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					                                                                                               Bulletin No. 2007-21
                                                                                                       May 21, 2007



HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.


INCOME TAX                                                           Rev. Rul. 2007–32, page 1278.
                                                                     Accrual of interest. This ruling requires an accrual method
                                                                     bank with a reasonable expectancy of receiving future pay-
Rev. Rul. 2007–24, page 1282.                                        ments on a loan to include accrued interest (determined under
Section 1035; certain exchanges of insurance policies.               regulations section 1.446–2(a)(2)) in gross income for the tax-
A taxpayer’s receipt of a check issued by an insurance com-          able year in which the right to receive the interest becomes
pany under a non-qualified annuity contract is treated as a tax-     fixed, notwithstanding bank regulatory rules that prevent ac-
able distribution, even if the check is endorsed to a second         crual of the interest for regulatory purposes. The ruling also
insurance company for the purchase of a second annuity. The          provides guidance as to the period in which a bank that has
transaction is not characterized as a tax-free exchange under        elected the conformity method of accounting under regulations
section 1035(a)(3) of the Code unless there is a direct ex-          section 1.166–2(d)(3) can treat uncollected interest as worth-
change or assignment of the original contract.                       less. Rev. Rul. 81–18 distinguished.
Rev. Rul. 2007–30, page 1277.                                        Rev. Rul. 2007–33, page 1281.
Income attributable to domestic production activities;               Real estate investment trust (REIT) foreign currency. This
qualifying in-kind partnerships. This ruling provides that           ruling provides that section 988 gain that is recognized by a
a partnership engaged in the extraction and processing of min-       REIT will be qualifying income under section 856(c)(2) or (3) of
erals within the United States is a qualifying in-kind partnership   the Code to the extent that the underlying income so qualifies.
for purposes of section 199 of the Code. Each partner of
a qualifying in-kind partnership is treated as having manufac-       Notice 2007–40, page 1284.
tured, produced, grown, or extracted (MPGE) property MPGE            Renewable electricity production, refined coal produc-
by the partnership that is distributed to that partner.              tion, and Indian coal production; calendar year 2007
                                                                     inflation adjustment factors and reference prices. This
Rev. Rul. 2007–31, page 1275.                                        notice announces the calendar year 2007 inflation adjustment
Contributions to the capital of a corporation; nonshare-             factors and reference prices for the renewable electricity pro-
holder contributions. This ruling provides that payments re-         duction credit, refined coal production credit, and Indian coal
ceived by a corporation under the federal universal service sup-     production credit under section 45 of the Code.
port mechanisms do not represent a nonshareholder contri-
bution to capital under section 118(a) of the Code. The fed-
eral universal service support mechanisms are funded by con-
tributions from telecommunications carriers. Telecommunica-
tions carriers receive support payments to provide discounted
telecommunications services or telecommunication services in
high cost areas.




                                                                                                (Continued on the next page)



Finding Lists begin on page ii.
Notice 2007–41, page 1287.                                           ance Priority List. Recommendations received after May 31,
The Department of Treasury and the Service invite public com-        2007, will be reviewed for inclusion in the next periodic up-
ments on recommendations for items that should be included           date.
on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-               ESTATE TAX
viewed for possible inclusion on the original 2007–2008 Guid-
ance Priority List. Recommendations received after May 31,
2007, will be reviewed for inclusion in the next periodic up-        REG–143316–03, page 1292.
date.                                                                Proposed regulations under section 2053 of the Code provide
                                                                     guidance to determine the amount deductible from a dece-
Notice 2007–42, page 1288.                                           dent’s gross estate for claims against the estate under section
This notice provides guidance to real estate investment trusts       2053(a)(3). Under these regulations, the amount deductible
(REITs) concerning the circumstances under which section             is generally the amount actually paid in satisfaction of a legit-
856(c)(2) or (3) of the Code characterizes section 987 gain          imate claim. The regulations provide special rules for poten-
as qualifying income for REIT qualification.                         tial claims, contested claims, claims against multiple parties,
                                                                     claims by family members and related entities, unenforceable
Rev. Proc. 2007–33, page 1289.                                       claims, and recurring payments. A public hearing is scheduled
This document provides the exclusive procedures under which          for August 6, 2007.
a bank may change its method of accounting for uncollected
interest to an elective safe harbor method based on the bank’s       Notice 2007–41, page 1287.
collection experience. Rev. Proc. 2002–9 modified and ampli-         The Department of Treasury and the Service invite public com-
fied.                                                                ments on recommendations for items that should be included
                                                                     on the 2007–2008 Guidance Priority List. Taxpayers may sub-
                                                                     mit recommendations for guidance at any time during the year.
                                                                     Recommendations submitted by May 31, 2007, will be re-
EMPLOYEE PLANS                                                       viewed for possible inclusion on the original 2007–2008 Guid-
                                                                     ance Priority List. Recommendations received after May 31,
Notice 2007–33, page 1284.                                           2007, will be reviewed for inclusion in the next periodic up-
Weighted average interest rate update; corporate bond                date.
indices; 30-year Treasury securities. The weighted aver-
age interest rate for May 2007 and the resulting permissible
range of interest rates used to calculate current liability and to   GIFT TAX
determine the required contribution are set forth.

Notice 2007–41, page 1287.                                           Notice 2007–41, page 1287.
The Department of Treasury and the Service invite public com-        The Department of Treasury and the Service invite public com-
ments on recommendations for items that should be included           ments on recommendations for items that should be included
on the 2007–2008 Guidance Priority List. Taxpayers may sub-          on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.        mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-               Recommendations submitted by May 31, 2007, will be re-
viewed for possible inclusion on the original 2007–2008 Guid-        viewed for possible inclusion on the original 2007–2008 Guid-
ance Priority List. Recommendations received after May 31,           ance Priority List. Recommendations received after May 31,
2007, will be reviewed for inclusion in the next periodic up-        2007, will be reviewed for inclusion in the next periodic up-
date.                                                                date.



EXEMPT ORGANIZATIONS

Notice 2007–41, page 1287.
The Department of Treasury and the Service invite public com-
ments on recommendations for items that should be included
on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-
viewed for possible inclusion on the original 2007–2008 Guid-

                                                                                                (Continued on the next page)

May 21, 2007                                                                                                    2007–21 I.R.B.
EMPLOYMENT TAX

Notice 2007–41, page 1287.
The Department of Treasury and the Service invite public com-
ments on recommendations for items that should be included
on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-
viewed for possible inclusion on the original 2007–2008 Guid-
ance Priority List. Recommendations received after May 31,
2007, will be reviewed for inclusion in the next periodic up-
date.


EXCISE TAX

Notice 2007–41, page 1287.
The Department of Treasury and the Service invite public com-
ments on recommendations for items that should be included
on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-
viewed for possible inclusion on the original 2007–2008 Guid-
ance Priority List. Recommendations received after May 31,
2007, will be reviewed for inclusion in the next periodic up-
date.


ADMINISTRATIVE

Notice 2007–41, page 1287.
The Department of Treasury and the Service invite public com-
ments on recommendations for items that should be included
on the 2007–2008 Guidance Priority List. Taxpayers may sub-
mit recommendations for guidance at any time during the year.
Recommendations submitted by May 31, 2007, will be re-
viewed for possible inclusion on the original 2007–2008 Guid-
ance Priority List. Recommendations received after May 31,
2007, will be reviewed for inclusion in the next periodic up-
date.

Announcement 2007–49, page 1300.
This document contains corrections to final regulations (T.D.
9315, 2007–15 I.R.B. 891) that address various dual consoli-
dated loss issues, including exceptions to the general prohibi-
tion against using a dual consolidated loss to reduce the tax-
able income of any other member of the affiliated group.




2007–21 I.R.B.                                                    May 21, 2007
The IRS Mission
Provide America’s taxpayers top quality service by helping                        applying the tax law with integrity and fairness to all.
them understand and meet their tax responsibilities and by


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



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

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




May 21, 2007                                                                                                                           2007–21 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 118.—Contribu-                              offer each of the services in order to re-      sal service support provided pursuant to
tions to the Capital of                             ceive federal universal service support. 47     47 C.F.R. part 54, subparts D, J, and K
a Corporation                                       C.F.R. § 54.101(b).                             (identified above) ensures that consumers
                                                        The Universal Service Administrative        in all regions of the nation have access to
26 CFR 1.118–1: Contributions to the capital of a
corporation.
                                                    Company (Administrator) administers the         and pay rates for telecommunication ser-
                                                    federal universal service support mecha-        vices that are reasonably comparable to
    Contributions to the capital of a               nisms. 47 C.F.R. § 54.701. The Adminis-         those in urban areas. The universal ser-
corporation; nonshareholder contribu-               trator is responsible for administering the     vice support provided by 47 C.F.R. part
tions. This ruling provides that payments           following federal universal support mech-       54, subparts E, F, and G (identified above)
received by a corporation under the fed-            anisms: (1) the high cost support mecha-        allows carriers to provide discounted, or
eral universal service support mechanisms           nisms described in 47 C.F.R. part 54, sub-      reduced, rates to low income consumers,
do not represent a nonshareholder con-              part D; (2) the low income support mecha-       schools and libraries, and rural health care
tribution to capital under section 118(a)           nisms described in 47 C.F.R. part 54, sub-      providers. The amount of federal univer-
of the Code. The federal universal ser-             part E; (3) the schools and libraries support   sal service support received depends on ei-
vice support mechanisms are funded by               mechanism described in 47 C.F.R. part 54,       ther the discount offered to the targeted
contributions from telecommunications               subpart F; (4) the rural health care support    customers or the cost of providing service
carriers.   Telecommunications carriers             mechanism described in 47 C.F.R. part 54,       (the carrier’s revenue requirement) in high
receive support payments to provide dis-            subpart G; (5) the interstate access uni-       cost areas. For financial accounting pur-
counted telecommunications services or              versal support mechanism described in 47        poses, the Commission requires all carri-
telecommunication services in high cost             C.F.R. part 54, subpart J; and (6) the in-      ers to record their federal universal service
areas.                                              terstate common line support mechanism          support receipts as revenue.
                                                    described in 47 C.F.R. part 54, subpart K.         All carriers that receive universal ser-
Rev. Rul. 2007–31                                   47 C.F.R. § 54.702(a). The Administrator        vice support must use that support only for
                                                    is responsible for billing contributors, col-   the provision, maintenance, and upgrad-
ISSUE                                               lecting contributions to the universal ser-     ing of facilities and services for which the
                                                    vice support mechanisms, and disbursing         universal service support is intended. 47
   Is universal service support received by         universal service support funds. 47 C.F.R.      U.S.C. § 254(e) and 47 C.F.R. § 54.7. This
a corporation under the universal service           § 54.702(b).                                    includes, for example, the ability to use the
support mechanisms a nonshareholder                     The federal universal service support       funds to reduce intrastate rates, to cover
contribution to capital under section 118(a)        mechanisms are funded by contributions          operating expenses (billing and marketing
of the Internal Revenue Code?                       from telecommunications carriers. Every         expenses) associated with the supported
FACTS                                               telecommunications carrier that provides        services, and to upgrade the facilities for
                                                    interstate telecommunications services          the supported services. Annual certifica-
    The federal universal service support           must contribute, on an equitable and            tions are required to be filed with the Ad-
mechanisms are required by 47 U.S.C.                nondiscriminatory basis, to the specific,       ministrator and the Commission with re-
§ 254.       The Federal Communication              predictable, and sufficient mechanisms es-      spect to universal service support from cer-
Commission (Commission) is required                 tablished by the Commission to preserve         tain universal service support mechanisms
to establish periodically the services to be        and advance universal service. 47 U.S.C.        stating that all universal service support
supported by federal universal service sup-         § 254(d). Entities that provide interstate      received from such mechanisms will be
port mechanisms. 47 U.S.C. § 254(c)(1).             telecommunications services to the public,      used only for the provision, maintenance,
The Commission has established that the             or to such classes of users as to be effec-     and upgrading of facilities and services for
following services be supported by federal          tively available to the public, for a fee       which the support is intended.
universal service support mechanisms: (1)           will be considered telecommunications
voice grade access to the public switched           carriers providing interstate telecommuni-      LAW AND ANALYSIS
network; (2) local usage; (3) dual tone             cations services and must contribute to the
                                                                                                        Section 118(a) of the Code provides
multi-frequency signaling or its functional         universal service support mechanisms. 47
                                                                                                    that in the case of a corporation, gross in-
equivalent; (4) single-party service or its         C.F.R. § 54.706(a). Federal universal ser-
                                                                                                    come does not include any contribution to
functional equivalent; (5) access to emer-          vice contribution costs may be recovered
                                                                                                    the capital of the taxpayer. The commit-
gency services; (6) access to operator ser-         through interstate telecommunications-re-
                                                                                                    tee reports accompanying the enactment of
vices; (7) access to interexchange service;         lated charges to end users. 47 C.F.R.
                                                                                                    what is now section 118(a) indicate that the
(8) access to directory assistance; and (9)         § 54.712(a).
                                                                                                    provision was intended to codify the exist-
toll limitations for qualifying low-income              In order to receive support, an eligible
                                                                                                    ing law that had developed through admin-
consumers. 47 C.F.R. § 54.101(a). An                telecommunications carrier first must pro-
                                                                                                    istrative and court decisions on the subject.
eligible telecommunications carrier must            vide the supported services. The univer-


2007–21 I.R.B.                                                         1275                                                  May 21, 2007
H.R. Rep. No. 1337, 83d Cong., 2d Sess.         for a specific, quantifiable service pro-          concluded that irrespective of the public
17 (1954); S. Rep. No. 1622, 83d Cong.,         vided for the transferor by the transferee;        benefit of reduced unemployment that oc-
2d Sess. 18 (1954).                             (3) the contribution must be bargained             curred as a result of the payments, the pay-
    Section 1.118–1 of the Income Tax           for; (4) the asset transferred foreseeably         ments constituted direct compensation for
Regulations includes within the meaning         must result in benefit to the transferee in        training services and thus could not be con-
of a contribution to capital, a contribution    an amount commensurate with its value;             sidered a contribution to capital.
by a nonshareholder and cites as examples       and (5) the asset ordinarily, if not always,           As provided in section 1.118–1 and
of nonshareholder contributions to capi-        will be employed in or contribute to the           stated by the Supreme Court in Detroit
tal: the value of land and other property       production of additional income and its            Edison and Chicago, Burlington & Quincy
contributed to a corporation by a govern-       value assured in that respect. 412 U.S. at         R.R., compensation in exchange for a spe-
mental unit or by a civic group for the         413, 1973–2 C.B. at 432.                           cific quantifiable service constitutes tax-
purpose of inducing the corporation to              In reaching its conclusion that the im-        able income, not a capital contribution.
locate its business in a particular commu-      provements at issue did not qualify as con-        Indeed, the Court in Brown Shoe premised
nity, or for the purpose of enabling the        tributions to capital, the Court reasoned:         its decision that inducement payments by
corporation to expand its operating facil-          Although the assets were not payments          community groups to a private corpora-
ities. However, the exclusion from gross            for specific, quantifiable services per-       tion for relocating and building a factory
income does not apply to any money or               formed by CB&Q for the Government              constituted a capital contribution, based
property transferred to the corporation in          as a customer, other characteristics of        on the specific absence of customers and
consideration for goods or services ren-            the transaction lead us to the conclusion      payment for services. Conversely, these
dered.                                              that, despite this, the assets did not qual-   are precisely the factors that are present
    In Detroit Edison Co. v. Commis-                ify as contributions to capital. The fa-       in the universal service support. There
sioner, 319 U.S. 98 (1943), 1943 C.B.               cilities were not in any real sense bar-       is a clear nexus between the universal
1019, the Supreme Court held that pay-              gained for by CB&Q. Indeed, except             service support and the provision of uni-
ments by prospective customers to an elec-          for the orders by state commissions and        versal telecommunications services by the
tric power company that were used by the            the government subsidies, the facilities       carriers. The motivation underlying the
company to construct the facilities neces-          would not have been constructed at all.        universal service support is to compensate
sary to deliver electricity to the customers    412 U.S. at 413–14, 1973–2 C.B. at 432.            the carriers for the shortfall in operating
were not nonshareholder contributions to            In Texas & Pacific Railway Co. v.              income for providing services at a discount
capital. The Court found that the moti-         United States, 286 U.S. 285 (1932), XI–1           to certain customers and/or providing ser-
vation for the prospective customers’ con-      C.B. 263, the Court held that payments             vices to customers in high cost areas at
tributions was to obtain electric services      received by a railroad company from the            below cost rates. The universal service
from the power company and, therefore,          federal government did not constitute a            support is predicated on the carriers pro-
the contributions were payment for ser-         contribution to capital and thus were in-          viding the mandated universal service and
vices. 319 U.S. at 102, 1943 C.B. at 1021.      cludible in income. The Court noted the            is an integral part of the government’s
    In contrast, Brown Shoe Co. v. Com-         Transportation Act of 1920 provided for            mandate to insure that universal service is
missioner, 339 U.S. 583 (1950), 1950–1          payments representing a guarantee of min-          provided.
C.B. 38, held that money and property con-      imum operating income to compensate the                In addition, the universal service sup-
tributions by community groups to induce        railroad during the transition from federal        port does not satisfy the five characteristics
a shoe company to locate or expand its fac-     control to private ownership. The Court            of a nonshareholder contribution to capital
tory operations in the contributing commu-      reasoned that the payments did not repre-          set forth in Chicago, Burlington & Quincy
nities were nonshareholder contributions        sent capital contributions:                        R.R., because the universal service sup-
to capital. The Court reasoned that when            Here they were to be measured by a de-         port: (1) does not necessarily become a
the motivation of the contributors is to ben-       ficiency in operating income, and might        permanent part of the carrier’s working
efit the community at large and the contrib-        be used for the payment of dividends, of       capital structure because the support is not
utors do not anticipate any direct benefit          operating expenses, of capital charges,        limited to the acquisition of capital assets
from their contributions, the contributions         or for any other purpose …. The Gov-           and can be used to pay current expenses;
are nonshareholder contributions to capi-           ernment’s payments were not in their           (2) is made for specific, quantifiable
tal. 339 U.S. at 591, 1950–1 C.B. at 41.            nature bounties, but an addition to a          telecommunication services to telecom-
    The Court again considered this issue           depleted operating revenue consequent          munication customers of the carrier; (3)
in United States v. Chicago, Burlington &           upon a federal activity.                       is not bargained for because the universal
Quincy R.R., 412 U.S. 401 (1973), 1973–2        286 U.S. at 290, XI–1 C.B. at 265.                 service support mechanisms are a unilat-
C.B. 428. In that case, the Court set forth         In Deason v. Commissioner, 590 F.2d            eral government program and the method
the following five characteristics of a non-    1377 (5th Cir. 1979), the Fifth Circuit held       of participation by carriers is mandated
shareholder contribution to capital: (1)        that payments received from the Depart-            (despite any certification requirements);
the contribution must become a perma-           ment of Labor for job training for unem-           (4) does not benefit the carrier commensu-
nent part of transferee’s working capital       ployed individuals were not a contribution         rate with the value of the support because
structure; (2) the contribution may not be      to capital under section 118. The court af-        the support payments merely maintain the
compensation, such as a direct payment          firmed the opinion of the Tax Court, which         carrier’s viability; and (5) does not neces-


May 21, 2007                                                        1276                                                   2007–21 I.R.B.
sarily generate additional income for the                Section 199.—Income                                          By this revenue ruling, the Inter-
carrier because the support is not limited               Attributable to Domestic                                 nal Revenue Service designates the ex-
to the acquisition of capital assets that will           Production Activities                                    traction and processing of minerals (as
generate additional income for the carrier,                                                                       defined in § 1.611–1(d)(5)) as an ac-
but can be used to pay current expenses or               26 CFR 199–9: Application of section 199 to pass-        tivity within §§ 1.199–9(i)(2)(iii) and
                                                         thru entities for taxable years beginning on or before
to replace capital assets.                               May 17, 2006, the enactment date of the Tax Increase     1.199–3T(i)(7)(ii)(C). Accordingly, a part-
    The holdings in Texas Pacific and                    Prevention and Reconciliation Act of 2005.               nership engaged solely in the extraction
Deason also are illustrative in this context.            (Also § 1.199–3T.)                                       and processing of minerals within the
In Texas Pacific, the federal government                                                                          United States will be a qualifying in-kind
provided payments to fulfill a statutory                    Income attributable to domestic pro-                  partnership under §§ 1.199–9(i)(2) and
public purpose and yet because of the                    duction activities; qualifying in-kind                   1.199–3T(i)(7)(ii).
inherent nature of the transaction as re-                partnerships. This ruling provides that a
imbursement for deficiencies in operating                partnership engaged in the extraction and                EFFECTIVE DATE
income, the payments did not warrant                     processing of minerals within the United
                                                         States is a qualifying in-kind partnership                  This revenue ruling is effective for tax-
capital contribution treatment. In Deason,
                                                         for purposes of section 199 of the Code.                 able years beginning after December 31,
the federal government made payments
                                                         Each partner of a qualifying in-kind part-               2004, the effective date of § 199. How-
that served the public goal of reducing
                                                         nership is treated as having manufactured,               ever, for taxable years beginning before
unemployment. Despite the existence of a
                                                         produced, grown, or extracted (MPGE)                     June 1, 2006, a taxpayer may apply this
public benefit derived from the payment,
                                                         property MPGE by the partnership that is                 revenue ruling only if the taxpayer applies
the court concluded that the payments
                                                         distributed to that partner.                             §§ 1.199–1 through 1.199–8 to that taxable
were compensation for services and there-
                                                                                                                  year.
fore ineligible as a capital contribution.
Similarly, although a public purpose is                  Rev. Rul. 2007–30                                        DRAFTING INFORMATION
served by payment of the universal service
support, and the payor is not the consumer                   This revenue ruling designates the                      The principal author of this revenue
of the universal telecommunications ser-                 extraction and processing of miner-                      ruling is David McDonnell of the Office
vices, the universal service support is                  als (as defined in § 1.611–1(d)(5) of                    of Associate Chief Counsel (Passthroughs
nonetheless compensation to the carriers                 the Income Tax Regulations) as an ac-                    and Special Industries). For further in-
for the provision of universal telecommu-                tivity within § 1.199–9(i)(2)(iii) and                   formation regarding this revenue ruling,
nications services.                                      § 1.199–3T(i)(7)(ii)(C) of the temporary                 contact Mr. McDonnell at (202) 622–3040
                                                         Income Tax Regulations. A partnership                    (not a toll-free call).
HOLDING                                                  engaged solely in an activity or indus-
                                                         try designated by the Secretary will be
   Universal service support received by                 a qualifying in-kind partnership under                   Section 446.—General Rule
a corporation under the universal service                §§ 1.199–9(i)(2) and 1.199–3T(i)(7)(ii).                 for Methods of Accounting
support mechanisms is not a nonshare-                        Pursuant to §§ 1.199–9(i)(1) and
holder contribution to capital under sec-                1.199–3T(i)(7)(i), each partner of a qual-                  A revenue ruling requiring an accrual method bank
tion 118(a) of the Code.                                                                                          with a reasonable expectation of receiving future pay-
                                                         ifying in-kind partnership is treated as                 ments on a loan to include accrued interest (deter-
                                                         having manufactured, produced, grown,                    mined under regulations section 1.446–2) in gross in-
DRAFTING INFORMATION
                                                         or extracted (MPGE) property MPGE by                     come for the taxable year in which the right to receive
   The principal author of this revenue                  the partnership that is distributed to that              the interest becomes fixed, notwithstanding bank reg-
ruling is David McDonnell of the Office                  partner.                                                 ulatory rules that prevent accrual of the interest for
                                                             Sections 1.199–9(i)(2) and 1.199–3T(i)               regulatory purposes. See Rev. Rul. 2007-32, page
of Associate Chief Counsel (Passthroughs
                                                                                                                  1278.
and Special Industries). For further in-                 (7)(ii) provide that a qualifying in-kind
formation regarding this revenue ruling,                 partnership includes a partnership en-
contact Mr. McDonnell at (202) 622–3040                  gaged solely in the extraction, refining,                   A revenue procedure providing the procedure un-
                                                         or processing of oil, natural gas, petro-                der which a bank may change its method of account-
(not a toll-free call).
                                                                                                                  ing for uncollected interest to an elective safe harbor
                                                         chemicals, or products derived from
                                                                                                                  method based on the bank’s collection experience.
                                                         oil, natural gas, or petrochemicals in
                                                                                                                  See Rev. Proc. 2007-33, page 1289.
Section 166.—Bad Debts                                   whole or in significant part within the
                                                         United States; or the production or
   A revenue ruling providing guidance as to the
                                                         generation of electricity in the United                  Section 451.—General Rule
period in which a bank that has elected the confor-
                                                         States. Under §§ 1.199–9(i)(2)(iii) and                  for Taxable Year of Inclusion
mity method of accounting under regulations section
1.166–2(d)(3) can treat uncollected interest as worth-   1.199–3T(i)(7)(ii)(C), a qualifying in-kind
                                                                                                                     A revenue procedure providing an elective safe
less. See Rev. Rul. 2007-32, page 1278.                  partnership may include a partnership                    harbor method of accounting for a bank’s uncollected
                                                         engaged solely in an activity or industry                interest based on the bank’s collection experience.
                                                         designated by the Secretary by publication               See Rev. Proc. 2007-33, page 1289.
                                                         in the Internal Revenue Bulletin.


