

Notice 2011-85, 2011-44 I.R.B. 605

Proposed Regulations:

REG-158677-05

Withdrawn by

Ann. 2011-75, 2011-48 I.R.B. 823

REG-118761-09

Hearing scheduled by

Ann. 2011-38, 2011-28 I.R.B. 45

REG-151687-10

Hearing scheduled by

Ann. 2011-48, 2011-48 I.R.B. 874Ann. 2011-48, 2011-36 I.R.B. 874

Revenue Procedures:

72-36

Amplified and modified by

Rev. Proc. 2011-42, 2011-37 I.R.B. 318

Revenue Procedures— Continued:

2003-14

Clarified, modified, and superseded by

Rev. Proc. 2011-56, 2011-49 I.R.B. 834

2004-29


Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2005-16

Modified and superseded by

Rev. Proc. 2011-49, 2011-44 I.R.B. 608

2006-24

Modified by

Ann. 2011-77, 2011-51 I.R.B. 874

2006-56

Modified and amplified by

Rev. Proc. 2011-46, 2011-42 I.R.B. 518

2007-35


Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2008-24

Modified and superseded by

Rev. Proc. 2011-38, 2011-30 I.R.B. 66

2008-32

Superseded by

Rev. Proc. 2011-39, 2011-30 I.R.B. 68

2009-20

Modified by

Rev. Proc. 2011-58, 2011-50 I.R.B. 849

2010-27

Modified by

Ann. 2011-77, 2011-51 I.R.B. 874

2010-33

Superseded by

Rev. Proc. 2011-50, 2011-44 I.R.B. 628

2010-37

Superseded by

Rev. Proc. 2011-51, 2011-44 I.R.B. 669

2010-39

Amplified, modified, and superseded by

Rev. Proc. 2011-47, 2011-42 I.R.B. 520

2011-4

Modified by

Rev. Proc. 2011-44, 2011-39 I.R.B. 446

2011-6

Modified by

Rev. Proc. 2011-49, 2011-44 I.R.B. 608

2011-8

Modified by

Rev. Proc. 2011-49, 2011-44 I.R.B. 608

Revenue Procedures— Continued:

2011-14

Modified by

Rev. Proc. 2011-43, 2011-37 I.R.B. 326

2011-24

Obsoleted by

Notice 2011-92, 2011-48 I.R.B. 809

2011-35


Rev. Proc. 2011-42, 2011-37 I.R.B. 318

Revenue Rulings:

58-225

Obsoleted by

Rev. Rul. 2011-15, 2011-30 I.R.B. 57

76-345

Revoked by

Rev. Rul. 2011-29, 2011-49 I.R.B. 824

92-19

Supplemented in part by

Rev. Rul. 2011-23, 2011-43 I.R.B. 585

2007-28

Superseded by

Rev. Rul. 2011-26, 2011-48 I.R.B. 803

2010-30

Supplemented and superseded by

Rev. Rul. 2011-27, 2011-48 I.R.B. 805

Treasury Decisions:

9527

Corrected by

Ann. 2011-49, 2011-36 I.R.B. 228

9554

Corrected by

Ann. 2011-80, 2011-51 I.R.B. 903

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin 2011–26, dated June 27, 2011.

2011–51 I.R.B. iv December 19, 2011

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