2007–21 I.R.B.                                                                 1277                                                             May 21, 2007
26 CFR 1.451–1: General rule for taxable year of   able income using an accrual method of ac-        become 90 days past due. Nonetheless,
inclusion.                                         counting and files its federal income tax re-     X reasonably expects the borrower to con-
(Also: Part I, §§ 166, 446; 1.166–2, 1.446–1,
1.446–2.)
                                                   turns on a calendar year basis. Loans made        tinue making some but not all payments on
                                                   by X are subject to § 1.446–2, which de-          the loan.
   Accrual of interest. This ruling re-            termines the amount of “accrued interest”             On January 16, 2007, the uncollected
quires an accrual method bank with a               related to each loan for federal income tax       accrued interest on Loan A is $9,000
reasonable expectancy of receiving future          purposes.                                         ($8,000 attributable to the calendar year
payments on a loan to include accrued                  X is subject to regulatory supervision        ending December 31, 2006, and $1,000
interest (determined under regulations             by federal banking authorities (“supervi-         attributable to the period January 1, 2007
section 1.446–2(a)(2)) in gross income             sory authorities”) and is required to pre-        through January 16, 2007). Prior to Jan-
for the taxable year in which the right            pare regulatory financial statements that         uary 17, 2007, X recognized the $9,000
to receive the interest becomes fixed,             comply with federal banking rules. For            as income for regulatory financial state-
notwithstanding bank regulatory rules that         regulatory financial statement purposes,          ment purposes. During the period January
prevent accrual of the interest for regula-        unless a loan is both well secured and in         17, 2007 through December 31, 2007,
tory purposes. The ruling also provides            the process of collection, federal banking        an additional $23,000 of accrued interest
guidance as to the period in which a bank          rules generally require that X suspend the        becomes due on Loan A.
that has elected the conformity method             recognition into income of uncollected                Pursuant to federal banking rules, on
of accounting under regulations section            accrued interest on a loan and reverse any        January 16, 2007, X reverses the $9,000 of
1.166–2(d)(3) can treat uncollected in-            previously recognized uncollected interest        uncollected accrued interest that had pre-
terest as worthless. Rev. Rul. 81–18               income if:                                        viously been recognized by making adjust-
distinguished.                                         (i) the loan is maintained on a cash basis    ments to appropriate income statement and
                                                   because of deterioration in the borrower’s        balance sheet accounts for regulatory fi-
Rev. Rul. 2007–32                                  financial condition;                              nancial statement purposes. In addition,
                                                       (ii) payment in full of principal or inter-   federal banking rules do not permit X to
ISSUES                                             est is not expected; or                           recognize as income any of the $23,000
                                                       (iii) payment of principal or interest has    accrued interest attributable to the period
    1. If federal banking rules require a          been in default for a period of 90 days or        January 17, 2007 through December 31,
bank to suspend the recognition of cer-            more.                                             2007.
tain uncollected “accrued interest” as de-             Under federal banking rules, a loan may           On January 1, 2008, X receives a
fined in § 1.446–2 of the Income Tax Reg-          be considered a bankable asset (i.e., not         $31,000 payment on Loan A. For reg-
ulations as income for regulatory financial        written off for regulatory financial state-       ulatory financial statement purposes, X
statement purposes should the bank also            ment purposes) even if accrued interest on        characterizes the $31,000 payment as a
cease recognizing uncollected accrued in-          the loan is no longer being recognized as         recovery of principal rather than a recov-
terest into income for federal income tax          income (or was previously recognized and          ery of accrued interest. Therefore, X does
purposes?                                          subsequently charged off) for regulatory          not recognize any of the $31,000 payment
    2.      If a bank uses a conformity            financial statement purposes. In this rev-        as interest income for regulatory financial
method of accounting as provided for               enue ruling, the loan is referred to as a         statement purposes.
in § 1.166–2(d) but does not recognize             “non-accrual loan receivable.”                        X’s supervisory authorities, in connec-
uncollected accrued interest as income                 In general, federal banking rules require     tion with the most recent examination of
for regulatory financial statement pur-            a bank such as X to apply any payment re-         X’s regulatory financial statements and
poses, when should the bank recognize a            ceived on a non-accrual loan receivable to        lending practices, have determined that X
worthless debt with respect to uncollected         reduce its recorded investment in the loan        maintains and applies standards that are
accrued interest for federal income tax            (i.e., treat all monies that come in on the       consistent with federal banking rules.
purposes?                                          loan as a collection of loan principal) to
    3. If a bank receives payments on a loan       the extent necessary to eliminate doubt as        LAW AND ANALYSIS
where the bank for federal income tax pur-         to collectibility. Therefore, for regulatory
poses either (i) previously recognized the                                                           Issue 1.
                                                   financial statement purposes, X character-
uncollected accrued interest as income and         izes any payment received on a non-ac-
subsequently deducted the accrued interest                                                              Section 1.446–2 provides rules for
                                                   crual loan receivable as a payment of prin-       determining the amount of accrued in-
receivable as a worthless debt under sec-          cipal rather than a payment of the outstand-
tion 166 or (ii) did not recognized the un-                                                          terest (other than interest described in
                                                   ing accrued interest on the loan until the re-    § 1.446–2(a)(2)) that is generated on a
collected accrued interest on the loan as in-      maining principal on the non-accrual loan
come, how should the payments be charac-                                                             loan over time for federal income tax pur-
                                                   receivable is considered to be fully col-         poses.
terized for federal income tax purposes?           lectible.                                            Section 1.446–2(a)(1) provides that
FACTS                                                  On January 16, 2007, X classifies Loan        the period in which a taxpayer recog-
                                                   A as a non-accrual loan receivable for reg-       nizes accrued interest (determined under
   X corporation is a bank as defined in           ulatory financial statement purposes be-          § 1.446–2(b) or § 1.446–2(c)) in gross
§ 1.166–2(d)(4)(i). X determines its tax-          cause an amount of principal or interest has


May 21, 2007                                                          1278                                                 2007–21 I.R.B.
income is determined under the taxpayer’s       its collectibility”); Koehring Co. v. United     Foundry Co. v. Commissioner, 292 U.S.
regular method of accounting.                   States, 421 F.2d 715, 721 (Ct. Cl. 1970)         182 (1934). See also Atlantic Coast Line
    Section 451(a) provides that the amount     (stating that “a reasonable doubt as to the      Railroad Co. v. Commissioner, 31 B.T.A.
of any item of gross income is included in      collectibility of a debt is a sufficient rea-    730, 751 (1934), acq., XIV–2 C.B. (1935).
gross income for the taxable year in which      son to justify its nonaccrual as income”);           Rev. Rul. 81–18, 1981–1 C.B. 295,
received by the taxpayer, unless, under the     Rev. Rul. 80–361, 1980–2 C.B. 164 (cit-          addressed an accrual basis savings and
method of accounting used in computing          ing Jones Lumber Co., supra.)                    loan association operating on a calendar
taxable income, such amount is to be prop-          The “no reasonable expectancy of pay-        year for federal income tax purposes. On
erly accounted for in a different period.       ment” exception to the fundamental rules         its 1978 income tax return, the savings and
    In the case of an accrual method tax-       of income accrual is strictly construed.         loan recognized into income uncollected
payer, § 1.451–1(a) provides that income        “For accrual of income to be prevented,          accrued interest on a loan. However, no
is includible in gross income when all the      uncertainty as to collection must be sub-        interest payments were ever received on
events have occurred which fix the right        stantial.” European Am. Bank & Trust             the loan. On January 30, 1979, the savings
to receive such income and the amount           Co., 20 Cl. Ct. at 605. To treat an item         and loan charged off the previously recog-
thereof can be determined with reasonable       as non-accruable because of doubtful             nized 1978 accrued interest for regulatory
accuracy. See also § 1.446–1(c)(1)(ii).         collectibility, the cases generally have         financial accounting purposes and rec-
    As an accrual method taxpayer, X gen-       required substantial evidence as to the          ognized a bad debt deduction for federal
erally is required to recognize accrued         financial instability or insolvency of the       income tax purposes. The charge-off was
interest determined under § 1.446–2 into        debtor. See Jones Lumber Co., 404 F.2d at        made pursuant to then existing Federal
gross income for the taxable year in which      766. This substantiation requirement has         Home Loan Bank Board (FHLBB) regu-
all the events have occurred which fix          been applied on a loan by loan basis.            lations. The FHLBB regulations required
the right to receive such interest and the          Temporary financial difficulty of a          that interest be treated as uncollectible if
amount thereof can be determined with           debtor cannot support non-recognition of         any portion of the interest was due but
reasonable accuracy. See § 1.451–1(a).          income absent the existence of real doubt        uncollected for a period in excess of 90
Under the “all events” test, a taxpayer’s       regarding ultimate payment. Koehring             days. FHLBB examiners, upon their first
right to receive income becomes fixed on        Co., 421 F.2d 715, 721–722; see also             audit of the savings and loan after the
the earlier of the date that: (1) payment       Harmont Plaza Inc. v. Commissioner, 64           charge-off, confirmed that the charge-off
is earned through performance; (2) pay-         T.C. 632, 650 (1975), aff’d, 549 F.2d 414        was properly recognized for regulatory
ment is due; or (3) payment is actually         (6th Cir. 1977) (stating that “the fact that a   financial statement purposes and made in
received. Rev. Rul. 84–31, 1984–1 C.B.          lapse of time is contemplated before actual      accordance with established policies of
127. An amount of accrued interest de-          satisfaction is possible does not constitute     the FHLBB. The ruling considered two
termined pursuant to § 1.446–2 satisfies        the requisite doubtful collectibility”). If      issues: (1) whether the savings and loan’s
the “reasonable accuracy” requirement of        there is some doubt regarding receipt of         claim for the uncollected 1978 interest
§ 1.451–1(a).                                   payment but a reasonable person would            was worthless for purposes of recognizing
    Although federal banking rules do not       have an expectancy of payment, then an           a section 166 bad debt deduction; and (2)
permit X to recognize accrued interest re-      accrual method taxpayer is required to           whether the savings and loan was required
lated to a non-accrual loan receivable as       recognize the income.                            under section 451 and § 1.451–1(a) to
income for regulatory financial statement           When an income item is properly ac-          recognize the uncollected accrued interest
purposes, regulatory accounting rules are       crued and subsequently becomes uncol-            on the nonperforming loan for periods
not controlling for federal income tax pur-     lectible, a taxpayer’s remedy is by way          after December 31, 1978 under the ac-
poses. See Old Colony R. Co. v. Commis-         of a bad debt deduction under section 166        crual method of accounting. The ruling
sioner, 284 U.S. 552, 562 (1932).               rather than through elimination of the ac-       concluded that for federal income tax pur-
    “A fixed right to a determinable amount     crual. Rev. Rul. 80–361. See also                poses, the savings and loan’s claim to the
does not require accrual, however, if the       § 1.166–1(e) (relating to a bad debt de-         1978 uncollected accrued interest was a
income is uncollectible when the right to       duction for uncollected income items in-         worthless debt for purposes of section 166.
receive the income item arises. Accrual of      cluded as income for the taxable year in         The ruling also concluded that the savings
income is not required when a fixed right       which the bad debt deduction is claimed or       and loan was not required to recognize any
to receive arises if there is not a reason-     for a prior taxable year); section 585 (al-      uncollected accrued interest on the loan
able expectancy that the claim will ever be     lowing certain banks to deduct additions         after December 31, 1978.
paid.” European Am. Bank & Trust Co. v.         to a reserve for bad debts in lieu of the            Unlike the situation in Rev. Rul.
United States, 20 Cl. Ct. 594, 605 (1990)       bad debt deduction provided by section           81–18, where no payments on the loan
(footnotes omitted), aff’d per curiam, 940      166) and § 1.585–2(e)(2) (excluding inter-       were made and there was no reason-
F.2d 677 (Fed. Cir. 1991); see also Jones       est that has not been included in gross in-      able expectation of payment, in this rev-
Lumber Co. v. Commissioner, 404 F.2d            come from a loan used to determine addi-         enue ruling X reasonably expects the
764, 766 (6th Cir. 1968) (stating that “[t]he   tions to the reserve for bad debts). This        borrower to continue making some but
right to receive . . . determines the ac-       rule is applicable even when the item is         not all payments on Loan A. Therefore,
crual of income unless, at the time the right   accrued and becomes uncollectible dur-           the borrower’s default on Loan A only
arises, there exists a reasonable doubt as to   ing the same taxable year. Spring City           demonstrates that timely repayment is not


2007–21 I.R.B.                                                     1279                                                  May 21, 2007
occurring. The late payment of interest               In connection with the most recent           2006 and $24,000 of uncollected accrued
by itself is not sufficient to demonstrate        examination of X’s regulatory financial          interest in 2007).
that X has no reasonable expectation of           statements, X’s supervisory authorities
payment of the accrued interest related to        have determined that X maintains and             Issue 3.
Loan A. Under these circumstances, the            applies standards that are consistent with
                                                                                                       In general, § 1.446–2(e) provides that
“no reasonable expectancy of payment”             federal banking rules. See Rev. Proc.
                                                                                                   each payment made on a loan (other than
exception to the general accrual rule does        92–84, 1992–2 C.B. 489 (providing the
                                                                                                   payments of additional interest or simi-
not apply. See Koehring Co., 421 F.2d at          form for the determination). Therefore,
                                                                                                   lar charges with regard to amounts that
721–722; Harmont Plaza Inc., 64 T.C. at           X satisfies the express determination re-
                                                                                                   are not paid when due) is treated as a
650.                                              quirement of § 1.166–2(d)(3)(iii)(D).
                                                                                                   payment of interest to the extent of any
   As an accrual method taxpayer, X is                Various procedures can be used
                                                                                                   accrued interest that is uncollected on
required to recognize the $8,000 of un-           by a bank to classify a debt, or por-
                                                                                                   the date the payment becomes due. The
collected 2006 accrued interest as income         tion thereof, as a loss asset described
                                                                                                   interest characterization provided for in
in X’s 2006 taxable year for federal in-          in § 1.166–2(d)(3)(ii)(C). Rev.          Rul.
                                                                                                   § 1.446–2(e) applies to all payments made
come tax purposes. X is also required             2001–59, 2001–2 C.B. 585. On January
                                                                                                   on a loan regardless of the taxpayer’s
to recognize the $24,000 of uncollected           16, 2007, X reverses the recognition of
                                                                                                   overall method of accounting. For exam-
2007 accrued interest in X’s 2007 tax-            the $9,000 of pre-January 17, 2007 uncol-
                                                                                                   ple, the interest characterization provided
able year. The result is the same regard-         lected accrued interest as interest income
                                                                                                   for in § 1.446–2(e) would apply to a pay-
less of whether the bank uses a confor-           on Loan A ($8,000 of 2006 interest and
                                                                                                   ment on a loan for which the uncollected
mity method of accounting provided for in         $1,000 of interest for the period January
                                                                                                   accrued interest was not previously rec-
§ 1.166–2(d).                                     1, 2007 through January 16, 2007) for
                                                                                                   ognized as income for federal income tax
                                                  regulatory financial statement purposes.
Issue 2.                                                                                           purposes. Similarly, the interest character-
                                                  X’s reversal of the accrual of $9,000 of
                                                                                                   ization provided for in § 1.446–2(e) would
                                                  uncollected pre-January 17, 2007 accrued
   Section 166(a)(1) provides that a de-                                                           apply to a payment on a loan for which
                                                  interest, removes the interest receivable
duction shall be allowed for any debt that                                                         the uncollected accrued interest was pre-
                                                  from X’s books and records for regula-
becomes worthless during the taxable year.                                                         viously recognized as income for federal
                                                  tory financial statement purposes. Under
In addition, section 166(a)(2) provides a                                                          income tax purposes and subsequently
                                                  federal banking rules, the $9,000 interest
deduction for “partially worthless debts”                                                          deducted as a worthless debt under the
                                                  receivable is treated as an uncollectible
not in excess of the part charged off in                                                           taxpayer’s method of accounting.
                                                  asset of such little value that its inclusion
the taxpayer’s books and records within                                                                Under § 1.166–1(f), any amount attrib-
                                                  as a bankable asset is not warranted. The
the taxable year to the extent the Com-                                                            utable to a recovery of a bad debt, or of a
                                                  reversal of the accrual of the $9,000 of
missioner is satisfied that the debt is re-                                                        portion of a bad debt, which was allowed
                                                  interest receivable constitutes a charge off
coverable only in part. A deduction for a                                                          as a deduction from gross income in a prior
                                                  of the interest receivable as a loss asset for
worthless debt arising from an item of tax-                                                        taxable year, is included in gross income
                                                  purposes of § 1.166–2(d)(3)(ii)(C).
able income shall be allowed only if the                                                           for the taxable year of recovery, except
                                                      For regulatory purposes, X does not
item is recognized as taxable income dur-                                                          to the extent that the recovery is excluded
                                                  recognize as income any of the $23,000 of
ing the taxable year in which the deduc-                                                           from gross income under the provisions of
                                                  accrued interest attributable to the period
tion is claimed or a prior taxable year. See                                                       section 111 and § 1.111–1.
                                                  January 17, 2007 through December 31,
§ 1.166–1(e).                                                                                          On January 1, 2008, X receives a
                                                  2007 because X’s right to the $23,000 of
   In general, there is no bright line test for                                                    $31,000 payment on Loan A. For regula-
                                                  accrued interest has such little value that
determining the period in which a debt be-                                                         tory financial statement purposes, X char-
                                                  recognition of the accrued interest receiv-
comes worthless. However, § 1.166–2(d)                                                             acterizes the $31,000 as a payment of loan
                                                  able as a bankable asset is not warranted.
permits a bank subject to supervision by                                                           principal. However, under § 1.446–2(e),
                                                  Under these circumstances, X’s failure to
federal banking authorities to use a con-                                                          X is required to characterize any payment
                                                  recognize the $23,000 of accrued interest
formity method of accounting to determine                                                          received on Loan A (other than payments
                                                  for regulatory financial statement purposes
when a debt becomes worthless. Under a                                                             of additional interest or similar charges
                                                  is tantamount to recognizing the accrued
conformity method, debts that are charged                                                          with regard to amounts that are not paid
                                                  interest as income and immediately charg-
off, in whole or in part, for regulatory pur-                                                      when due) as a payment of interest for
                                                  ing off the uncollected accrued interest re-
poses are conclusively presumed to be-                                                             federal income tax purposes to the extent
                                                  ceivable as a loss asset.
come worthless for federal income tax pur-                                                         there is uncollected accrued interest out-
                                                      As a result of X’s conformity method
poses at the time of the regulatory charge                                                         standing on Loan A.
                                                  of accounting under § 1.166–2(d), X will
off. Under a conformity method of ac-                                                                  Immediately prior to the receipt of the
                                                  be entitled to claim a worthless debt de-
counting, the bank is allowed to recog-                                                            $31,000 payment on January 1, 2008, the
                                                  duction under section 166 in X’s tax year
nize a bad debt deduction for the taxable                                                          uncollected accrued interest on Loan A is
                                                  ending December 31, 2007 for the $32,000
year in which a debt is conclusively pre-                                                          $32,000 ($8,000 attributable to 2006 and
                                                  of uncollected accrued interest on Loan A
sumed to have become worthless. See                                                                $24,000 attributable to 2007). Therefore,
                                                  ($8,000 of uncollected accrued interest in
§ 1.166–2(d)(3)(ii)(A)(2).                                                                         § 1.446–2(e) requires that X characterize



May 21, 2007                                                         1280                                                 2007–21 I.R.B.
the $31,000 payment on Loan A as a pay-        2008 as a payment of interest for federal               Rev. Rul. 2007–33
ment of interest for federal income tax pur-   income tax purposes. The result would be
poses. The characterization of the $31,000     the same whether (i) X had not yet recog-               ISSUE
payment as interest under § 1.446–2(e)         nized the $32,000 of uncollected accrued
                                                                                                          If a real estate investment trust (REIT)
would be the same regardless of whether:       interest on Loan A as gross income un-
                                                                                                       recognizes foreign currency gain in a sec-
(i) X had not yet recognized the $32,000       der its method of accounting for federal in-
                                                                                                       tion 988 transaction, to what extent is that
of uncollected accrued interest on Loan A      come tax purposes, (ii) X had recognized
                                                                                                       gain qualifying income for purposes of the
as income under its method of account-         the $32,000 of uncollected accrued interest
                                                                                                       REIT income tests under § 856(c) of the
ing for federal income tax purposes, (ii)      on Loan A as gross income for federal tax
                                                                                                       Internal Revenue Code?
X had recognized the $32,000 of uncol-         purposes but subsequently deducted the re-
lected accrued interest on Loan A as in-       ceivable as a bad debt under section 166,               FACTS
come for federal tax purposes but subse-       or (iii) X used a conformity method of ac-
quently deducted the interest receivable as    counting under § 1.166–2(d). If X had                      R, a corporation with the U.S. dollar
a bad debt under section 166 under its         previously deducted the $32,000 of uncol-               as its functional currency, has elected, and
method of accounting, or (iii) X used a        lected accrued interest as a bad debt for               qualifies, to be treated as a REIT under
conformity method of accounting under          federal income tax purposes then the sub-               subchapter M of Chapter 1 of the Code. R
§ 1.166–2(d).                                  sequent $31,000 payment on the loan will                invests both in real property from which R
                                               be characterized as a partial recovery of               derives rental income and in debt instru-
HOLDINGS                                       that bad debt.                                          ments that are partially or fully secured by
                                                                                                       mortgages on real property.
   1. X is required to recognize in gross      EFFECT ON OTHER RULINGS                                    Some of the leases of the real estate
income the uncollected accrued interest on
                                                                                                       that R owns provide for rents to be paid
Loan A for federal income tax purposes            Rev. Rul. 81–18 is distinguished with
                                                                                                       in euros. For some of these leases, R
notwithstanding that federal banking rules     regard to when interest accrues for federal
                                                                                                       recognizes rental income for federal in-
required X to suspend the recognition of       income tax purposes.
                                                                                                       come tax purposes before receiving the
accrued interest on Loan A into income for
                                               DRAFTING INFORMATION                                    corresponding rent payments. R’s rental
regulatory financial statement purposes.
                                                                                                       income from these euro-denominated
For the taxable year ending December 31,
                                                   The principal author of this revenue rul-           leases is described in § 856(c)(2)(C) and
2006, X must recognize in gross income
                                               ing is Timothy Sebastian of the Office of               in § 856(c)(3)(A).
the $8,000 of uncollected accrued interest
                                               the Associate Chief Counsel (Financial In-                 Some of the mortgage loans that R ac-
on Loan A that was generated during 2006.
                                               stitutions and Products). For further infor-            quires are denominated in euros, and both
For the taxable year ending December 31,
                                               mation regarding this revenue ruling, con-              principal and interest under these loans are
2007, X must recognize in gross income
                                               tact Mr. Sebastian (202) 622–7417.                      payable in euros. R’s interest income from
the $24,000 of uncollected accrued inter-
                                                                                                       these euro-denominated loans is described
est on Loan A that was generated during
                                                                                                       in § 856(c)(2)(B) and in § 856(c)(3)(B).
2007. X must recognize the uncollected         Section 856.—Definition of                                 R’s activities of investing in rent-pro-
accrued interest as gross income in 2006       Real Estate Investment Trust                            ducing real estate and in mortgage loans
and 2007 regardless of whether X has
                                                                                                       are not subject to § 987. Therefore, if the
elected a conformity method of account-           A notice provides that if a REIT recognizes cur-
                                               rency gain under section 987, the REIT may apply
                                                                                                       euro changes in value against the dollar,
ing under § 1.166–2(d)(3) to determine
                                               the principles of the proposed regulations under sec-   payments of rent under the leases of the
when a debt becomes worthless.
                                               tion 987 that were issued on September 7, 2006, to      real estate and periodic payments made un-
   2. As X uses a conformity method
                                               determine whether the currency gain is derived from     der the mortgage loans may generate for-
of accounting under § 1.166–2(d), X’s          income described in section 856(c)(2) or (3). See No-   eign currency gain or loss under § 988. See
$32,000 accrued interest receivable re-        tice 2007-42, page 1288.                                § 1.988–2(b).
lated to Loan A ($8,000 of uncollected
                                                                                                          During its taxable year, R recognized
accrued interest in 2006 and $24,000 of
                                               26 CFR 1.856–2: Limitations.                            rental income on the euro-denominated
uncollected accrued interest in 2007) is       (Also § 988; 1.988–2.)                                  leases, interest income on the euro-de-
considered worthless for purposes of sec-
                                                                                                       nominated mortgage loans, and section
tion 166 in the year the amount is charged         Real estate investment trust (REIT)
                                                                                                       988 gain on payments received under the
off for regulatory financial statement pur-    foreign currency. This ruling provides
                                                                                                       leases and the mortgage loans.
poses. Therefore, for federal income tax       that section 988 gain that is recognized by
purposes, X is allowed a worthless debt        a REIT will be qualifying income under                  LAW AND ANALYSIS
deduction for the $32,000 of uncollected       section 856(c)(2) or (3) of the Code to the
accrued interest written off for regulatory    extent that the underlying income so qual-                  To qualify as a REIT for a taxable year,
financial statement purposes in the tax        ifies.                                                  at least 95 percent of an entity’s gross in-
year ending December 31, 2007.                                                                         come must be “derived from” the types of
   3. X is required to characterize the                                                                income listed in § 856(c)(2), and at least
$31,000 payment received on Loan A in                                                                  75 percent of its gross income must be



2007–21 I.R.B.                                                       1281                                                      May 21, 2007
“derived from” the types of income listed       law and the property were located in the        HOLDING
in § 856(c)(3). Gains from foreign cur-         United States. Thus, foreign situs of a
rency are not specifically enumerated in        REIT’s assets does not necessarily prevent          If section 988 gain is recognized with
§ 856(c)(2) or (c)(3).                          the REIT from satisfying the income and         respect to income recognized by a REIT,
    Section 988(c)(1) defines a “section        asset tests of § 856(c), which must be met      the gain qualifies under § 856(c)(2) or (3)
988 transaction” as any transaction de-         in order to qualify as a REIT. Rev. Rul.        to the extent that the underlying income so
scribed in § 988(c)(1)(B) if the amount         74–191, however, does not address the           qualifies.
which the taxpayer is entitled to receive       treatment of foreign currency gain that
                                                                                                DRAFTING INFORMATION
(or is required to pay) by reason of such       may result from investing in real prop-
transaction is denominated in terms of          erty or other assets that produce income           The principal author of this revenue rul-
a nonfunctional currency or is deter-           denominated in a currency other than the        ing is Jonathan D. Silver of the Office of
mined by reference to the value of one          taxpayer’s functional currency.                 Associate Chief Counsel (Financial Insti-
or more nonfunctional currencies. Under             The legislative history describing the      tutions & Products). For further informa-
§ 988(c)(1)(B)(i), a section 988 transaction    tax treatment of REITs indicates that the       tion regarding this revenue ruling, contact
includes the acquisition of a debt instru-      central concern behind the gross income         Jonathan D. Silver at (202) 622–3930 (not
ment or becoming the obligor under a debt       restrictions in § 856(c) is that a REIT’s       a toll-free call).
instrument. Under § 988(c)(1)(B)(ii), a         gross income should largely be com-
section 988 transaction also includes ac-       posed of passive income. For example,
cruing (or otherwise taking into account)       H.R. Rep. No. 2020, 86th Cong., 2d Sess.        Section 987.—Branch
any item of gross income or receipts which      4 (1960) at 6, 1960–2 C.B. 819, 822–23          Transactions
is received after the date on which so ac-      states, “One of the principal purposes of
crued or taken into account.                    your committee in imposing restrictions            A notice provides that if a REIT recognizes cur-
                                                                                                rency gain under section 987, the REIT may apply
    Section 988(b)(1) provides that the term    on types of income of a qualifying real
                                                                                                the principles of the proposed regulations under sec-
“foreign currency gain” means any gain          estate investment trust is to be sure the       tion 987 that were issued on September 7, 2006, to
from a section 988 transaction to the ex-       bulk of its income is from passive income       determine whether the currency gain is derived from
tent that such gain does not exceed gain        sources and not from the active conduct of      income described in section 856(c)(2) or (3). See No-
realized by reason of changes in exchange       a trade or business.”                           tice 2007-42, page 1288.
rates on or after the booking date (as de-          Although § 856(c) describes the sources
fined in § 988(c)(2)) and before the pay-       of REIT qualifying income, neither the          Section 988.—Treatment of
ment date (as defined in § 988(c)(3)).          statute nor its legislative history describes   Certain Foreign Currency
    Rev. Rul. 74–191, 1974–1 C.B. 170,          what it means for income to be “derived
holds that otherwise-qualifying assets do       from” those sources. Because of the close
                                                                                                Transactions
not fail to satisfy § 856(c)(4) merely be-      nexus, however, between section 988 gain           A revenue ruling holds that if section 988 gain is
cause the assets are foreign:                   on payments received by a REIT and the          recognized with respect to income recognized by a
    Neither section 856 of the Code nor the     income from which that payment is de-           REIT, the gain qualifies under section 856(c)(2) or (3)
    regulations thereunder restrict the term    rived, the section 988 gain qualifies un-       to the extent that the underlying income so qualifies.
                                                                                                See Rev. Rul. 2007-33, page 1281.
    “real estate assets” to those located       der § 856(c)(2) or (3) to the extent that
    within the United States. Accordingly,      the underlying income does. Thus, for ex-
    it is held that, for purposes of section    ample, if interest income recognized by R       Section 1035.—Certain
    856(c), the term “real property” in-        qualifies under § 856(c)(2) or (3), then so     Exchanges of Insurance
    cludes land or improvements thereon         does the 988 gain from that interest in-        Policies
    located outside the United States and       come. Similarly, if an item of income qual-
                                                                                                26 CFR 1.1035–1: Certain exchanges of insurance
    the term “mortgages on real property”       ifies as rents from real property for pur-
                                                                                                policies.
    includes a security interest which, un-     poses of § 856(c)(3)(C), then, for purposes     (Also § 72.)
    der the laws of the jurisdiction in which   of § 856(c)(3), section 988 gain with re-
    the property is located, is the legal       spect to that income is derived from a type        Section 1035; certain exchanges of in-
    equivalent of a mortgage or deed of         of income listed in § 856(c)(3)(A)–(H). Cf.     surance policies. A taxpayer’s receipt of
    trust in the United States.                 Rev. Rul. 92–56, 1992–2 C.B. 153 (con-          a check issued by an insurance company
1974–1 C.B. at 170. It follows from this        cluding that a regulated investment com-        under a non-qualified annuity contract is
holding both that rents on foreign real         pany’s (RIC’s) receipt of a reimbursement       treated as a taxable distribution, even if
property qualify under § 856(c)(2)–(3) to       of an investment advisory fee was “derived      the check is endorsed to a second insur-
the same extent that they would qualify         from” the RIC’s business of investing in        ance company for the purchase of a second
if the property were located in the United      stock, securities, or foreign currencies and    annuity. The transaction is not character-
States and that interest on foreign mort-       was therefore qualifying income under the       ized as a tax-free exchange under section
gage loans qualifies under § 856(c)(2)–(3)      “other income” provision of § 851(b)(2)).       1035(a)(3) of the Code unless there is a di-
to the same extent that it would qualify if                                                     rect exchange or assignment of the original
the loans were governed by United States                                                        contract.



May 21, 2007                                                       1282                                                      2007–21 I.R.B.
Rev. Rul. 2007–24                              sis. Section 72(e)(5)(E) provides that this      did A assign the IC1 contract to IC2; nor
                                               rule applies to any amounts received on the      was there a direct transfer from IC1 to
ISSUE                                          complete surrender, redemption, or matu-         IC2 of the cash value of the old contract
                                               rity of an annuity contract.                     in exchange for the new contract. In-
    If a Taxpayer receives a check from a          Section 1035(a)(3) provides that no          stead, IC1 disbursed a check to A, which
life insurance company under a non-qual-       gain or loss is recognized on the exchange       A, in turn, endorsed to IC2 as considera-
ified annuity contract, does the endorse-      of an annuity contract for another annuity       tion for a new contract. Neither § 1035
ment of the check to a second company          contract. The legislative history of § 1035      nor the regulations make any special pro-
as consideration for a second annuity con-     explains that § 1035 provides non-recog-         vision for the purchase of an annuity con-
tract qualify as a tax-free exchange un-       nition treatment for taxpayers who have          tract with amounts distributed to the poli-
der § 1035(a)(3) of the Internal Revenue       “merely exchanged an [annuity contract]          cyholder under another contract. Because
Code?                                          for another better suited to their needs         the annuity contract was a non-qualified
                                               and who have not actually realized gain.”        contract, no rollover provision, such as
FACTS
                                               H. Rep. 1337, 83d Cong., 2d Sess. 81             § 403(a)(4), applied to the amount received
   A, an individual, owned a non-qualified     (1954). Under § 1.1035–1, the contracts          from IC1. Accordingly, the amount that A
annuity contract issued by IC1, a life in-     exchanged must relate to the same insured,       received from IC1 under the first annuity
surance company. In 2007, A requested          and the obligee or obligees under the con-       contract is taxable in 2007 to the extent set
that IC1 issue directly to IC2, another life   tract received in the exchange must be the       forth in § 72(e).
insurance company, a check as consider-        same as those under the original contract.
ation for a new annuity contract to be is-         In Rev. Rul. 72–358, 1972–2 C.B. 473,        HOLDING
sued by IC2. A intended the transaction        a taxpayer who owned a life insurance con-
to be treated as a tax-free exchange under     tract issued by one insurance company as-            If a Taxpayer receives a check from a
§ 1035. IC1 refused to do so and, instead,     signed the contract, prior to its maturity, to   life insurance company under a non-qual-
issued a check to A. A did not deposit the     a second insurance company in exchange           ified annuity contract, the endorsement of
check, but instead endorsed it to IC2 as       for a variable annuity contract issued by        the check to a second company as consid-
consideration for a new annuity contract.      the second company. The ruling concludes         eration for a second annuity contract does
                                               that, pursuant to § 1035, no gain or loss        not qualify as a tax-free exchange under
LAW AND ANALYSIS                               is recognized on the exchange. Similarly,        § 1035(a)(3). Instead, the amount received
                                               Rev. Rul. 2002–75, 2002–2 C.B. 812,              is taxable to the extent set forth in § 72(e).
    Section 72(a) provides that, except as     concludes that an individual’s assignment
otherwise provided in Chapter 1 of the         of an annuity contract issued by one insur-      DRAFTING INFORMATION
Internal Revenue Code, gross income in-        ance company to a second insurance com-
cludes any amount received as an annuity       pany, which then deposits the cash surren-          The principal author of this revenue
under an annuity contract. Under § 72(e),      der value of the assigned contract into a        ruling is Josephine H. Firehock of the Of-
amounts received under an annuity con-         pre-existing annuity contract owned by the       fice of Associate Chief Counsel (Financial
tract, but not as an annuity, generally are    same taxpayer, qualifies as a tax-free ex-       Institutions & Products). For further in-
included in gross income to the extent al-     change under § 1035.                             formation regarding this revenue ruling,
locable to income on the contract. That            In the present case, there was no ac-        contact Josephine H. Firehock at (202)
is, they are taxed on an income-first ba-      tual exchange of annuity contracts; nor          622–3970 (not a toll-free call).




2007–21 I.R.B.                                                    1283                                                   May 21, 2007
Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest                       Equity Act of 2004 and by the Pension Pro-       rate bond weighted average is based on the
Rates Update                                    tection Act of 2006, provide that the inter-     monthly composite corporate bond rate de-
                                                est rates used to calculate current liability    rived from designated corporate bond in-
Notice 2007–33                                  and to determine the required contribution       dices. The methodology for determining
                                                under § 412(l) for plan years beginning in       the monthly composite corporate bond rate
   This notice provides guidance as to the      2004 through 2007 must be within a per-          as set forth in Notice 2004–34 continues to
corporate bond weighted average interest        missible range based on the weighted av-         apply in determining that rate. See Notice
rate and the permissible range of interest      erage of the rates of interest on amounts        2006–75, 2006–36 I.R.B. 366.
rates specified under § 412(b)(5)(B)(ii)(II)    invested conservatively in long term in-            The composite corporate bond rate for
of the Internal Revenue Code. In addi-          vestment grade corporate bonds during the        April 2007 is 5.98 percent. Pursuant to No-
tion, it provides guidance as to the interest   4-year period ending on the last day before      tice 2004–34, the Service has determined
rate on 30-year Treasury securities under       the beginning of the plan year.                  this rate as the average of the monthly
§ 417(e)(3)(A)(ii)(II).                             Notice 2004–34, 2004–1 C.B. 848, pro-        yields for the included corporate bond in-
                                                vides guidelines for determining the cor-        dices for that month.
CORPORATE BOND WEIGHTED                         porate bond weighted average interest rate          The following corporate bond weighted
AVERAGE INTEREST RATE                           and the resulting permissible range of in-       average interest rate was determined for
   Sections 412(b)(5)(B)(ii) and 412(l)(7)      terest rates used to calculate current liabil-   plan years beginning in the month shown
(C)(i), as amended by the Pension Funding       ity. That notice establishes that the corpo-     below.


                                                                                   Corporate
                           For Plan Years                                            Bond                           90% to 100%
                            Beginning in:                                          Weighted                          Permissible
              Month                               Year                              Average                            Range
               May                                2007                                5.80                           5.22 to 5.80

30-YEAR TREASURY SECURITIES                     Drafting Information                             Credit for Renewable
INTEREST RATE                                                                                    Electricity Production,
                                                    The principal authors of this notice are
    Section 417(e)(3)(A)(ii)(II) defines        Paul Stern and Tony Montanaro of the Em-         Refined Coal Production,
the applicable interest rate, which must        ployee Plans, Tax Exempt and Govern-             and Indian Coal Production,
be used for purposes of determining the         ment Entities Division. For further infor-       and Publication of Inflation
minimum present value of a participant’s        mation regarding this notice, please con-        Adjustment Factors and
benefit under § 417(e)(1) and (2), as the       tact the Employee Plans’ taxpayer assis-
                                                                                                 Reference Prices for Calendar
annual rate of interest on 30-year Treasury     tance telephone service at 877–829–5500
securities for the month before the date        (a toll-free number), between the hours of       Year 2007
of distribution or such other time as the       8:30 a.m. and 4:30 p.m. Eastern time,
Secretary may by regulations prescribe.         Monday through Friday. Mr. Stern may be          Notice 2007–40
Section 1.417(e)–1(d)(3) of the Income          reached at 202–283–9703. Mr. Montanaro               This notice publishes the inflation ad-
Tax Regulations provides that the applica-      may be reached at 202–283–9714. The              justment factors and reference prices for
ble interest rate for a month is the annual     telephone numbers in the preceding sen-          calendar year 2007 for the renewable elec-
interest rate on 30-year Treasury securi-       tences are not toll-free.                        tricity production credit, the refined coal
ties as specified by the Commissioner for                                                        production credit, and the Indian coal pro-
that month in revenue rulings, notices or                                                        duction credit under § 45 of the Internal
other guidance published in the Internal                                                         Revenue Code. The 2007 inflation adjust-
Revenue Bulletin.                                                                                ment factors and reference prices are used
    The rate of interest on 30-year Treasury                                                     in determining the availability of the cred-
securities for April 2007 is 4.87 percent.                                                       its. The 2007 inflation adjustment factors
The Service has determined this rate as the                                                      and reference prices apply to calendar year
monthly average of the daily determina-                                                          2007 sales of kilowatt-hours of electricity
tion of yield on the 30-year Treasury bond                                                       produced in the United States or a pos-
maturing in February 2037.                                                                       session thereof from qualified energy re-
                                                                                                 sources and to calendar year 2007 sales of
                                                                                                 refined coal and Indian coal produced in
                                                                                                 the United States or a possession thereof.


May 21, 2007                                                       1284                                                 2007–21 I.R.B.
BACKGROUND                                        but only if the modification is approved          in service after the date of enactment of
                                                  under the Biomass Power for Rural De-             § 45(d)(5) and before January 1, 2009.
    Section 45(a) provides that the renew-        velopment Programs or is part of a pilot              Section 45(d)(6) defines a qualified fa-
able electricity production credit for any        project of the Commodity Credit Corpora-          cility using gas derived from the biodegra-
tax year is an amount equal to the prod-          tion as described in 65 Fed. Reg. 63052.          dation of municipal solid waste to produce
uct of 1.5 cents multiplied by the kilowatt       Section 45(d)(2)(B) provides that in the          electricity as any facility owned by the tax-
hours of specified electricity produced by        case of a qualified facility described in         payer which is originally placed in service
the taxpayer and sold to an unrelated per-        § 45(d)(2)(A)(ii), (i) the 10-year period re-     after the date of enactment of § 45(d)(6)
son during the tax year. This electricity         ferred to in § 45(a) is treated as begin-         and before January 1, 2009.
must be produced from qualified energy            ning no earlier than the date of enactment            Section 45(d)(7) defines a qualified fa-
resources and at a qualified facility during      of § 45(d)(2)(B)(i); (ii) the amount of the       cility that burns municipal solid waste to
the 10-year period beginning on the date          credit determined under § 45(a) with re-          produce electricity as any facility owned
the facility was originally placed in ser-        spect to the facility is an amount equal          by the taxpayer which is originally placed
vice.                                             to the amount determined without regard           in service after the date of enactment of
    Section 45(b)(1) provides that the            to § 45(d)(2)(B)(ii) multiplied by the ratio      § 45(d)(7) and before January 1, 2009. A
amount of the credit determined under             of the thermal content of the closed-loop         qualified facility burning municipal solid
§ 45(a) is reduced by an amount which             biomass used in the facility to the thermal       waste includes a new unit placed in service
bears the same ratio to the amount of the         content of all fuels used in the facility; and    in connection with a facility placed in ser-
credit as (A) the amount by which the             (iii) if the owner of the facility is not the     vice on or before the date of enactment of
reference price for the calendar year in          producer of the electricity, the person eli-      § 45(d)(7), but only to the extent of the in-
which the sale occurs exceeds 8 cents,            gible for the credit allowable under § 45(a)      creased amount of electricity produced at
bears to (B) 3 cents. Under § 45(b)(2),           is the lessee or the operator of the facility.    the facility by reason of such new unit.
the 1.5 cent amount in § 45(a), the 8 cent            Section 45(d)(3)(A) defines a qualified           Section 45(d)(8) provides in the case
amount in § 45(b)(1), the $4.375 amount in        facility using open-loop biomass to pro-          of a facility that produces refined coal,
§ 45(e)(8)(A), and in § 45(e)(8)(B)(i) the        duce electricity as any facility owned by         the term “refined coal production facility”
reference price of fuel used as feedstock         the taxpayer which (i) in the case of a facil-    means a facility which is placed in service
(within the meaning of § 45(c)(7)(A)) in          ity using agricultural livestock waste nutri-     after the date of enactment of § 45(d)(8)
2002 are each adjusted by multiplying the         ents, (I) is originally placed in service after   and before January 1, 2009.
amount by the inflation adjustment factor         the date of enactment of § 45(d)(3)(A)(i)(I)          Section 45(d)(9) defines a qualified
for the calendar year in which the sale           and before January 1, 2009, and (II) the          facility producing qualified hydroelec-
occurs. If any amount as increased under          nameplate capacity rating of which is not         tric production described in § 45(c)(8) as
the preceding sentence is not a multiple          less than 150 kilowatts; and (ii) in the case     (A) any facility producing incremental
of 0.1 cent, the amount is rounded to the         of any other facility, is originally placed in    hydropower production, but only to the
nearest multiple of 0.1 cent.                     service before January 1, 2009. In the case       extent of its incremental hydropower pro-
    Section 45(c)(1) defines qualified            of any facility described in § 45(d)(3)(A),       duction attributable to efficiency improve-
energy resources as wind, closed-loop             if the owner of the facility is not the pro-      ments or additions to capacity described
biomass, open-loop biomass, geother-              ducer of the electricity, § 45(d)(3)(B) pro-      in § 45(c)(8)(B) placed in service after the
mal energy, solar energy, small irrigation        vides that the person eligible for the credit     date of enactment of § 45(d)(9) and before
power, municipal solid waste, and quali-          allowable under § 45(a) is the lessee or the      January 1, 2009, and (B) any other facility
fied hydropower production.                       operator of the facility.                         placed in service after the date of enact-
    Section 45(d)(1) defines a qualified fa-          Section 45(d)(4) defines a qualified fa-      ment of § 45(d)(9) and before January 1,
cility using wind to produce electricity as       cility using geothermal or solar energy to        2009. Section 45(d)(9)(C) provides that in
any facility owned by the taxpayer that is        produce electricity as any facility owned         the case of a qualified facility described in
originally placed in service after Decem-         by the taxpayer which is originally placed        § 45(d)(9)(A), the 10-year period referred
ber 31, 1993, and before January 1, 2009.         in service after the date of enactment of         to in § 45(a) is treated as beginning on
See § 45(e)(7) for rules relating to the in-      § 45(d)(4) and before January 1, 2009 (Jan-       the date the efficiency improvements or
applicability of the credit to electricity sold   uary 1, 2006, in the case of a facility us-       additions to capacity are placed in service.
to utilities under certain contracts.             ing solar energy). A qualified facility us-           Section 45(d)(10) provides in the case
    Section 45(d)(2)(A) defines a qualified       ing geothermal or solar energy does not in-       of a facility that produces Indian coal,
facility using closed-loop biomass to pro-        clude any property described in § 48(a)(3)        the term “Indian coal production facility”
duce electricity as any facility (i) owned        the basis of which is taken into account by       means a facility which is placed in service
by the taxpayer that is originally placed in      the taxpayer for purposes of determining          before January 1, 2009.
service after December 31, 1992, and be-          the energy credit under § 48.                         Section 45(e)(8)(A) provides that the
fore January 1, 2009, or (ii) owned by the            Section 45(d)(5) defines a qualified          refined coal production credit is an amount
taxpayer which before January 1, 2009, is         facility using small irrigation power to          equal to $4.375 per ton of qualified re-
originally placed in service and modified         produce electricity as any facility owned         fined coal (i) produced by the taxpayer
to use closed-loop biomass to co-fire with        by the taxpayer which is originally placed        at a refined coal production facility dur-
coal, with other biomass, or with both,                                                             ing the 10-year period beginning on the


2007–21 I.R.B.                                                       1285                                                    May 21, 2007
date the facility was originally placed in      from the same qualified energy resource         refined coal does not exceed the $31.90
service, and (ii) sold by the taxpayer (I)      and sold in the previous year in the United     reference price of such fuel in 2002 mul-
to an unrelated person and (II) during the      States. Only contracts entered into af-         tiplied by the inflation adjustment factor
10-year period and the tax year. Section        ter December 31, 1989, are taken into ac-       and 1.7, the phaseout of credit provided
45(e)(8)(B) provides that the amount of         count.                                          in § 45(e)(8)(B) does not apply to re-
credit determined under § 45(e)(8)(A) is            Under § 45(e)(8)(C), the determination      fined coal sold during calendar year 2007.
reduced by an amount which bears the            of the reference price for fuel used as feed-   Further, for electricity produced from
same ratio to the amount of the increase        stock within the meaning of § 45(c)(7)(A)       closed-loop biomass, open-loop biomass,
as (i) the amount by which the reference        is made according to rules similar to the       geothermal energy, solar energy, small
price of fuel used as feedstock (within the     rules under § 45(e)(2)(C).                      irrigation power, municipal solid waste,
meaning of § 45(c)(7)(A)) for the calendar          Under section 45(e)(10)(B)(ii), in the      and qualified hydropower production, the
year in which the sale occurs exceeds an        case of any calendar year after 2006,           phaseout of credit provided in § 45(b)(1)
amount equal to 1.7 multiplied by the ref-      each of the dollar amounts under section        does not apply to such electricity sold dur-
erence price for such fuel in 2002, bears to    45(e)(10)(B)(i) shall be equal to the prod-     ing calendar year 2007.
(ii) $8.75.                                     uct of such dollar amount and the inflation
    Section 45(e)(10)(A) provides in the        adjustment factor determined under sec-         CREDIT AMOUNT BY QUALIFIED
case of a producer of Indian coal, the credit   tion 45(e)(2)(B) for the calendar year,         ENERGY RESOURCE AND FACILITY,
determined under section 45 for any tax-        except that section 45(e)(2)(B) shall be        REFINED COAL, AND INDIAN COAL
able year shall be increased by an amount       applied by substituting 2005 for 1992.
equal to the applicable dollar amount per                                                           As required by § 45(b)(2), the 1.5 cent
ton of Indian coal (i) produced by the tax-     INFLATION ADJUSTMENT FACTORS                    amount in § 45(a)(1), the 8 cent amount
payer at an Indian coal production facility     AND REFERENCE PRICES                            in § 45(b)(1), and the $4.375 amount in
during the 7-year period beginning on Jan-                                                      § 45(e)(8)(A) are each adjusted by mul-
                                                    The inflation adjustment factor for
uary 1, 2006, and (ii) sold by the taxpayer                                                     tiplying such amount by the inflation
                                                calendar year 2007 for qualified energy
(I) to an unrelated person, and (II) during                                                     adjustment factor for the calendar year
                                                resources and refined coal is 1.3433. The
such 7-year period and such taxable year.                                                       in which the sale occurs. If any amount
                                                inflation adjustment factor for Indian coal
    Section 45(e)(10)(B)(i) defines “ap-                                                        as increased under the preceding sen-
                                                is 1.0293. The reference price for calendar
plicable dollar amount” for any taxable                                                         tence is not a multiple of 0.1 cent, such
                                                year 2007 for facilities producing elec-
year as (I) $1.50 in the case of calendar                                                       amount is rounded to the nearest multi-
                                                tricity from wind (based upon information
years 2006 through 2009, and (II) $2.00 in                                                      ple of 0.1 cent. In the case of electricity
                                                provided by the Department of Energy)
the case of calendar years beginning after                                                      produced in open-loop biomass facilities,
                                                is 3.29 cents per kilowatt hour. The ref-
2009.                                                                                           small irrigation power facilities, landfill
                                                erence prices for fuel used as feedstock
    Section 45(e)(2)(A) requires the Secre-                                                     gas facilities, trash combustion facili-
                                                within the meaning of § 45(c)(7)(A), re-
tary to determine and publish in the Fed-                                                       ties, and qualified hydropower facilities,
                                                lating to refined coal production (based
eral Register each calendar year the infla-                                                     § 45(b)(4)(A) requires the amount in ef-
                                                upon information provided by the Depart-
tion adjustment factor and the reference                                                        fect under § 45(a)(1) (before rounding
                                                ment of Energy) are $31.90 per ton for
price for the calendar year. The infla-                                                         to the nearest 0.1 cent) to be reduced by
                                                calendar year 2002 and $48.35 per ton for
tion adjustment factors and the reference                                                       one-half. Under the calculation required
                                                calendar year 2007. The reference prices
prices for the 2007 calendar year were pub-                                                     by § 45(b)(2), the credit for renewable
                                                for facilities producing electricity from
lished in the Federal Register on March 29,                                                     electricity production for calendar year
                                                closed-loop biomass, open-loop biomass,
2007 (72 Fed. Reg. 14862).                                                                      2007 under § 45(a) is 2.0 cents per kilo-
                                                geothermal energy, solar energy, small ir-
    Section 45(e)(2)(B) defines the infla-                                                      watt hour on the sale of electricity pro-
                                                rigation power, municipal solid waste, and
tion adjustment factor for a calendar year                                                      duced from the qualified energy resources
                                                qualified hydropower production have not
as the fraction the numerator of which is                                                       of wind, closed-loop biomass, geothermal
                                                been determined for calendar year 2007.
the GDP implicit price deflator for the pre-                                                    energy, and solar energy, and 1.0 cent per
                                                The IRS is exploring methods of deter-
ceding calendar year and the denominator                                                        kilowatt hour on the sale of electricity
                                                mining those reference prices for calendar
of which is the GDP implicit price defla-                                                       produced in open-loop biomass facilities,
                                                year 2008.
tor for the calendar year 1992. The term                                                        small irrigation power facilities, landfill
“GDP implicit price deflator” means the         PHASE-OUT CALCULATION                           gas facilities, trash combustion facilities,
most recent revision of the implicit price                                                      and qualified hydropower facilities. Under
deflator for the gross domestic product as         Because the 2007 reference price for         the calculation required by § 45(b)(2), the
computed and published by the Depart-           electricity produced from wind does not         credit for refined coal production for cal-
ment of Commerce before March 15 of the         exceed 8 cents multiplied by the infla-         endar year 2007 under section 45(e)(8)(A)
calendar year.                                  tion adjustment factor, the phaseout of         is $5.877 per ton on the sale of qualified
    Section 45(e)(2)(C) provides that the       the credit provided in § 45(b)(1) does          refined coal. The credit for Indian coal
reference price is the Secretary’s determi-     not apply to such electricity sold during       production for calendar year 2007 under
nation of the annual average contract price     calendar year 2007. Because the 2007 ref-       § 45(e)(10)(B) is $1.544 per ton on the
per kilowatt hour of electricity generated      erence price of fuel used as feedstock for      sale of Indian coal.


May 21, 2007                                                       1286                                                2007–21 I.R.B.
DRAFTING AND CONTACT                          2577, which was enacted on December            The periodic updates allow the Treasury
INFORMATION                                   21, 2005; and the Tax Increase Prevention      Department and the Service to respond to
                                              and Reconciliation Act of 2005, Pub. L.        the need for additional guidance that may
   The principal author of this notice is     No. 109–222, 120 Stat. 345, which was          arise during the plan year. Recommenda-
David A. Selig of the Office of Associate     enacted on May 17, 2006. Similarly, the        tions for guidance received after May 31,
Chief Counsel (Passthroughs and Special       Treasury Department and the Service have       2007, will be reviewed for inclusion in the
Industries). For further information re-      devoted substantial resources to published     next periodic update.
garding this notice, contact Mr. Selig at     guidance projects necessary to implement          Taxpayers are not required to submit
(202) 622–3040 (not a toll-free call).        the provisions of additional tax legislation   recommendations for guidance in any par-
                                              that was enacted during the current plan       ticular format. Taxpayers should, how-
                                              year, such as the Pension Protection Act of    ever, briefly describe the recommended
Public Comment Invited                        2006, Pub. L. No. 109–280, 120 Stat. 780,      guidance and explain the need for the guid-
on Recommendations for                        which was enacted on August 17, 2006;          ance. In addition, taxpayers may include
2007–2008 Guidance Priority                   and the Tax Relief and Health Care Act         an analysis of how the issue should be re-
List                                          of 2006, Pub. L. No. 109–432, 120 Stat.        solved. It would be helpful if taxpayers
                                              2922, which was enacted on December            suggesting more than one guidance project
Notice 2007–41                                20, 2006. The Treasury Department and          would prioritize the projects by order of
                                              the Service will continue to evaluate the      importance. If a large number of projects
    The Department of Treasury and Inter-     priority of each guidance project in light     are being suggested, it also would be help-
nal Revenue Service invite public com-        of the above-mentioned tax legislation and     ful if the projects were grouped in terms of
ment on recommendations for items that        other developments occurring during the        high, medium or low priority.
should be included on the 2007–2008           2007–2008 plan year.                              Taxpayers should send written com-
Guidance Priority List.                           In reviewing recommendations and           ments to:
    Treasury’s Office of Tax Policy and the   selecting projects for inclusion on the
Service use the Guidance Priority List each   2007–2008 Guidance Priority List, the             Internal Revenue Service
year to identify and prioritize the tax is-   Treasury Department and the Service will          Attn: CC:PA:LPD:PR
sues that should be addressed through reg-    consider the following:                             (Notice 2007–41)
ulations, revenue rulings, revenue proce-                                                       Room 5203
dures, notices, and other published admin-    1.   Whether the recommended guidance             P.O. Box 7604
istrative guidance. The 2007–2008 Guid-            resolves significant issues relevant to      Ben Franklin Station
ance Priority List will establish the guid-        many taxpayers;                              Washington, D.C. 20044
ance that the Treasury Department and the
Service intend to issue from July 1, 2007,    2.   Whether the recommended guidance          or hand deliver comments Monday
through June 30, 2008. The Treasury De-            promotes sound tax administration;        through Friday between the hours of
partment and the Service recognize the                                                       8 a.m. and 4 p.m. to:
                                              3.   Whether the recommended guidance
importance of public input to formulate            can be drafted in a manner that will
a Guidance Priority List that focuses re-                                                       Courier’s Desk
                                                   enable taxpayers to easily understand        Internal Revenue Service
sources on guidance items that are most            and apply the guidance;
important to taxpayers and tax administra-                                                      Attn: CC:PA:LPD:PR
tion. Published guidance plays an impor-                                                          (Notice 2007–41)
                                              4.   Whether the Service can administer
tant role in increasing voluntary compli-                                                       1111 Constitution Avenue, N.W.
                                                   the recommended guidance on a uni-
ance by helping to clarify ambiguous areas                                                      Washington, D.C. 20224
                                                   form basis; and
of the tax law.
    As is the case whenever significant       5.   Whether the recommended guidance             Alternatively, taxpayers may sub-
legislation is enacted, the Treasury De-           reduces controversy and lessens the       mit    comments       electronically   via
partment and the Service have continued            burden on taxpayers or the Service.       e-mail to the following address:
to dedicate substantial resources during                                                     Notice.Comments@irscounsel.treas.gov.
the current plan year to published guid-         Taxpayers may submit recommenda-            Taxpayers should include “Notice
ance projects necessary to implement the      tions for guidance at any time during the      2007–41” in the subject line. All com-
provisions of the American Jobs Creation      year. Please submit recommendations by         ments will be available for public inspec-
Act of 2004, Pub. L. No. 108–357, 118         May 31, 2007, for possible inclusion on        tion and copying in their entirety.
Stat. 1418, which was enacted on Oc-          the original 2007–2008 Guidance Prior-            For further information regarding this
tober 22, 2004; the Energy Policy Act         ity List. The Service plans to update the      notice, contact Henry Schneiderman of
of 2005, Pub. L. No. 109–58, 119 Stat.        2007–2008 Guidance Priority List period-       the Office of Associate Chief Counsel
594, which was enacted on August 8,           ically to reflect additional guidance that     (Procedure and Administration) at (202)
2005; the Gulf Opportunity Zone Act of        the Treasury Department and the Service        622–3400 (not a toll-free call).
2005, Pub. L. No. 109–135, 119 Stat.          intend to publish during the plan year.



2007–21 I.R.B.                                                  1287                                                 May 21, 2007
Treatment of Currency Gain                      they would qualify if the property were lo-     2006. Section 1.987–6(b) of the proposed
That a Real Estate Investment                   cated in the United States, and that interest   regulations generally provides that the
Trust (REIT) Recognizes From                    on foreign mortgage loans qualifies under       owner of a § 987 QBU must determine the
                                                § 856(c)(2)–(3) to the same extent that it      character of § 987 gain or loss in the year
a Qualified Business Unit                       would qualify if the loans were governed        of remittance using the asset method pro-
(QBU) of the REIT                               by United States law and the property were      vided in § 1.861–9T(g), as modified by the
                                                located in the United States. Thus, foreign     proposed regulations. The modified gross
Notice 2007–42                                  situs of a REIT’s assets does not necessar-     income method described in § 1.861–9T(j)
                                                ily prevent the REIT from satisfying the        cannot be used. If finalized as currently
   This notice provides guidance with re-
                                                income and asset tests of § 856(c), which       proposed, however, the regulations will
spect to the circumstances under which
                                                must be met in order to qualify as a REIT.      not apply to REITs. See Prop. Treas. Reg.
§ 856(c)(2) or § 856(c)(3) characterizes
                                                Rev. Rul. 74–191, however, does not             § 1.987–1(b)(1)(iii). Some REITs have
§ 987 gain as qualifying income for pur-
                                                address the treatment of foreign currency       requested guidance concerning the status
poses of REIT qualification.
                                                gain that may result from investing in real     under § 856(c)(2)–(3) of any foreign cur-
BACKGROUND                                      property or other assets through a QBU          rency gain that is recognized under § 987
                                                with a functional currency other than the       when a QBU remits property to a REIT.
    Under paragraph (3) of § 856(c), at least   dollar.
75 percent of a REIT’s annual gross in-             In general, § 985 provides that all         INTERIM GUIDANCE
come must be derived from the types of in-      determinations for federal income tax pur-
                                                                                                    Because the currency gain from remit-
come listed in that paragraph, often charac-    poses are to be made in the taxpayer’s
                                                                                                tances is determined under § 987, the Ser-
terized as income from real estate sources.     functional currency. Section 985(a). Sec-
                                                                                                vice believes that it is appropriate for is-
Under paragraph (2) of § 856(c), at least       tion 1.985–1(b)(1)(iii) of the Income
                                                                                                sues that arise in connection with that gain
95 percent of a REIT’s annual gross in-         Tax Regulations provides that, except
                                                                                                to be addressed under methods similar to
come must be derived from the types of in-      as otherwise provided by ruling or ad-
                                                                                                those provided in § 987 and the regulations
come listed in that paragraph, often charac-    ministrative pronouncement, the U.S.
                                                                                                thereunder. The Treasury Department and
terized as income from “passive” sources,       dollar is the functional currency of a
                                                                                                the Service therefore intend to amend the
including interest and dividends.               QBU that has the United States as its res-
                                                                                                proposed regulations under § 987 to in-
    The Service is aware that some REITs        idence, as defined in § 988(a)(3)(B).
                                                                                                clude guidance concerning the character-
have invested in real estate assets outside     Section 1.989(a)–1(b)(2)(i) provides
                                                                                                ization for purposes of § 856(c)(2) and (3)
the United States through entities or part-     that a corporation is a QBU. Section
                                                                                                of § 987 gain recognized by a REIT on a
nerships that qualify as QBUs, as defined       988(a)(3)(B)(i)(II) provides that the
                                                                                                remittance from a QBU of the REIT.
in § 989(a). The Service has explicitly         United States is the residence of a cor-
                                                                                                    Until further guidance is published, if a
ruled that otherwise-qualifying assets do       poration that is a United States person.
                                                                                                REIT recognizes § 987 gain, the REIT may
not fail to satisfy § 856(c)(4) merely be-      Section 7701(a)(30) provides, in part, that
                                                                                                apply the principles of the proposed reg-
cause the assets are foreign:                   the term “United States person” includes a
                                                                                                ulations under § 987 issued September 7,
    Neither section 856 of the Code nor the     domestic corporation. Section 7701(a)(4)
                                                                                                2006 to determine whether that § 987 gain
    regulations thereunder restrict the term    provides that the term “domestic,” as ap-
                                                                                                is derived from income that is described in
    “real estate assets” to those located       plied to a corporation, means created or
                                                                                                § 856(c)(2)(A) – (H) or § 856(c)(3)(A) –
    within the United States. Accordingly,      organized in the United States or under
                                                                                                (I).
    it is held that, for purposes of sec-       the law of the United States or any State.
                                                                                                    The principal author of this notice
    tion 856(c), the term “real property”       Thus, absent a ruling to the contrary, a
                                                                                                is Jonathan D. Silver of the Office of
    includes land or improvements thereon       REIT has the dollar as its functional cur-
                                                                                                Associate Chief Counsel (Financial In-
    located outside the United States and       rency because § 856(a)(3) requires it to be
                                                                                                stitutions & Products).         For further
    the term “mortgages on real property”       taxable as a domestic corporation.
                                                                                                information regarding this notice, con-
    includes a security interest which, un-         A REIT may have a QBU that is subject
                                                                                                tact Jonathan D. Silver at (202) 622–3930
    der the laws of the jurisdiction in which   to § 987 and that has a functional currency
                                                                                                (not a toll-free call).
    the property is located, is the legal       other than the dollar. See § 1.985–1(c). In
    equivalent of a mortgage or deed of         such a case, a REIT may recognize cur-
    trust in the United States.                 rency gain under § 987 when the QBU re-
Rev. Rul. 74–191, 1974–1 C.B. 170,              mits property to the REIT. Section 987(3).
170. It follows from this holding both that         Proposed regulations (REG–208270–
rents on foreign real property qualify un-      86, 2006–42 I.R.B. 698 [71 FR 52,876])
der § 856(c)(2)–(3) to the same extent that     under § 987 were issued September 7,




May 21, 2007                                                       1288                                                2007–21 I.R.B.
26 CFR 601.601: Rules and regulations.
(Also, Part I, §§ 446, 451; 1.446–2, 1.451–1.)


Rev. Proc. 2007–33

                                                                                    TABLE OF CONTENTS

SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 4. SAFE HARBOR METHOD OF ACCOUNTING FOR UNCOLLECTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 5. EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 6. ADOPTION OF SAFE HARBOR METHOD OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 7. REQUEST FOR COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 8. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 9. EFFECT ON OTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

DRAFTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 1. PURPOSE                                                     into account the length of the interval be-                            rules that prevent accrual of the interest
                                                                       tween payments. See 1.1273–1(c).                                       for regulatory purposes. The ruling also
    This revenue procedure provides the                                    .03 In the case of interest other than                             provides guidance as to the period in which
exclusive procedure by which a taxpayer                                “qualified stated interest,” § 1.446–2(c)                              a taxpayer that has elected the conformity
described in SECTION 3 may obtain                                      provides that the amount of interest that ac-                          method of accounting under 1.166–2(d)(3)
the Commissioner’s consent to change                                   crues for any accrual period is determined                             can treat uncollected interest as worthless.
its method of accounting for uncollected                               under rules similar to those in the regu-                                  .07 APPENDIX 5A of Rev. Proc.
interest (other than interest described in                             lations under sections 1272 and 1275 of                                2002–9, 2002–1 C.B. 327, modified and
§ 1.446–2(a)(2) of the Income Tax Regula-                              the Internal Revenue Code for the accrual                              clarified by Announcement 2002–17,
tions) to the safe harbor method provided                              of original issue discount (subject to the                             2002–1 C.B. 561, modified and amplified
in SECTION 4 of this revenue procedure.                                modifications set forth in § 1.446–2(d)).                              by Rev. Proc. 2002–19, 2002–1 C.B.
                                                                           .04 Section 1.446–2(e) provides that                               696, amplified, clarified, and modified by
SECTION 2. BACKGROUND                                                  each payment on a loan (other than pay-                                Rev. Proc. 2002–54, 2002–2 C.B. 432,
                                                                       ments of additional interest or similar                                states that “for interest to be determined
   .01 For certain types of interest,                                  charges with regard to amounts not paid                                uncollectible, the taxpayer must substan-
§ 1.446–2 provides rules for determin-                                 when due) is treated as a payment of inter-                            tiate, taking into account all the facts and
ing the amount of interest that accrues                                est to the extent of the accrued but unpaid                            circumstances, that it has no reasonable
during an accrual period and the portion of                            interest (determined under § 1.446–2(b)                                expectation of payment of the interest.”
a payment that consists of accrued interest.                           and § 1.446–2(c)) as of the date the pay-                              APPENDIX 5A of Rev. Proc. 2002–9 also
For descriptions of the types of interest                              ment becomes due.                                                      states that the “substantiation requirement
(e.g., original issue discount) to which the                               .05 Section 1.446–2(a)(1) provides that                            is applied on a loan by loan basis.”
§ 1.446–2 accrual rules do not apply, see                              a taxpayer determines the taxable year in                                  .08 Substantiation of uncollectible
1.446–2(a)(2).                                                         which to include an amount of accrued in-                              interest using a loan-by-loan facts and cir-
   .02 Section 1.446–2(b) provides that                                terest (determined under § 1.446–2(b) or                               cumstances methodology can be admin-
“qualified stated interest” accrues ratably                            § 1.446–2(c)) in gross income under the                                istratively burdensome and impractical,
over an accrual period (or periods) to                                 taxpayer’s regular method of accounting.                               particularly for smaller unsecured loans.
which it is attributable and accrues at the                                .06 Rev. Rul. 2007–32, page 1278 of                                For example, a bank may have a signifi-
stated rate for the period (or periods). In                            this Bulletin, requires an accrual method                              cant number of consumer loans. For these
general, “qualified stated interest” is stated                         bank with a reasonable expectancy of                                   loans, the bank’s loan files often may not
interest that is unconditionally payable in                            receiving future payments on a loan to                                 contain updated information regarding the
cash or in property (other than debt instru-                           accrue interest in the taxable year in which                           debtors’ financial condition or the value
ments of the issuer) at least annually at a                            the right to receive the interest becomes                              of the collateral, if any, securing the loans.
single fixed rate that appropriately takes                             fixed, notwithstanding bank regulatory


2007–21 I.R.B.                                                                                     1289                                                                            May 21, 2007
SECTION 3. SCOPE                               taxable year and the 5 immediately pre-         est for which there is a reasonable ex-
                                               ceding taxable years), by                       pectancy of payment, Bank X first cal-
   This revenue procedure applies to a             (b) total amounts that were due and         culates its recovery percentage for 2007.
“bank” as defined in 1.166–2(d)(4)(i)          payable to the bank on loans during the         Bank X determines its recovery percent-
that—                                          same 5 (or fewer) taxable years.                age by dividing the $73,048,313 of pay-
   (1) uses an accrual method of account-          (2) The recovery percentage cannot ex-      ments received during the 2002–2006 pe-
ing to determine its taxable income for fed-   ceed 100 percent.                               riod by the $74,900,705 that was due and
eral income tax purposes,                          (3) The recovery percentage must be         payable during the same period. Bank
   (2) is subject to supervision by Federal    calculated to at least four decimal places.     X’s 2007 recovery percentage is 97.5269%
authorities, or by state authorities main-         (4) The data used in the recovery per-      [$73,048,313 ÷ $74,900,705 = 97.5269%].
taining substantially equivalent standards,    centage must take into account acquisi-         Bank X determines the portion of the un-
and                                            tions and dispositions as follows:              collected 2007 interest for which it is con-
   (3) has uncollected interest other than         (a) If a bank acquires the major portion    sidered to have a reasonable expectancy of
interest described in 1.446–2(a)(2).           of a trade or business of another person        payment by multiplying the $51,600 of ac-
                                               (predecessor) or the major portion of a sep-    crued but uncollected interest for that year
SECTION 4. SAFE HARBOR                         arate unit of a trade or business of a prede-   by the 97.5269 recovery percentage. Bank
METHOD OF ACCOUNTING FOR                       cessor, then in applying this revenue pro-      X has a reasonable expectancy of payment
UNCOLLECTED INTEREST                           cedure for any taxable year ending on or        for $50,323.88 of the uncollected 2007 in-
                                               after the acquisition, the data from preced-    terest [$51,600 × 97.5269% = $50,323.88].
   .01 Safe Harbor Method. Under the
                                               ing taxable years of the predecessor attrib-    Bank X includes the $50,323.88 of uncol-
safe harbor method of accounting pro-
                                               utable to the portion of the trade or busi-     lected 2007 interest in gross income for
vided by this SECTION 4, a bank deter-
                                               ness acquired, if available, must be used in    2007.
mines for each taxable year the amount
                                               determining the bank’s recovery percent-           (2) Bank X is considered not to have
of uncollected interest (other than interest
                                               age.                                            a reasonable expectancy of payment for
described in 1.446–2(a)(2)) for which it
                                                   (b) If a bank disposes of a major portion   $1,276.12 of the uncollected 2007 interest
is considered to have a reasonable ex-
                                               of a trade or business or the major portion     ($51,600 - $50,323.88 = $1,276.12). Bank
pectancy of payment by multiplying:
                                               of a separate unit of a trade or business,      X excludes $1,276.12 of the uncollected
(1) the total accrued (determined under
                                               and the bank furnished the acquiring per-       2007 interest from its 2007 gross income.
§ 1.446–2) but uncollected interest for
                                               son the information necessary for the com-
the year by, (2) the bank’s “recovery per-                                                     SECTION 6. ADOPTION OF SAFE
                                               putations required by this revenue proce-
centage” (determined under paragraph                                                           HARBOR METHOD OF ACCOUNTING
                                               dure, then in applying this revenue proce-
.02 of this SECTION 4) for that year.
                                               dure for any taxable year ending on or af-
Solely for purposes of this safe harbor,                                                          .01 Any change to the safe harbor
                                               ter the disposition, the data from preceding
the bank is not considered to have a rea-                                                      method provided in SECTION 4 of this
                                               taxable years attributable to the disposed
sonable expectancy of payment for the                                                          revenue procedure is a change in method
                                               portion of the trade or business may not
excess, if any, of the accrued but uncol-                                                      of accounting to which the provisions
                                               be used in determining the bank’s recov-
lected interest over the expected collection                                                   of section 446 and section 481, and the
                                               ery percentage.
amount determined using the bank’s re-                                                         regulations thereunder, apply.        Under
covery percentage. The bank includes in        SECTION 5. EXAMPLE                              § 1.446–1(e)(2)(i), a taxpayer generally
gross income the portion of accrued but                                                        must secure the consent of the Commis-
uncollected interest for which it has a rea-      .01 Facts. Bank X is a calendar year         sioner before changing a method of ac-
sonable expectancy of payment. The bank        taxpayer that determines its taxable in-        counting for federal income tax purposes.
excludes from income the portion of ac-        come using an accrual method of ac-             Section 1.446–1(e)(3)(ii) authorizes the
crued but uncollected interest for which it    counting. For 2007, Bank X’s accrued            Commissioner to prescribe administrative
has no reasonable expectancy of payment.       but uncollected interest (determined un-        procedures setting forth the terms and
   .02 Recovery Percentage. (1) Subject to     der § 1.446–2) is $51,600. Bank X uses          conditions necessary to obtain consent to
the limitations and conditions in subpara-     the safe harbor method of accounting de-        change a method of accounting.
graphs (2) – (4) of this SECTION 4.02,         scribed in SECTION 4 of this revenue               .02 If a bank with less than 6 years of
a bank determines its recovery percentage      procedure to determine the amount of un-        collection experience wants to change its
for each taxable year by dividing—             collected interest for which the Bank has       method of accounting for uncollected in-
   (a) total payments that the bank re-        a reasonable expectancy of payment. Dur-        terest to the safe harbor method provided
ceived on loans (including principal and       ing the 5 immediately preceding taxable         in SECTION 4 of this revenue procedure,
interest) during the 5 taxable years im-       years, Bank X received $73,048,313 of           the bank is required to follow the provi-
mediately preceding the taxable year (or,      payments on all of its loans. During the        sions of Rev. Proc. 97–27, 1997–1 C.B.
with the approval of the Commissioner,         same 5-year period, $74,900,705 was due         680 (or its successor), as modified and am-
a shorter period if the bank has less than     and payable on the loans.                       plified by Rev. Proc. 2002–19, as ampli-
6 years of collection experience, i.e., the       .02 Analysis. (1) To determine the por-      fied and clarified by Rev. Proc. 2002–54,
                                               tion of the accrued but uncollected inter-      except that the scope limitations in section


May 21, 2007                                                      1290                                                2007–21 I.R.B.
4.02(2) through (6) of Rev. Proc. 97–27 do      SECTION 7. REQUEST FOR                        the subject line of any electronic commu-
not apply to a bank that makes the change       COMMENTS                                      nication. All materials submitted will be
for either its first or second taxable year                                                   available for public inspection and copy-
ending on or after December 31, 2006.               The Internal Revenue Service requests     ing.
    .03 If a bank with 6 or more years of       comments on this revenue procedure. In
collection experience wants to change its       particular, comments are requested regard-    SECTION 8. EFFECTIVE DATE
method of accounting for uncollected in-        ing the appropriate treatment of payments
terest to the safe harbor method provided       received in future years. For example,           This revenue procedure is effective for
in SECTION 4 of this revenue procedure,         comments are requested regarding how to       tax years ending on or after its publication.
the bank is required to follow the auto-        determine the portion, if any, of a payment
matic change in method of accounting pro-       attributable to amounts that the bank ex-     SECTION 9. EFFECT ON OTHER
visions of Rev. Proc. 2002–9 (or its suc-       cluded from gross income. All comments        DOCUMENTS
cessor), with the following modifications:      should be submitted by August 20, 2007,
    (1) the scope limitations in section 4.02   to:                                              Rev. Proc. 2002–9 is modified and am-
of Rev. Proc. 2002–9 do not apply to a                                                        plified to include the accounting method
bank that makes the change for either its          Internal Revenue Service                   change provided by this revenue proce-
first or second taxable year ending on or          P. O. Box 7604                             dure.
after December 31, 2006; and                       Ben Franklin Station
                                                   Washington, DC 20044                       DRAFTING INFORMATION
    (2) the designated automatic accounting
change number for changes in method of             Attn: CC:PA:LPD:PRB (FIP)
                                                   Room 5529                                     The principal author of this revenue
accounting made pursuant to the revenue
                                                                                              procedure is Timothy Sebastian of the
procedure is 108.
                                                Alternatively, comments may be sub-           Office of the Associate Chief Counsel
                                                mitted electronically directly to the Ser-    (Financial Institutions and Products). For
                                                vice via the following e-mail address:        further information regarding this revenue
                                                Notice.comments@irscounsel.treas.gov.         procedure, contact Mr. Sebastian (202)
                                                Please include “Rev. Proc. 2007–33” in        622–7417 (not a toll-free call).




2007–21 I.R.B.                                                    1291                                                 May 21, 2007
Part IV. Items of General Interest
Notice of Proposed                              FOR      FURTHER       INFORMATION                   The amount an estate may deduct for
Rulemaking and Notice of                        CONTACT: Concerning the proposed                 claims against the estate has been a highly
Public Hearing                                  regulations, DeAnn K. Malone, at                 litigious issue. Unlike section 2031, sec-
                                                (202) 622–3112; concerning submis-               tion 2053(a) does not contain a specific
                                                sions of comments, the hearing, and/or           directive to value a deductible claim at
Guidance Under Section 2053                     to be placed on the building access list         its date of death value. Section 2053, in
Regarding Post-Death Events                     to attend the hearing, Richard Hurst,            fact, specifically contemplates expenses
                                                at (202) 622–2949 (TDD telephone)                such as funeral and administration ex-
REG–143316–03                                   (not toll-free numbers) or e-mail at             penses, which are only determinable after
                                                Richard.A.Hurst@irscounsel.treas.gov.            the decedent’s date of death. Although
AGENCY: Internal Revenue Service                                                                 numerous courts have addressed section
(IRS), Treasury.                                SUPPLEMENTARY INFORMATION:                       2053(a)(3), there is little or no consistency
                                                                                                 among the conclusions of those courts
ACTION: Notice of proposed rulemaking
                                                Background                                       with regard to the extent (if any) to which
and notice of public hearing.
                                                                                                 post-death events are to be considered in
SUMMARY: This document contains pro-                Section 2001 of the Code imposes a           valuing such claims. One line of cases fol-
posed amendments to the regulations relat-      tax on the transfer of the taxable estate,       lows the decision in Ithaca Trust v. Com-
ing to the amount deductible from a dece-       determined as provided in section 2051,          missioner, 279 U.S. 151 (1929), holding
dent’s gross estate for claims against the      of every decedent, citizen, or resident of       that the estate tax charitable deduction for
estate under section 2053(a)(3) of the In-      the United States. Section 2031(a) gen-          a charitable remainder interest was to be
ternal Revenue Code (Code). In addition,        erally provides that the value of the dece-      determined as of date of death. In Federal
the proposed regulations update the pro-        dent’s gross estate shall include the value      judicial circuits where the Ithaca Trust
visions relating to the deduction for cer-      at the time of decedent’s death of all prop-     date-of-death valuation approach is ap-
tain state death taxes to reflect the statu-    erty, real or personal, tangible or intangi-     plied to a claim against a decedent’s estate
tory amendments made in 2001 under sec-         ble, wherever situated. Section 2051 pro-        under section 2053(a)(3), courts generally
tions 2053(d) and 2058. The proposed            vides that the value of the taxable estate       hold that post-death events may not be
regulations will affect estates of decedents    is determined by deducting from the value        considered when determining the amount
against whom there are claims outstanding       of the gross estate the deductions provided      deductible for that claim. At the opposite
at the time of the decedent’s death. This       for in sections 2051 through 2058. Pur-          end of the spectrum, there is a line of cases
document also provides notice of a public       suant to section 2053(a), “the value of the      that follows the Eighth Circuit’s opinion
hearing on these proposed regulations.          taxable estate shall be determined by de-        in Jacobs v. Commissioner, 34 F.2d 233
                                                ducting from the value of the gross estate       (8th Cir. 1929), cert. denied, 280 U.S.
DATES: Written or electronic comments           such amounts – (1) for funeral expenses,         603 (1929), in which the court considered
must be received by July 23, 2007. Out-         (2) for administration expenses, (3) for         but rejected the date-of-death valuation
lines of topics to be discussed at the public   claims against the estate, and (4) for un-       approach in determining the deductible
hearing scheduled for August 6, 2007, at        paid mortgages on, or any indebtedness in        amount of a claim against the estate. The
10 a.m., must be received by July 30, 2007.     respect of, property where the value of the      court in Jacobs distinguished Ithaca Trust,
                                                decedent’s interest therein, undiminished        stating that, unlike charitable deductions,
ADDRESSES: Send submissions to:                 by such mortgage or indebtedness, is in-         “…the claims which Congress intended
CC:PA:LPD:PR           (REG–143316–03),         cluded in the value of the gross estate, as      to be deducted were actual claims, not
Room 5203, Internal Revenue Service, PO         are allowable by the laws of the jurisdic-       theoretical ones.” The court therefore held
Box 7604, Ben Franklin Station, Wash-           tion, whether within or without the United       that only claims presented and determined
ington, DC 20044. Submissions may be            States, under which the estate is being ad-      as valid against the estate and actually
hand delivered Monday through Friday            ministered.”                                     paid could be deducted as claims against
between the hours of 8 a.m. and 4 p.m.              The deductions allowable under sec-          the estate. Jacobs, 34 F.2d at 235. The
to CC:PA:LPD:PR (REG–143316–03),                tions 2051 through 2058 operate to elim-         courts that follow Jacobs generally re-
Courier’s Desk, Internal Revenue Ser-           inate from estate taxation those portions        strict the amount deductible under section
vice, 1111 Constitution Avenue, NW,             of the gross estate that are necessarily ex-     2053(a)(3) to amounts actually paid by the
Washington, DC; or sent electroni-              pended in paying certain claims and ex-          estate in satisfaction of the claim.
cally via the Federal eRulemaking Por-          penses of the estate. The rationale for              Even in the circuits where the date-
tal at http://www.regulations.gov (IRS          those deductions is that those expended          of-death valuation approach has been ap-
REG–143316–03). The public hearing              portions of the gross estate are not trans-      plied in determining the amount that may
will be held in the IRS Auditorium, Inter-      ferred to the decedent’s legatees, benefi-       be deducted for a claim against the dece-
nal Revenue Building, 1111 Constitution         ciaries, or heirs and, therefore, are not sub-   dent’s estate, courts have recognized ex-
Avenue, NW, Washington, DC.                     ject to the transfer tax.                        ceptions that necessitate taking into ac-



May 21, 2007                                                       1292                                                 2007–21 I.R.B.
count events that occur after the decedent’s    der to further the goal of the effective and     particular circumstances. When a claim
death. For example, courts have deviated        fair administration of the tax laws, the pro-    against an estate lists multiple defendants,
from the date-of-death valuation approach       posed regulations adopt rules based on the       the estate may only deduct the decedent’s
in favor of the actual payment approach         premise that an estate may deduct under          portion of the liability. Claims by family
when a claim is contested, contingent, un-      section 2053(a)(3) only amounts actually         members or beneficiaries of a decedent’s
enforceable, becomes unenforceable after        paid in settlement of claims against the es-     estate will be strictly scrutinized to en-
the decedent’s death, or is not in fact pre-    tate. If the resolution of a contested or con-   sure that they are legitimate claims. If
sented for payment. The application and         tingent claim cannot be reached prior to the     a claim becomes unenforceable after the
extent of these exceptions are inconsistent     expiration of the period of limitations for      decedent’s death, the estate may not take
from circuit to circuit, however, and can-      claims for refund, the estate may file a pro-    a section 2053(a)(3) deduction with re-
not be reconciled to form a conclusive rule     tective claim for refund to preserve its right   spect to the claim. If a claim represents
applicable to all estates.                      to claim a deduction under section 2053(a).      a decedent’s obligation to make recur-
    The result of this lack of consistency in                                                    ring payments that will likely continue
the case law is that similarly situated es-     Explanation of Provisions                        for a period extending beyond the final
tates are being treated differently for Fed-                                                     determination of the estate tax liability, a
eral estate tax purposes, depending only            The proposed regulations will amend          deduction is allowed only as each payment
upon the jurisdiction in which the executor     the regulations under section 2053 to clar-      is made, provided the period of limitations
resides. The Treasury Department and the        ify that events occurring after a decedent’s     for claims for refund has not expired or
IRS believe that similarly situated estates     death are to be considered when determin-        the estate has properly preserved the claim
should be treated consistently by having        ing the amount deductible under all provi-       for refund. Alternatively, a deduction
section 2053(a)(3) construed and applied        sions of section 2053 and that deductions        is allowed for the cost of a commercial
in the same way in all jurisdictions.           under section 2053 are limited to amounts        annuity purchased by the estate from an
    One possible approach would be to           actually paid by the estate in satisfaction      unrelated dealer in commercial annuities
value claims against a decedent’s estate        of deductible expenses and claims. Final         in satisfaction of that obligation.
on the basis of the facts existing on the       court decisions as to the amount and en-            Finally, the proposed regulations reflect
date of the decedent’s death. The Trea-         forceability of the claim or expense are         changes made to section 2053(d) and the
sury Department and the IRS believe,            accepted in determining the amount de-           enactment of section 2058 in 2001 and
however, that this date-of-death valuation      ductible if the court passes upon the facts      clarify that the rules in section 20.2053–9
approach, when applied, has required an         upon which deductibility depends. Set-           apply only to the estates of decedents dy-
inefficient use of resources for taxpayers,     tlements are accepted if they are reached        ing on or before December 31, 2004.
the IRS, and the courts. Determining a          in bona fide negotiations between adverse
date-of-death value requires the taxpayer       parties with valid claims recognizable un-       Proposed Effective Date
and the IRS to retry the substantive issues     der applicable law, and if they are not in-
                                                                                                    The regulations, as proposed, apply to
underlying the claims against the estate in     consistent with the applicable law. A pro-
                                                                                                 the estate of any decedent dying on or after
a tax controversy setting. In most cases,       tective claim for refund may be filed be-
                                                                                                 the date final regulations are published in
the tax controversy is addressed after the      fore the expiration of the period of limita-
                                                                                                 the Federal Register.
issue either has been settled by or has been    tions for claims for refund in order to pre-
argued by parties with adverse interests        serve the estate’s right to claim a refund if    Special Analyses
in a court of competent jurisdiction that       the amount of a liability will not be ascer-
is more familiar with the nuances of the        tainable by the time of the expiration of the        It has been determined that this notice
underlying applicable law. Furthermore,         period of limitations for claims of refund.      of proposed rulemaking is not a signifi-
this approach has proven to be expensive,       A deduction is not allowed to the extent the     cant regulatory action as defined in Exec-
both in terms of appraisal and litigation       expense or claim is compensated for by in-       utive Order 12866. Therefore, a regula-
costs. In addition, this approach gener-        surance or is otherwise reimbursed.              tory assessment is not required. It has also
ally results in a deduction that is different       The proposed regulations further pro-        been determined that section 553(b) of the
from the amount actually paid on disputed       vide that no deduction may be taken on an        Administrative Procedure Act (5 U.S.C.
claims. Finally, the date-of-death valu-        estate tax return for a claim that is poten-     chapter 5) does not apply to these regu-
ation approach often forces the taxpayer        tial, unmatured, or contested at the time the    lations, and because these regulations do
involved in actively defending against a        return is filed. A protective claim for re-      not impose a collection of information on
claim to take contradictory positions on        fund may be filed before the expiration of       small entities, the Regulatory Flexibility
the estate tax return and in the substantive    the period of limitations for claims for re-     Act (5 U.S.C. chapter 6) does not apply.
court pleadings, and may actually increase      fund in order to preserve the estate’s right     Therefore, a Regulatory Flexibility Anal-
the taxpayer’s potential liability.             to claim a refund by reason of the deduc-        ysis is not required. Pursuant to section
    After carefully considering the numer-      tion of a claim against the estate to the ex-    7805(f) of the Code, this notice of pro-
ous judicial decisions and the analysis and     tent that claim is ultimately paid by the es-    posed rulemaking will be submitted to the
conclusion in each, the legislative history     tate.                                            Chief Counsel for Advocacy of the Small
of section 2053 and its predecessors, and           Additional provisions in the proposed        Business Administration for comment on
the various possible alternatives, and in or-   regulations provide guidance for other           its impact on small business.


2007–21 I.R.B.                                                     1293                                                  May 21, 2007
Comments and Public Hearing                     PART 20—ESTATE TAX; ESTATES                         Par. 3. Section 20.2053–1 is amended
                                                OF DECEDENTS DYING AFTER                         by:
    Before these proposed regulations are       AUGUST 16, 1954                                     1. Revising the introductory text of
adopted as final regulations, consideration                                                      paragraph (a).
will be given to any written (a signed origi-      Paragraph 1. The authority citation for          2. Adding two new sentences at the end
nal and eight (8) copies) or electronic com-    part 20 continues to read in part as follows:    of paragraph (b)(1).
ments that are submitted timely to the IRS.        Authority: 26 U.S.C. 7805. * * *                 3. Revising paragraph (b)(2).
The IRS and the Treasury Department also           Par. 2. Section 20.2051–1 is revised to          4. Redesignating paragraph (b)(3) as
request comments on the clarity of the pro-     read as follows:                                 (b)(4) and revising the newly-designated
posed rules and how they can be made eas-                                                        paragraph (b)(4).
                                                §20.2051–1 Definition of taxable estate.
ier to understand. All comments will be                                                             5. Adding new paragraphs (b)(3),
available for public inspection and copy-           (a) The taxable estate of a dece-            (b)(5), (b)(6), and (e).
ing.                                            dent who was a citizen or resident (see             The revisions and additions read as fol-
    A public hearing has been scheduled         §20.0–1(b)(1)(i)) of the United States at        lows:
for August 6, 2007, at 10 a.m. in the           death is determined by subtracting the to-
IRS Auditorium, Internal Revenue Ser-           tal amount of the deductions authorized by       §20.2053–1 Deductions for expenses,
vice, 1111 Constitution Avenue, NW,             sections 2052 through 2058 from the total        indebtedness, and taxes; in general.
Washington, DC. Due to building security        amount which must be included in the
procedures, visitors must enter at the Con-                                                          (a) General rule. In determining the
                                                gross estate under sections 2031 through
stitution Avenue entrance. In addition, all                                                      taxable estate of a decedent who was a
                                                2044. These deductions are in general as
visitors must present photo identification                                                       citizen or resident of the United States
                                                follows:
to enter the building. Because of access                                                         at death, there are allowed as deductions
                                                    (1) An exemption of $60,000 (section
restrictions, visitors will not be admitted                                                      under section 2053(a) and (b) amounts
                                                2052) (applicable only to the estates of
beyond the immediate entrance area more                                                          falling within the following two categories
                                                decedents dying on or before December
than 30 minutes before the hearing starts.                                                       (subject to the limitations contained in
                                                31, 1976).
For information about having your name                                                           this section and in §§20.2053–2 through
                                                    (2) Funeral and administration ex-
placed on the building access list to attend                                                     20.2053–10):
                                                penses and claims against the estate
the hearing, see the “FOR FURTHER IN-           (including certain taxes and charitable          *****
FORMATION CONTACT” section of this              pledges) (section 2053).                             (b) * * * (1) * * * In order to properly
preamble.                                           (3) Losses from casualty or theft dur-       take into account events occurring after
    The rules of 26 CFR 601.601(a)(3) ap-       ing the administration of the estate (section    the date of a decedent’s death when de-
ply to the hearing. Persons who wish to         2054).                                           termining the amount deductible against
present oral comments at the hearing must           (4) Charitable transfers (section 2055).     a decedent’s estate, the deduction for any
submit electronic or written comments by            (5) The marital deduction (section           item described in paragraph (a) of this
July 16, 2007, and an outline of the topics     2056).                                           section is limited to the total amount actu-
to be discussed and the time to be devoted          (6) Qualified domestic trusts (section       ally paid (subject to any time requirement
to each topic (signed original and eight (8)    2056A).                                          under paragraph (a) of this section) in
copies) by July 30, 2007. A period of 10            (7) Family-owned business interests          settlement or satisfaction of that item.
minutes will be allotted to each person for     (section 2057) (applicable only to the           (See however, §20.2053–1(b)(4) for a spe-
making comments. An agenda showing              estates of decedents dying on or before          cial rule for deducting certain estimated
the scheduling of the speakers will be pre-     December 31, 2003).                              amounts.)
pared after the deadline for receiving out-         (8) State death taxes (section 2058) (ap-        (2) Effect of court decree—(i) In gen-
lines has passed. Copies of the agenda will     plicable only to the estates of decedents        eral. If the court with appropriate jurisdic-
be available free of charge at the hearing.     dying after December 31, 2004).                  tion over the administration of the estate
                                                    (b) See section 2106 and these regula-       reviews and approves expenditures for fu-
Drafting Information
                                                tions for the computation of the taxable es-     neral expenses, administration expenses,
                                                tate of a decedent who was not a citizen         claims against the estate, or unpaid mort-
   The principal author of these proposed
                                                or resident of the United States. See also       gages as allowable estate expenditures
regulations is DeAnn K. Malone, Office of
                                                §1.642(g)–1 of this chapter concerning the       under local law, the executor may rely on
the Chief Counsel, IRS.
                                                disallowance for income tax purposes of          the final judicial decision in that matter
                  *****                         certain deductions allowed for estate tax        to determine the amount deductible for
                                                purposes.                                        estate tax purposes if the following con-
Proposed Amendments to the                          (c) Effective date. The rules of this sec-   ditions are satisfied: the expenditures are
Regulations                                     tion apply to the estates of decedents dying     otherwise deductible under section 2053
                                                on or after the date of publication of the       and the corresponding regulations; the
   Accordingly, 26 CFR part 20 is pro-          Treasury decision adopting these rules as        expenditures have been paid by the estate
posed to be amended as follows:                 final regulations in the Federal Register.       or meet the requirements for estimated



May 21, 2007                                                       1294                                                 2007–21 I.R.B.
expenses; the court reviewed the facts re-       able outcomes under applicable state law         ular dollar amount or demand an immedi-
lating to the expenditures; and the court’s      governing the issues resolved by the set-        ate refund, the protective claim must iden-
decision is consistent with local law. See       tlement. A settlement that results in a com-     tify the outstanding liability or claim that
§20.2053–2 for additional rules regard-          promise between the positions of such ad-        would have been deductible under section
ing the deductibility of funeral expenses.       verse parties and reflects the parties’ as-      2053(a) had it already been paid. The pro-
See §20.2053–3 for additional rules re-          sessments of the relative strengths of their     tective claim must also describe the rea-
garding the deductibility of administration      respective positions is a settlement that is     sons and contingencies delaying the deter-
expenses. See §20.2053–4 for additional          within the range of reasonable outcomes.         mination of the liability or the actual pay-
rules regarding the deductibility of claims      However, a deduction for amounts paid            ment of the claim. Action on protective
against the estate. See §20.2053–7 for           in settlement of a claim against the dece-       claims will proceed after the executor has
additional rules regarding the deductibil-       dent’s estate will not be allowed if the         notified the Commissioner that the contin-
ity of unpaid mortgages. If the decision         terms of the settlement are inconsistent         gency has been resolved.
reached by the court is inconsistent with        with applicable local law. No deduction              (5) Reimbursements. A deduction is not
local law, the estate may not rely on the        will be allowed for amounts paid in set-         allowed to the extent that the expense or
court’s decree to establish the amount           tlement of an unenforceable claim. See           claim is or could be compensated for by
deductible for estate tax purposes. For          §20.2053–4(b)(4) for special rules to de-        insurance or otherwise reimbursed.
example, a local court decree approving          termine the amount deductible for claims             (6) Examples. The following examples
an allowance made to an executor in ex-          by decedent’s family members, related en-        illustrate the application of this section.
cess of the amount or limit prescribed by        tities, or beneficiaries of the decedent’s es-   Assume that the amounts are payable
statute may not be relied upon to establish      tate or revocable trust. For settlements         out of property subject to claims and are
the amount deductible under section 2053.        structured using recurring payments, see         allowable by the law of the jurisdiction
An estate will not be denied an otherwise        §20.2053–4(b)(7).                                governing the administration of the es-
allowable deduction under section 2053               (4) Estimated amounts. A deduction           tate, whether the applicable jurisdiction is
solely because a local court decree has not      will be allowed for a claim that satisfies       within or without the United States.
been entered with respect to that amount         all applicable requirements even though its           Example 1. Estimated amounts, deduction ascer-
if the amount would be allowable under           exact amount is not then known, provided         tainable. Decedent’s (D’s) estate was probated in
                                                                                                  state. State law provides that the personal representa-
local law and if no court decree is required     that the amount is ascertainable with rea-       tive shall receive compensation equal to 2.5 percent
under applicable law for payment.                sonable certainty, and will be paid. Under       of the value of the probate estate. The executor (E)
    (ii) Consent decree. An executor may         this exception to the rule set forth in para-    may claim a deduction for estimated fees equal to 2.5
rely on a local court decree rendered by         graph (b)(1) of this section, no deduction       percent of D’s probate estate on the estate tax return
consent to establish the amount deductible       may be taken upon the basis of a vague           filed for D’s estate as an estimated amount, provided
                                                                                                  the amount will be paid to E after the estate tax re-
under section 2053 for amounts paid (or          or uncertain estimate. If a deduction is al-     turn is filed. To the extent that, at the time of the ex-
meeting the requirements for estimated ex-       lowed in advance of payment and the pay-         amination of the return, the amount has not been paid
penses) if the consent was a bona fide           ment is thereafter waived or otherwise left      and E cannot satisfy the conditions listed in paragraph
recognition of the validity of the claim and     unpaid, it shall be the duty of the executor     (b)(4) of this section and §20.2053–3(b)(1), the de-
was accepted by the court as satisfactory        to notify the Commissioner and to pay the        duction will be disallowed, but the executor may file
                                                                                                  a timely protective claim for refund to protect the es-
evidence upon the merits. Consent given          resulting tax, together with interest. To the    tate’s right to a refund once the amount has been paid
by all parties having interests adverse to       extent that the amount of a liability other-     or satisfies the applicable conditions. If the deduction
that of the claimant will be presumed to         wise deductible under section 2053 is not        is allowed in advance of payment and the payment is
be recognition of the claim’s validity. See      ascertainable with reasonable certainty at       thereafter waived or otherwise left unpaid, it shall be
§20.2053–4(b)(4) for special rules to de-        the time of examination of the return by the     the duty of the executor to notify the Commissioner
                                                                                                  and to pay the resulting tax, together with interest.
termine the amount deductible for claims         Commissioner, or to the extent that it is not         Example 2. Estimated amounts, deduction not as-
by decedent’s family members, related en-        then clear that the amount will be paid, that    certainable. Prior to death, Decedent (D) is sued by
tities, or beneficiaries of the decedent’s es-   amount will not be allowed as a deduction        Claimant (C) for $100x in a tort proceeding and re-
tate or revocable trust.                         by the Commissioner. If the deduction is         sponds asserting affirmative defenses available to D
    (3) Settlements. An executor may rely        disallowed in whole or in part on examina-       under applicable local law. C and D are unrelated.
                                                                                                  D subsequently dies and D’s Form 706 is due be-
on a settlement to establish the amount de-      tion of the return and the amount of the lia-    fore a final judgment is entered in the case. The
ductible under section 2053 for amounts          bility is subsequently ascertained and paid,     executor (E) of D’s estate may not take a deduc-
paid (or meeting the requirements for esti-      relief may be sought by a timely claim for       tion for $100x on D’s estate tax return as an esti-
mated expenses) (subject to any applicable       refund as provided by section 6511. A pro-       mated amount because the deductible amount can-
time limitation under paragraph (a) of this      tective claim for refund may be filed be-        not be ascertained with reasonable certainty in accor-
                                                                                                  dance with §20.2053–4(b)(2). If the amount of the
section) if the following conditions are sat-    fore the expiration of the period of limita-     actual liability will not be paid or cannot be ascer-
isfied: the settlement resolves a bona fide      tions for claims for refund in order to pre-     tained with reasonable certainty before the expiration
issue in an active and genuine contest; the      serve the estate’s right to claim a refund if    of the period of limitations for claims for refund, E
settlement is the product of arm’s length        the amount of a liability was or will not be     may file a protective claim before that date in order
negotiations by parties having adverse in-       paid before the expiration of the period of      to preserve the estate’s right subsequently to claim a
                                                                                                  refund.
terests with respect to the claim; and the       limitations for claims for refund. Although
settlement is within the range of reason-        the protective claim need not state a partic-    *****


2007–21 I.R.B.                                                      1295                                                         May 21, 2007
   (e) Effective date. The rules of this sec-        (3) If the deduction is disallowed in       issues. Expenses incurred merely for the
tion apply to the estates of decedents dying     whole or in part on the examination of the      purpose of unreasonably extending the
on or after the date of publication of the       return and a protective claim was timely        time for payment, or incurred other than
Treasury decision adopting these rules as        filed, the disallowance will be subject to      in good faith, are not deductible.
final regulations in the Federal Register.       modification once the requirements for de-         (e) Effective date. The rules of this sec-
   Par. 4. Section 20.2053–3 is amended          ductibility are met. If the deduction is al-    tion apply to the estates of decedents dying
by:                                              lowed in advance of payment and payment         on or after the date of publication of the
   1. Redesignating paragraphs (b)(2) and        is thereafter waived or otherwise left un-      Treasury decision adopting these rules as
(b)(3) as paragraphs (b)(4) and (b)(5), re-      paid, it shall be the duty of the executor to   final regulations in the Federal Register.
spectively.                                      notify the Commissioner and to pay the re-         Par. 5. Section 20.2053–4 is revised to
   2. Designating the undesignated text          sulting tax, together with interest.            read as follows:
following paragraph (b)(1) as new para-
graph (b)(3).                                    *****                                           §20.2053–4 Deduction for claims against
   3. Revising paragraphs (b)(1) and                 (c) Attorney’s fees. (1) The executor,      the estate.
(c)(1).                                          in filing the estate tax return, may deduct
                                                 such an amount of attorney’s fees as has            (a) In general. (1) For purposes of
   4. Adding new paragraphs (b)(2),
                                                 actually been paid, or an amount which at       this section, liabilities imposed by law or
(d)(3) and (e).
                                                 the time of filing may reasonably be ex-        arising out of contracts or torts are de-
   The revisions and additions read as fol-
                                                 pected to be paid. If on the examination of     ductible if they meet the requirements set
lows:
                                                 the return, the fees claimed have not been      forth in §20.2053–1 and this section. Ex-
§20.2053–3 Deductions for expenses of            awarded by the proper court and paid, the       cept as provided in paragraph (b) of this
administering estate.                            deduction will, nevertheless, be allowed, if    section, the amounts that may be deducted
                                                 the Commissioner is reasonably satisfied        as claims against a decedent’s estate are
*****                                            that the amount claimed will be paid and        limited to amounts for legitimate and bona
    (b) Executor’s commissions. (1) The          that it does not exceed a reasonable remu-      fide claims that—
executor, in filing the estate tax return,       neration for the services rendered, taking          (i) Represent personal obligations of the
may deduct executor’s commissions in             into account the size and character of the      decedent existing at the time of the dece-
such an amount as has actually been paid,        estate and the local law and practice. If       dent’s death;
or in an amount which at the time of filing      the amount does not satisfy these require-          (ii) Are enforceable against the dece-
the estate tax return may reasonably be          ments, a protective claim for refund may        dent’s estate at the time of payment; and
expected to be paid, but no deduction may        be filed before the expiration of the period        (iii) Are actually paid by the estate in
be taken if no commissions are to be col-        of limitations for claims for refund in order   settlement of the claim.
lected. If the amount of the commissions         to preserve the estate’s right to claim a re-       (2) Events occurring after the date of a
has not been fixed by decree of the proper       fund for future amounts paid as described       decedent’s death shall be considered when
court, the deduction will be allowed on          in §20.2053–1(b)(4). If the deduction is        determining the amount deductible against
the examination of the return, to the extent     disallowed in whole or in part on the exam-     a decedent’s estate.
that all three of the following conditions       ination of the return and a protective claim        (b) Special rules—(1) Potential and un-
are satisfied:                                   was timely filed, the disallowance will be      matured claims. Claims that are unma-
    (i) The Commissioner is reasonably sat-      subject to modification once the require-       tured on the date of the decedent’s death
isfied that the commissions claimed will be      ments for deductibility are met.                and that later mature and are paid are de-
paid.                                                                                            ductible by the estate. However, no deduc-
    (ii) The amount claimed as a deduction       *****                                           tion may be taken on an estate tax return
is within the amount allowable by the laws          (d) * * *                                    for a potential or unmatured claim. If the
of the jurisdiction in which the estate is          (3) Expenses incurred in defending the       claim matures and is paid prior to the ex-
being administered.                              estate against claims described in section      piration of the period of limitations for fil-
    (iii) It is in accordance with the usually   2053(a)(3) are deductible as provided in        ing a claim for refund, the estate may file
accepted practice in the jurisdiction to al-     §20.2053–1 if the expenses are incurred         a claim for refund as provided by section
low such an amount in estates of similar         incident to the assertion of defenses to        6511. A protective claim for refund may
size and character.                              the claim available under the applicable        be filed before the expiration of the period
    (2) If the conditions described in para-     law, even if the estate is not ultimately       of limitations for claims for refund in order
graph (b)(1) of this section are not met, a      victorious. For purposes of this section,       to preserve the estate’s right to claim a re-
protective claim for refund may be filed         “expenses incurred in defending the estate      fund once the claim against the decedent’s
before the expiration of the period of lim-      against claims” include costs relating to       estate is matured and is paid or may be es-
itations for claims for refund in order to       the arbitration and mediation of contested      timated as provided in §20.2053–1(b)(4).
preserve the estate’s right to claim a re-       issues, costs associated with defending         Although the protective claim need not
fund for future amounts paid as described        the estate against claims (whether or not       state a particular dollar amount or demand
in §20.2053–1(b)(4).                             enforceable), and costs associated with         an immediate refund, the protective claim
                                                 reaching a negotiated settlement of the         must identify the outstanding liability or



May 21, 2007                                                        1296                                                 2007–21 I.R.B.
claim that would have been deductible un-       circumstances that would reasonably sup-              (7) Recurring payments—(i) Non-Con-
der section 2053(a) had it already been         port a similar claim by unrelated persons or      tingent obligations. If a decedent is obli-
paid, and must describe the reasons and         non-beneficiaries. Similarly, a settlement        gated to make recurring payments on an
contingencies delaying actual payment of        between a decedent’s estate or revocable          enforceable and certain claim that are not
the liability or claim. Action on protective    trust and a family member, a related en-          subject to a contingency and if the pay-
claims will proceed after the executor has      tity, or a beneficiary of the decedent’s es-      ments will continue for a period that will
notified the Commissioner that the contin-      tate or revocable trust will be presumed to       likely extend beyond the final determi-
gency has been resolved.                        not be deductible absent evidence of the le-      nation of the estate tax liability, the obli-
    (2) Contested claims. No deduction          gitimacy and bona fide nature of the claim.       gation may be deducted as an estimated
may be taken on an estate tax return            For purposes of this section, family mem-         amount using the rules in §20.2053–1. The
for a claim against the decedent’s es-          bers include the spouse of the decedent;          amount deductible is the present value of
tate to the extent the estate is contesting     the grandparents, parents, siblings, and lin-     the payments on the decedent’s date of
the decedent’s liability. However, see          eal descendants of the decedent or of the         death as determined under §20.2031–7(d).
§20.2053–1(b)(4) relating to estimated          decedent’s spouse; and the spouse and lin-        See §§20.7520–1 through 20.7520–4. If
amounts.                                        eal descendants of any such grandparent,          there is a reasonable likelihood that full
    (3) Claims against multiple parties. If     parent, and sibling. Family members in-           satisfaction of the liability will not be
the decedent or the decedent’s estate is one    clude adopted individuals. For purposes of        made, then the obligation will be deemed
of two or more parties against whom the         this section, a related entity is an entity in    to be subject to a contingency for purposes
claim is being asserted, the estate may only    which the decedent, either directly or in-        of this section.
deduct the portion of the total claim due       directly, had a beneficial ownership inter-           (ii) Contingent obligations. If a dece-
from and paid by the estate, reduced by the     est at the time of the decedent’s death or        dent has a recurring obligation to pay an
total of any reimbursement received from        at any time during the three-year period          enforceable and certain claim, but the
another party, insurance, or otherwise. The     ending on the decedent’s date of death.           decedent’s obligation is subject to a con-
estate’s deductible portion will also be re-    Such an entity, however, shall not include a      tingency or is otherwise not described
duced by the amount or contribution the         publicly-traded entity nor shall it include a     in paragraph (b)(7)(i) of this section, the
estate could have collected from another        closely-held entity in which the combined         estate’s deduction is limited to amounts
party or an insurer but which the estate        beneficial interest, either direct or indirect,   actually paid by the estate in satisfaction
declines or fails to attempt to collect. If,    of the decedent and the decedent’s family         of the claim.
however, the estate establishes that the bur-   members, collectively, is less than thirty            (iii) Purchase of commercial annuity
den of necessary collection efforts would       percent of the beneficial ownership inter-        to satisfy recurring obligation to pay.
have outweighed the benefit from those ef-      ests (whether voting or non-voting).              If a decedent has a recurring obligation
forts, the potential reimbursement will not         (5) Unenforceable claims. Claims that         (whether or not contingent) to pay an en-
reduce the estate’s deductible portion of       are unenforceable prior to or at the dece-        forceable and certain claim and the estate
the total claim. If the estate establishes      dent’s death are not deductible, even if          purchases a commercial annuity from an
that the party from whom a potential re-        they are actually paid. Claims that become        unrelated dealer in commercial annuities
imbursement could be collected could only       unenforceable during the administration of        in an arms-length transaction to satisfy the
pay a portion of the potential reimburse-       the estate are not deductible to the extent       obligation, the amount deductible by the
ment, then only that portion that could rea-    that they are paid after they become unen-        estate is the sum of—
sonably have been expected to be collected      forceable. To the extent that enforceability          (A) The amount paid for the commer-
will reduce the estate’s deductible portion     of a claim is at issue, see paragraph (b)(2)      cial annuity; and
of the total claim.                             of this section relating to contested claims.         (B) Any amount actually paid to the
    (4) Claims by family members, related           (6) Claims founded upon a promise.            claimant by the estate prior to the purchase
entities, or beneficiaries. Relationships       Except with regard to pledges or sub-             of the commercial annuity.
with and among a decedent and the dece-         scriptions, (see §20.2053–5), section                 (c) Interest on claims. The interest on
dent’s family members, related entities,        2053(c)(1)(A) provides that the deduc-            a deductible claim is itself deductible as a
and beneficiaries may create the potential      tion for a claim founded upon a promise or        claim under section 2053, but only to the
for collusion in asserting invalid or exag-     agreement is limited to the extent that the       extent of the amount of interest accrued at
gerated claims in order to reduce the dece-     promise or agreement was bona fide and in         the date of the decedent’s death and actu-
dent’s taxable estate. Thus, notwithstand-      exchange for adequate and full considera-         ally paid, even if the executor elects the
ing §20.2053–1 and paragraph (a) of this        tion in money or money’s worth. For this          alternate valuation method under section
section, there will be a rebuttable presump-    purpose, bona fide and for adequate and           2032. (Post-death accrued interest may
tion that claims by a family member of          full consideration in money or money’s            be deductible in appropriate circumstances
the decedent, a related entity, or a bene-      worth requires that the promise or agree-         either as an estate tax administration ex-
ficiary of the decedent’s estate or revoca-     ment must have been made in good faith,           pense under section 2053 or as an income
ble trust are not legitimate and bona fide      and that the price must have been an ad-          tax deduction.)
and therefore are not deductible. Evidence      equate and full equivalent reducible to a             (d) Examples. The following examples
sufficient to rebut the presumption may in-     money value.                                      illustrate the application of paragraphs (a)
clude evidence that the claim arises from                                                         through (c) of this section. Except as is


2007–21 I.R.B.                                                     1297                                                    May 21, 2007
otherwise provided in the examples, as-                    expenses incurred prior to the filing of the estate tax    to preserve the estate’s right to claim a refund if pay-
sume that the claimant (C) is not a fam-                   return in defending the estate against the claim and in    ment on any amount in excess of $75x is subsequently
ily member, related entity or beneficiary                  processing payment of the claim.                           made in resolution of a claim that would qualify for a
                                                               Example 3. Contested claim, single defendant,          deduction under section 2053. To the extent that the
of the decedent (D) and is not the executor                settlement and payment. The facts are the same as          expenses incurred in defending the estate against the
(E). Assume that a claim represents a per-                 in Example 1 except that, before the return is timely      claim are not deducted as an estimate, they may be
sonal obligation of D existing at the time                 filed, a settlement is reached between D’s estate and      included in the protective claim for refund.
of D’s death and is enforceable against D’s                C for $80x and payment is made. A deduction is                  Example 7. Unenforceable claims. D is sued by C
estate. Assume that the payment of the                     allowed for the amount of the settlement paid to C         for $100x in a tort proceeding but the claim is barred
                                                           ($80x) under section 2053(a)(3). In addition, a de-        by the applicable period of limitations and there is no
claim, where applicable, is made out of                    duction may be available under §20.2053–3(d)(3) for        other recourse available to C. A deduction is not al-
property subject to claims (as defined in                  expenses incurred prior to the filing of the estate tax    lowed for the claim under section 2053(a)(3) whether
section 2053(c)(2) and §20.2053–1(c)(2))                   return in defending the estate, reaching a settlement,     or not the estate actually pays money in satisfaction
and is allowable by the law of the juris-                  and processing payment of the claim.                       of the claim. A deduction may be available, however,
diction under which the decedent’s estate                      Example 4. Contested claim, multiple defendants.       under §20.2053–3(d)(3) for expenses incurred in de-
                                                           The facts are the same as in Example 1 except that the     fending the estate against the claim.
is being administered, or is paid prior to                 suit filed by C lists D and K, an unrelated third-party,        Example 8. Non-contingent and recurring obli-
the filing of the estate tax return (including             as defendants. If the claim is not resolved prior to       gation to pay, binding on estate. D’s property settle-
any extension granted under section 6081)                  the time the estate tax return is filed, E may not take    ment agreement incident to D’s divorce, signed three
from property not subject to claims. As-                   a deduction for the claim under section 2053(a)(3)         years prior to D’s death, obligates D or D’s estate to
sume that any court decree is based upon                   on the return. If payment is subsequently made of          pay to S, D’s former spouse, $20x per year for 10
                                                           D’s share of the claim pursuant to a court decision        years. The payments are not conditioned on whether
the facts upon which deductibility depends                 or a settlement holding D liable for 40 percent of         or not S remarries. If S dies prior to the last payment,
and is consistent with applicable local law.               the amount due and K liable for 60 percent of the          the terms of the agreement state that the remaining
Assume that any settlement is reached in                   amount due, then the estate may take a deduction for       payments are to be made to S’s estate or as S may
bona fide negotiations between or among                    the amount paid in satisfaction of the claim represent-    appoint in S’s will. Prior to filing D’s estate tax re-
parties having adverse interests with re-                  ing D’s share of the liability as assigned by the court    turn, D’s estate pays the first of the 7 payments re-
                                                           decree ($40x), plus any interest on that share accrued     maining as of D’s death. The estate may take a de-
spect to the claim and that the terms of the               prior to D’s death, under section 2053(a)(3). If the       duction for the present value of these payments. See
settlement are not inconsistent with appli-                court decision finds D and K jointly and severally li-     §§20.7520–1 through 20.7520–4.
cable local law.                                           able for the entire $100x and D’s estate pays the entire        Example 9. Contingent recurring obligation to
    Example 1. Contested claim, single defendant,          $100x but could have reasonably collected $50x from        pay, binding on estate. D’s property settlement agree-
no decision. D is sued by C for $100x in a tort pro-       K in reimbursement, the estate may take a deduction        ment incident to D’s divorce, signed three years prior
ceeding and responds asserting affirmative defenses        under section 2053(a)(3) and paragraph (b)(3) of this      to D’s death, obligates D or D’s estate to pay to S,
available to D under applicable local law. D dies and      section for only $50x and the interest on $50x ac-         D’s former spouse, $20x per year for 10 years. The
E is substituted as defendant in the suit. D’s estate      crued prior to D’s death. In both instances, a deduc-      obligation to make the annual payments ceases upon
tax return is due before a judgment is reached in the      tion may also be available under §20.2053–3(d)(3)          S’s remarriage or S’s death prior to the due date of the
case. D’s gross estate includes only property sub-         for expenses incurred and not previously deducted in       last payment. Prior to filing D’s estate tax return, D’s
ject to claims and exceeds $100x. E may not take           defending the estate against the claim and processing      estate pays the first of the 7 payments remaining as of
a deduction on the return for the claim under section      payment of the amount due from D.                          D’s death. E may take as a deduction on the return the
2053(a)(3). A deduction may be claimed on the re-              Example 5. Contested claim, multiple defendants,       amount of the 1 payment made prior to the filing of
turn, however, for expenses incurred prior to the fil-     settlement and payment. The facts are the same as          D’s estate tax return. Additional payments become
ing of the estate tax return in defending the estate       in Example 1 except that the suit filed by C lists D       deductible as they are paid. E may file a protective
against the claim if the expenses have been paid in        and K, an unrelated third-party, as defendants. D’s        claim for refund before the expiration of the period
accordance with §20.2053–3(c) or (d)(3) or as an es-       estate settles with C for $10x and payment is made         of limitations for claims for refund of the estate tax in
timate under §20.2053–1(b)(4). E may file a protec-        before the return is timely filed. E may take a deduc-     order to preserve the estate’s right to claim a refund
tive claim for refund before the expiration of the pe-     tion for the amount paid to C in satisfaction of the       if the amount of the liability will not be paid or is not
riod of limitations for claims for refund of the estate    claim. In addition, a deduction may be available un-       ascertainable with reasonable certainty by the expira-
tax in order to preserve the estate’s right to claim a     der §20.2053–3(d)(3) for expenses incurred prior to        tion of the applicable period of limitations. If the total
refund if the amount of the liability will not be paid     the filing of the estate tax return in defending the es-   amount to be paid in satisfaction of the liability is not
or cannot be ascertained with reasonable certainty by      tate, reaching a settlement, and processing payment        ascertainable with reasonable certainty at the time of
the expiration of that period of limitations. If pay-      of the claim.                                              examination of the return, relief may be sought by a
ment is subsequently made pursuant to a court deci-            Example 6. Mixed claims. During life, D con-           claim for refund (either actual or protective) as pro-
sion or a settlement, a deduction for the payment, as      tracts with C to perform specific work on D’s home         vided by section 6511.
well as expenses incurred incident to the claim and        for $75x. Under the contract, additional work must              Example 10. Recurring obligation to pay, es-
not previously deducted, may be taken and relief may       be approved in advance by D. C performs additional         tate purchases a commercial annuity in satisfaction.
be sought by supplementing a previously filed protec-      work and sues D for $100x for work completed in-           D’s property settlement agreement incident to D’s di-
tive claim or by filing a claim for refund as provided     cluding the $75x agreed to in the contract. D dies         vorce, signed three years prior to D’s death, obligates
by section 6511.                                           and D’s estate tax return is due before a judgment         D or D’s estate to pay to S, D’s former spouse, $20x
    Example 2. Contested claim, single defendant, fi-      is reached in the case. E contests liability for $25x.     per year for 10 years. D’s estate purchases a commer-
nal court decree and payment. The facts are the same       E may take a deduction on the return for $75x if it        cial annuity from an unrelated dealer in commercial
as in Example 1 except that, before the return is timely   has been paid or if it meets the requirements of an        annuities, XYZ, in a bona fide sale to satisfy the obli-
filed, the court enters a decision in favor of C, no       estimated amount. In addition, a deduction may be          gation to S. E may deduct the entire amount paid to
timely appeal is filed, and payment is made. A de-         claimed on the return for expenses incurred in defend-     XYZ to obtain the annuity, regardless of whether or
duction is allowed for the amount paid in satisfaction     ing the estate against the claim if they have been paid    not the obligation to S was contingent.
of the claim pursuant to the final decision of the lo-     under §20.2053–3(c) or (d)(3) or as an estimate un-           (e) Effective date. The rules of this sec-
cal court, including any interest accrued prior to D’s     der §20.2053–1(b)(4). E may file a protective claim
                                                                                                                      tion apply to the estates of decedents dying
death, under section 2053(a)(3). In addition, a de-        for refund before the expiration of the period of limi-
duction may be available under §20.2053–3(d)(3) for        tations on claims for refund of the estate tax in order
                                                                                                                      on or after the date of publication of the



May 21, 2007                                                                      1298                                                              2007–21 I.R.B.
Treasury decision adopting these rules as        refund of estate taxes may be filed before                    (c) Exercise of election. The election to
final regulations in the Federal Register.       the expiration of the period of limitations                take a deduction for a state death tax im-
   Par. 6. Section 20.2053–6 is amended          for claims for refund in order to preserve                 posed upon a transfer for charitable, etc.,
by revising paragraphs (a) and (c) and           the estate’s right to claim a refund if the                uses shall be exercised by the executor by
adding new paragraphs (g) and (h) to read        amount of a deductible tax liability may be                the filing of a written notification to that
as follows:                                      affected by such an adjustment or refund.                  effect with the Commissioner. * * * The
                                                 The application of this section may be                     election may be revoked by the executor
§20.2053–6 Deduction for taxes.                  illustrated by the following examples:                     by the filing of a written notification to that
                                                     Example 1. Increase in tax due. After the dece-        effect with the Commissioner at any time
   (a) In general. Taxes are deductible          dent’s death, the Internal Revenue Service examines        before the expiration of such period.
in computing a decedent’s gross estate           the gift tax return filed by the decedent in the year
only as claims against the estate (except        before the decedent’s death and asserts a deficiency       *****
                                                 of $100x. The estate spends $30x in a non-frivolous           (f) Effective date. The rules of this sec-
to the extent that excise taxes may be           defense against the increased deficiency. The final
allowable as administration expenses),                                                                      tion apply to the estates of decedents dying
                                                 determination of the deficiency, in the amount of
and only to the extent not disallowed by         $90x, is paid by the estate. The estate may deduct
                                                                                                            on or before December 31, 2004.
section 2053(c)(1)(B) (see the remaining         $90x under section 2053(a)(3) and $30x under                  Par. 8. Section 20.2053–10 is amended
paragraphs of this section). However, see        §20.2053–3(c)(2) or (d)(3).                                by revising paragraph (c) and adding a new
                                                     Example 2. Refund of taxes paid. Decedent’s es-        paragraph (e) to read as follows:
§§20.2053–9 and 20.2053–10 with respect          tate timely files D’s individual income tax return for
to the deduction allowed for certain state       the year in which the decedent died. The estate timely     §20.2053–10 Deduction for certain
and foreign death taxes.                         pays the entire amount of the tax due, $50x, as shown
                                                                                                            foreign death taxes.
                                                 on that return. The entire $50x was attributable to
*****                                            income received prior to the decedent’s death. Dece-
   (c) Death taxes. (1) For the estates of       dent’s estate subsequently discovers an error on the
                                                                                                            *****
decedents dying on or before December            income tax return and files a timely claim for refund.         (c) Exercise of election. The election to
31, 2004, no estate, succession, legacy or       Decedent’s estate receives a refund of $10x. The es-       take a deduction for a foreign death tax im-
                                                 tate is only allowed a deduction of $40x under section     posed upon a transfer for charitable, etc.,
inheritance tax payable by reason of the         2053(a)(3) for the income tax liability accrued prior
decedent’s death is deductible, except as                                                                   uses shall be exercised by the executor by
                                                 to the decedent’s death. If a deduction for $50x was
provided in §20.2053–9 and §20.2053–10           allowed on the estate tax return prior to the receipt of
                                                                                                            the filing of a written notification to that ef-
with respect to certain state and foreign        the refund, it shall be the duty of the executor to no-    fect with the Commissioner. An election to
death taxes on transfers for charitable, etc.,   tify the Commissioner of the change and to pay the         take the deduction for foreign death taxes
                                                 resulting tax, with interest.                              is deemed to be a waiver of the right to
uses. However, see sections 2011 and
                                                    (h) Effective date. The rules of this sec-              claim a credit under a treaty with any for-
2014 and these regulations with respect to
                                                 tion apply to the estates of decedents dying               eign country for any tax or portion thereof
credits for death taxes.
                                                 on or after the date of publication of the                 claimed as a deduction under this section.
   (2) For the estates of decedents dying
                                                 Treasury decision adopting these rules as                  The notification shall be filed before the
after December 31, 2004, see section 2058
                                                 final regulations in the Federal Register.                 expiration of the period of limitations for
to determine the deductibility of state
                                                    Par. 7. Section 20.2053–9 is amended                    assessment provided in section 6501 (usu-
death taxes.
                                                 as follows:                                                ally 3 years from the last day for filing the
*****                                               1. Revising the heading for paragraph                   return). The election may be revoked by
   (g) Post-death adjustments of de-             (a) and adding a sentence at the end of                    the executor by the filing of a written no-
ductible tax liability. Post-death adjust-       paragraph (a).                                             tification to that effect with the Commis-
ments increasing a tax liability accrued            2. Revising the first and last sentences                sioner at any time before the expiration of
prior to the decedent’s death, including         of paragraph (c).                                          such period.
increases of taxes deducted under this              3. Adding new paragraph (f).
                                                                                                            *****
section, will increase the amount of the            The revisions and addition read as fol-
                                                                                                               (e) Effective date. The rules of this sec-
deduction taken under section 2053(a)(3)         lows:
                                                                                                            tion apply to the estates of decedents dying
for that tax liability. Similarly, any re-
                                                 §20.2053–9 Deduction for certain state                     on or after the date of publication of the
fund subsequently determined to be due
                                                 death taxes.                                               Treasury decision adopting these rules as
to and received by the estate with respect
                                                                                                            final regulations in the Federal Register.
to taxes deducted by the estate under this
                                                    (a) General rules for the estates of dece-
section reduces the amount of the de-                                                                                                     Kevin M. Brown,
                                                 dents dying on or before December 31,
duction taken for that tax liability under                                                                                        Deputy Commissioner for
                                                 2004.* * * For the estates of decedents dy-
section 2053(a)(3).     Expenses associ-                                                                                          Services and Enforcement.
                                                 ing after December 31, 2004, see section
ated with defending the estate against the
                                                 2058 to determine the deductibility of state               (Filed by the Office of the Federal Register on April 20, 2007,
increase in tax liability or with obtain-                                                                   8:45 a.m., and published in the issue of the Federal Register
                                                 death taxes.
ing the refund may be deductible under                                                                      for April 23, 2007, 72 F.R. 20080)
§20.2053–3(d)(3). A protective claim for         *****




2007–21 I.R.B.                                                          1299                                                                   May 21, 2007
Dual Consolidated Loss                           §1.1503(d)–0 Table of contents.                     Par. 4. Section 1.1503(d)–7(c) is
Regulations; Correction                                                                           amended by revising the last sentence of
                                                 *****                                            paragraph (iv) of Example 5 and the last
Announcement 2007–49                                                                              sentence of paragraph (C) of Example
                                                 §1.1503(d)–8 Effective dates.                    40(ii).
AGENCY: Internal Revenue Service                                                                     The revisions read as follows:
                                                 *****
(IRS), Treasury.
                                                     (b) * * *                                    §1.1503(d)–7 Examples.
ACTION: Correcting amendments.                       (1) Reduction of term of agree-
                                                 ments filed under §§1.1503–2A(c)(3),             *****
SUMMARY: This document contains cor-             1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or             (c) * * *
rections to final regulations (T.D. 9315,        1.1503–2T(g)(2)(i).                                  Example 5. * * *
2007–15 I.R.B. 891) that were published in           (2) Reduction of term of agreements              (iv) * * * In addition, pursuant to
                                                                                                  §1.1503(d)–6(f)(1) and (3) , the deemed trans-
the Federal Register on Monday, March            filed under §§1.1503–2(g)(2)(iv)(B)(2)(i)        fers pursuant to Rev. Rul. 99–5 as a result of the
19, 2007 (72 FR 12902) regarding dual            (1992), 1.1503–2(g)(2)(iv)(B)(3)(i), or          sale are not treated as triggering events described in
consolidated losses. Section 1503(d) gen-        Rev. Proc. 2000–42.                              §1.1503(d)–6(e)(1)(iv) or (v).
erally provides that a dual consolidated                                                          *****
                                                 *****
loss of a dual resident corporation cannot                                                            Example 40. * * *
                                                    Par. 3. Section 1.1503(d)–5 is amended
reduce the taxable income of any other                                                                (ii) * * *
                                                 by revising the last sentence of paragraph           (C) * * * Pursuant to §1.1503(d)–6(j)(1)(iii), the
member of the affiliated group unless, to
                                                 (a), the second sentence of paragraph            domestic use agreement filed by the P consolidated
the extent provided in regulations, the loss                                                      group with respect to the year 1 dual consolidated loss
                                                 (c)(4)(i)(A), and the only sentence of
does not offset the income of any foreign                                                         of the Country X separate unit is terminated and has
                                                 paragraph (d) to read as follows:
corporation.                                                                                      no further effect.

                                                 §1.1503(d)–5 Attribution of items and            *****
DATES: These correcting amendments are
                                                 basis adjustments.                                  Par. 5. Section 1.1503(d)–8 is amended
effective April 25, 2007.
                                                                                                  by revising the heading texts of paragraphs
FOR    FURTHER           INFORMATION                (a) * * * The rules in this section ap-       (b)(1) and (2), the only sentence of para-
CONTACT: Jeffrey P. Cowan, (202)                 ply for purposes of §§1.1503(d)–1 through        graph (b)(1), the first sentence of para-
622–3860 (not a toll-free number).               1.1503(d)–7.                                     graph (b)(2) and the last sentence of para-
                                                                                                  graph (b)(4).
                                                 *****
SUPPLEMENTARY INFORMATION:                                                                           The revisions read as follows:
                                                     (c) * * *
Background                                           (4) * * *                                    §1.1503(d)–8 Effective dates.
                                                     (i) * * *
    The final regulations that are the subject       (A) * * * For purposes of determining        *****
of this document are under section 1503(d)       items of income, gain, deduction, and loss           (b) * * *
of the Internal Revenue Code.                    of the domestic owner that are attributable          (1) Reduction of term of agree-
                                                 to the domestic owner’s foreign branch           ments filed under §§1.1503–2A(c)(3),
Need for Correction                              separate unit described in the preceding         1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or
                                                 sentence, only items of income, gain, de-        1.1503–2T(g)(i). If an agreement is filed
  As published, final regulations (T.D.          duction, and loss that are attributable to the   in accordance with §§1.1503–2A(c)(3),
9315) contain errors that may prove to be        domestic owner’s interest in the hybrid en-      1.1503–2A(d)(3), 1.1503–2(g)(2)(i), or
misleading and are in need of clarification.     tity, or transparent entity, as provided in      1.1503–2T(g)(2)(i) with respect to a dual
                   *****                         paragraph (c)(3) of this section, shall be       consolidated loss incurred in a taxable year
                                                 taken into account. * * *                        beginning prior to the application date and
Correction of Publication                                                                         an event requiring recapture with respect
                                                 *****
                                                                                                  to the dual consolidated loss subject to
   Accordingly, 26 CFR part 1 is cor-               (d) * * * The fact that a particular item
                                                                                                  the agreement has not occurred as of the
rected by making the following correcting        taken into account in computing the in-
                                                                                                  application date, then such agreement will
amendments:                                      come or dual consolidated loss of a dual
                                                                                                  be considered by the Internal Revenue
                                                 resident corporation or a separate unit,
PART 1—INCOME TAXES                                                                               Service to apply only for any taxable year
                                                 or the income or loss of an interest in a
                                                                                                  up to and including the fifth taxable year
                                                 transparent entity, is not taken into account
   Paragraph 1. The authority citation for                                                        following the year in which the dual con-
                                                 in computing income (or loss) subject to
part 1 continues to read as follows:                                                              solidated loss that is the subject of the
                                                 a foreign country’s income tax shall not
   Authority: 26 U.S.C. 7805 * * *                                                                agreement was incurred and thereafter
                                                 cause such item to be excluded from being
   Par. 2. Section 1.1503(d)–0 is amended                                                         will have no effect.
                                                 taken into account under paragraph (b),
by revising the entries (1) and (2) of Sec-                                                           (2) Reduction of term of agreements
                                                 (c), or (e) of this section.
tion 1.1503(d)–8(b). The revisions read as                                                        filed under §§1.1503–2(g)(2)(iv)(B)(2)(i)
follows:                                         *****                                            (1992), 1.1503–2(g)(2)(iv)(B)(3)(i), or


May 21, 2007                                                        1300                                                       2007–21 I.R.B.
Rev. Proc. 2000–42. Taxpayers subject to      vided the dual consolidated losses have      *****
the terms of a closing agreement entered      not been recaptured. * * *
into with the Internal Revenue Service                                                                              LaNita Van Dyke,
                                              *****
pursuant to §§1.1503–2(g)(2)(iv)(B)(2)(i)                                                                      Chief, Publications and
                                                  (4) * * * Notwithstanding the
(1992), 1.1503–2(g)(2)(iv)(B)(3)(i), or                                                                            Regulations Branch,
                                              general application of this para-
Rev.     Proc.    2000–42, 2000–2 C.B.                                                                       Legal Processing Division,
                                              graph (b)(4) to events described in
394, see §601.601(d)(2)(ii)(b) of this                                                                         Associate Chief Counsel
                                              §1.1503–2(g)(2)(iv)(B)(1)(i)      through
chapter, will be deemed to have satis-                                                                  (Procedure and Administration).
                                              (iii) that occur after April 18, 2007,
fied the closing agreement’s fifteen-year     a taxpayer may choose to apply this          (Filed by the Office of the Federal Register on April 24, 2007,
certification period requirement if the       paragraph (b)(4) to events described in
                                                                                           8:45 a.m., and published in the issue of the Federal Register
                                                                                           for April 25, 2007, 72 F.R. 20423)
five-year certification period specified      §1.1503–2(g)(2)(iv)(B)(1)(i) through (iii)
in §1.1503(d)–1(b)(20) has elapsed, pro-      that occur after March 19, 2007 and on or
vided such closing agreement is still in      before April 18, 2007.
effect as of the application date, and pro-




2007–21 I.R.B.                                                 1301                                                           May 21, 2007
Definition of Terms
Revenue rulings and revenue procedures           and B, the prior ruling is modified because      of a prior ruling, a combination of terms
(hereinafter referred to as “rulings”) that      it corrects a published position. (Compare       is used. For example, modified and su-
have an effect on previous rulings use the       with amplified and clarified, above).            perseded describes a situation where the
following defined terms to describe the ef-          Obsoleted describes a previously pub-        substance of a previously published ruling
fect:                                            lished ruling that is not considered deter-      is being changed in part and is continued
    Amplified describes a situation where        minative with respect to future transac-         without change in part and it is desired to
no change is being made in a prior pub-          tions. This term is most commonly used in        restate the valid portion of the previously
lished position, but the prior position is be-   a ruling that lists previously published rul-    published ruling in a new ruling that is self
ing extended to apply to a variation of the      ings that are obsoleted because of changes       contained. In this case, the previously pub-
fact situation set forth therein. Thus, if       in laws or regulations. A ruling may also        lished ruling is first modified and then, as
an earlier ruling held that a principle ap-      be obsoleted because the substance has           modified, is superseded.
plied to A, and the new ruling holds that the    been included in regulations subsequently            Supplemented is used in situations in
same principle also applies to B, the earlier    adopted.                                         which a list, such as a list of the names of
ruling is amplified. (Compare with modi-             Revoked describes situations where the       countries, is published in a ruling and that
fied, below).                                    position in the previously published ruling      list is expanded by adding further names in
    Clarified is used in those instances         is not correct and the correct position is       subsequent rulings. After the original rul-
where the language in a prior ruling is be-      being stated in a new ruling.                    ing has been supplemented several times, a
ing made clear because the language has              Superseded describes a situation where       new ruling may be published that includes
caused, or may cause, some confusion.            the new ruling does nothing more than re-        the list in the original ruling and the ad-
It is not used where a position in a prior       state the substance and situation of a previ-    ditions, and supersedes all prior rulings in
ruling is being changed.                         ously published ruling (or rulings). Thus,       the series.
    Distinguished describes a situation          the term is used to republish under the              Suspended is used in rare situations
where a ruling mentions a previously pub-        1986 Code and regulations the same po-           to show that the previous published rul-
lished ruling and points out an essential        sition published under the 1939 Code and         ings will not be applied pending some
difference between them.                         regulations. The term is also used when          future action such as the issuance of new
    Modified is used where the substance         it is desired to republish in a single rul-      or amended regulations, the outcome of
of a previously published position is being      ing a series of situations, names, etc., that    cases in litigation, or the outcome of a
changed. Thus, if a prior ruling held that a     were previously published over a period of       Service study.
principle applied to A but not to B, and the     time in separate rulings. If the new rul-
new ruling holds that it applies to both A       ing does more than restate the substance


Abbreviations
The following abbreviations in current use       ER—Employer.                                     PRS—Partnership.
and formerly used will appear in material        ERISA—Employee Retirement Income Security Act.   PTE—Prohibited Transaction Exemption.
                                                 EX—Executor.                                     Pub. L.—Public Law.
published in the Bulletin.
                                                 F—Fiduciary.                                     REIT—Real Estate Investment Trust.
                                                 FC—Foreign Country.                              Rev. Proc.—Revenue Procedure.
A—Individual.
                                                 FICA—Federal Insurance Contributions Act.        Rev. Rul.—Revenue Ruling.
Acq.—Acquiescence.
B—Individual.                                    FISC—Foreign International Sales Company.        S—Subsidiary.
                                                 FPH—Foreign Personal Holding Company.            S.P.R.—Statement of Procedural Rules.
BE—Beneficiary.
                                                 F.R.—Federal Register.                           Stat.—Statutes at Large.
BK—Bank.
B.T.A.—Board of Tax Appeals.                     FUTA—Federal Unemployment Tax Act.               T—Target Corporation.
                                                 FX—Foreign corporation.                          T.C.—Tax Court.
C—Individual.
                                                 G.C.M.—Chief Counsel’s Memorandum.               T.D. —Treasury Decision.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.                 GE—Grantee.                                      TFE—Transferee.
                                                 GP—General Partner.                              TFR—Transferor.
CI—City.
                                                 GR—Grantor.                                      T.I.R.—Technical Information Release.
COOP—Cooperative.
Ct.D.—Court Decision.                            IC—Insurance Company.                            TP—Taxpayer.
                                                 I.R.B.—Internal Revenue Bulletin.                TR—Trust.
CY—County.
                                                 LE—Lessee.                                       TT—Trustee.
D—Decedent.
DC—Dummy Corporation.                            LP—Limited Partner.                              U.S.C.—United States Code.
                                                 LR—Lessor.                                       X—Corporation.
DE—Donee.
                                                 M—Minor.                                         Y—Corporation.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.   Nonacq.—Nonacquiescence.                         Z —Corporation.
                                                 O—Organization.
DR—Donor.
                                                 P—Parent Corporation.
E—Estate.
                                                 PHC—Personal Holding Company.
EE—Employee.
                                                 PO—Possession of the U.S.
E.O.—Executive Order.
                                                 PR—Partner.


May 21, 2007                                                           i                                                 2007–21 I.R.B.
Numerical Finding List1                                        Notices:                                                       Proposed Regulations— Continued:

Bulletins 2007–1 through 2007–21                                                                                              REG-125632-06, 2007-5 I.R.B. 415
                                                               2007-1, 2007-2 I.R.B. 254
                                                                                                                              REG-146247-06, 2007-16 I.R.B. 977
Announcements:                                                 2007-2, 2007-2 I.R.B. 254
                                                                                                                              REG-147144-06, 2007-10 I.R.B. 680
                                                               2007-3, 2007-2 I.R.B. 255
                                                                                                                              REG-156420-06, 2007-18 I.R.B. 1110
2007-1, 2007-1 I.R.B. 243                                      2007-4, 2007-2 I.R.B. 260
                                                                                                                              REG-156779-06, 2007-17 I.R.B. 1015
2007-2, 2007-2 I.R.B. 263                                      2007-5, 2007-3 I.R.B. 269
                                                                                                                              REG-157834-06, 2007-13 I.R.B. 840
2007-3, 2007-4 I.R.B. 376                                      2007-6, 2007-3 I.R.B. 272
2007-4, 2007-7 I.R.B. 518                                      2007-7, 2007-5 I.R.B. 395                                      Revenue Procedures:
2007-5, 2007-4 I.R.B. 376                                      2007-8, 2007-3 I.R.B. 276
2007-6, 2007-4 I.R.B. 376                                                                                                     2007-1, 2007-1 I.R.B. 1
                                                               2007-9, 2007-5 I.R.B. 401
2007-7, 2007-4 I.R.B. 377                                                                                                     2007-2, 2007-1 I.R.B. 88
                                                               2007-10, 2007-4 I.R.B. 354
2007-8, 2007-5 I.R.B. 416                                                                                                     2007-3, 2007-1 I.R.B. 108
                                                               2007-11, 2007-5 I.R.B. 405
2007-9, 2007-5 I.R.B. 417                                                                                                     2007-4, 2007-1 I.R.B. 118
                                                               2007-12, 2007-5 I.R.B. 409
2007-10, 2007-6 I.R.B. 464                                                                                                    2007-5, 2007-1 I.R.B. 161
                                                               2007-13, 2007-5 I.R.B. 410
2007-11, 2007-6 I.R.B. 464                                                                                                    2007-6, 2007-1 I.R.B. 189
                                                               2007-14, 2007-7 I.R.B. 501
2007-12, 2007-6 I.R.B. 465                                                                                                    2007-7, 2007-1 I.R.B. 227
                                                               2007-15, 2007-7 I.R.B. 503
2007-13, 2007-7 I.R.B. 519                                                                                                    2007-8, 2007-1 I.R.B. 230
                                                               2007-16, 2007-8 I.R.B. 536
2007-14, 2007-7 I.R.B. 519                                                                                                    2007-9, 2007-3 I.R.B. 278
                                                               2007-17, 2007-12 I.R.B. 748
2007-15, 2007-8 I.R.B. 596                                                                                                    2007-10, 2007-3 I.R.B. 289
                                                               2007-18, 2007-9 I.R.B. 608
2007-16, 2007-8 I.R.B. 597                                                                                                    2007-11, 2007-2 I.R.B. 261
                                                               2007-19, 2007-11 I.R.B. 689
2007-17, 2007-8 I.R.B. 597                                                                                                    2007-12, 2007-4 I.R.B. 354
                                                               2007-20, 2007-9 I.R.B. 610
2007-18, 2007-9 I.R.B. 625                                                                                                    2007-13, 2007-3 I.R.B. 295
                                                               2007-21, 2007-9 I.R.B. 611
2007-19, 2007-7 I.R.B. 521                                                                                                    2007-14, 2007-4 I.R.B. 357
                                                               2007-22, 2007-10 I.R.B. 670
2007-20, 2007-8 I.R.B. 599                                                                                                    2007-15, 2007-3 I.R.B. 300
                                                               2007-23, 2007-11 I.R.B. 690
2007-21, 2007-9 I.R.B. 630                                                                                                    2007-16, 2007-4 I.R.B. 358
                                                               2007-24, 2007-12 I.R.B. 750
2007-22, 2007-9 I.R.B. 631                                                                                                    2007-17, 2007-4 I.R.B. 368
                                                               2007-25, 2007-12 I.R.B. 760
2007-23, 2007-10 I.R.B. 665                                                                                                   2007-18, 2007-5 I.R.B. 413
                                                               2007-26, 2007-14 I.R.B. 870
2007-24, 2007-10 I.R.B. 681                                                                                                   2007-19, 2007-7 I.R.B. 515
                                                               2007-27, 2007-13 I.R.B. 814
2007-25, 2007-10 I.R.B. 682                                                                                                   2007-20, 2007-7 I.R.B. 517
                                                               2007-28, 2007-14 I.R.B. 880
2007-26, 2007-10 I.R.B. 682                                                                                                   2007-21, 2007-9 I.R.B. 613
                                                               2007-29, 2007-14 I.R.B. 881
2007-27, 2007-11 I.R.B. 733                                                                                                   2007-22, 2007-10 I.R.B. 675
                                                               2007-30, 2007-14 I.R.B. 883
2007-28, 2007-10 I.R.B. 683                                                                                                   2007-23, 2007-10 I.R.B. 675
                                                               2007-31, 2007-16 I.R.B. 971
2007-29, 2007-11 I.R.B. 733                                                                                                   2007-24, 2007-11 I.R.B. 692
                                                               2007-32, 2007-17 I.R.B. 996
2007-30, 2007-11 I.R.B. 734                                                                                                   2007-25, 2007-12 I.R.B. 761
                                                               2007-33, 2007-21 I.R.B. 1284
2007-31, 2007-12 I.R.B. 769                                                                                                   2007-26, 2007-13 I.R.B. 814
                                                               2007-34, 2007-17 I.R.B. 996
2007-32, 2007-11 I.R.B. 734                                                                                                   2007-27, 2007-14 I.R.B. 887
                                                               2007-35, 2007-15 I.R.B. 940
2007-33, 2007-13 I.R.B. 841                                                                                                   2007-28, 2007-16 I.R.B. 974
                                                               2007-36, 2007-17 I.R.B. 1000
2007-34, 2007-13 I.R.B. 842                                                                                                   2007-29, 2007-17 I.R.B. 1004
                                                               2007-37, 2007-17 I.R.B. 1002
2007-35, 2007-15 I.R.B. 949                                                                                                   2007-30, 2007-18 I.R.B. 1104
                                                               2007-38, 2007-18 I.R.B. 1103
2007-36, 2007-15 I.R.B. 953                                                                                                   2007-31, 2007-19 I.R.B. 1225
                                                               2007-39, 2007-20 I.R.B. 1243
2007-37, 2007-15 I.R.B. 954                                                                                                   2007-33, 2007-21 I.R.B. 1289
                                                               2007-40, 2007-21 I.R.B. 1284
2007-38, 2007-15 I.R.B. 954                                    2007-41, 2007-21 I.R.B. 1287                                   Revenue Rulings:
2007-39, 2007-15 I.R.B. 954                                    2007-42, 2007-21 I.R.B. 1288
2007-40, 2007-16 I.R.B. 978                                                                                                   2007-1, 2007-3 I.R.B. 265
                                                               Proposed Regulations:                                          2007-2, 2007-3 I.R.B. 266
2007-41, 2007-16 I.R.B. 978
2007-42, 2007-17 I.R.B. 1037                                                                                                  2007-3, 2007-4 I.R.B. 350
                                                               REG-100841-97, 2007-12 I.R.B. 763
2007-43, 2007-17 I.R.B. 1038                                                                                                  2007-4, 2007-4 I.R.B. 351
                                                               REG-153037-01, 2007-15 I.R.B. 942
2007-44, 2007-19 I.R.B. 1238                                                                                                  2007-5, 2007-5 I.R.B. 378
                                                               REG-157711-02, 2007-8 I.R.B. 537
2007-45, 2007-18 I.R.B. 1122                                                                                                  2007-6, 2007-5 I.R.B. 393
                                                               REG-143316-03, 2007-21 I.R.B. 1292
2007-46, 2007-19 I.R.B. 1239                                                                                                  2007-7, 2007-7 I.R.B. 468
                                                               REG-144859-04, 2007-20 I.R.B. 1245
2007-47, 2007-20 I.R.B. 1260                                                                                                  2007-8, 2007-7 I.R.B. 469
                                                               REG-159444-04, 2007-9 I.R.B. 618
2007-48, 2007-20 I.R.B. 1274                                                                                                  2007-9, 2007-6 I.R.B. 422
                                                               REG-115403-05, 2007-12 I.R.B. 767
2007-49, 2007-21 I.R.B. 1300                                                                                                  2007-10, 2007-10 I.R.B. 660
                                                               REG-152043-05, 2007-2 I.R.B. 263
                                                                                                                              2007-11, 2007-9 I.R.B. 606
                                                               REG-158677-05, 2007-16 I.R.B. 975
                                                                                                                              2007-12, 2007-11 I.R.B. 685
                                                               REG-161919-05, 2007-6 I.R.B. 463
                                                                                                                              2007-13, 2007-11 I.R.B. 684

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin
2006–52, dated December 26, 2006.


2007–21 I.R.B.                                                                             ii                                                                May 21, 2007
Revenue Rulings— Continued:
2007-14, 2007-12 I.R.B. 747
2007-15, 2007-11 I.R.B. 687
2007-16, 2007-13 I.R.B. 807
2007-17, 2007-13 I.R.B. 805
2007-18, 2007-13 I.R.B. 806
2007-19, 2007-14 I.R.B. 843
2007-20, 2007-14 I.R.B. 863
2007-21, 2007-14 I.R.B. 865
2007-22, 2007-14 I.R.B. 866
2007-23, 2007-15 I.R.B. 889
2007-24, 2007-21 I.R.B. 1282
2007-25, 2007-16 I.R.B. 956
2007-26, 2007-16 I.R.B. 970
2007-27, 2007-18 I.R.B. 1099
2007-28, 2007-18 I.R.B. 1039
2007-29, 2007-19 I.R.B. 1223
2007-30, 2007-21 I.R.B. 1277
2007-31, 2007-21 I.R.B. 1275
2007-32, 2007-21 I.R.B. 1278
2007-33, 2007-21 I.R.B. 1281

Tax Conventions:

2007-23, 2007-10 I.R.B. 665

Treasury Decisions:

9298, 2007-6 I.R.B. 434
9299, 2007-6 I.R.B. 460
9300, 2007-2 I.R.B. 246
9301, 2007-2 I.R.B. 244
9302, 2007-5 I.R.B. 382
9303, 2007-5 I.R.B. 379
9304, 2007-6 I.R.B. 423
9305, 2007-7 I.R.B. 479
9306, 2007-6 I.R.B. 420
9307, 2007-7 I.R.B. 470
9308, 2007-8 I.R.B. 523
9309, 2007-7 I.R.B. 497
9310, 2007-9 I.R.B. 601
9311, 2007-10 I.R.B. 635
9312, 2007-12 I.R.B. 736
9313, 2007-13 I.R.B. 805
9314, 2007-14 I.R.B. 845
9315, 2007-15 I.R.B. 891
9316, 2007-16 I.R.B. 962
9317, 2007-16 I.R.B. 957
9318, 2007-17 I.R.B. 990
9319, 2007-18 I.R.B. 1041
9320, 2007-17 I.R.B. 994
9321, 2007-19 I.R.B. 1123
9322, 2007-18 I.R.B. 1100
9323, 2007-20 I.R.B. 1240




May 21, 2007                   iii   2007–21 I.R.B.
Finding List of Current Actions on                            Proposed Regulations:                                         Revenue Procedures— Continued:
Previously Published Items1
                                                              REG-208270-86
                                                                                                                            Rev. Proc. 2007-33, 2007-21 I.R.B. 1289
Bulletins 2007–1 through 2007–21                              Corrected by                                                  Modified by
Announcements:                                                Ann. 2007-4, 2007-7 I.R.B. 518                                Rev. Proc. 2007-16, 2007-4 I.R.B. 358
                                                              REG-121509-00                                                 2004-11
2006-45
                                                              Corrected by                                                  Superseded by
Updated and superseded by
                                                              Ann. 2007-17, 2007-8 I.R.B. 597                               Rev. Proc. 2007-16, 2007-4 I.R.B. 358
Ann. 2007-47, 2007-20 I.R.B. 1260
                                                              REG-139059-02                                                 2004-65
Notices:                                                      Corrected by                                                  Modified and superseded by
2002-45                                                       Ann. 2007-36, 2007-15 I.R.B. 953                              Rev. Proc. 2007-20, 2007-7 I.R.B. 517
                                                              Ann. 2007-37, 2007-15 I.R.B. 954
Modified by                                                                                                                 2005-12
Notice 2007-22, 2007-10 I.R.B. 670                            REG-141901-05
                                                                                                                            Superseded by
                                                              Corrected by
2005-1                                                                                                                      Rev. Proc. 2007-17, 2007-4 I.R.B. 368
                                                              Ann. 2007-7, 2007-4 I.R.B. 377
Obsoleted in part by                                                                                                        2005-51
T.D. 9321, 2007-19 I.R.B. 1123                                REG-142270-05
                                                                                                                            Amplified by
                                                              Corrected by
2005-29                                                                                                                     Rev. Proc. 2007-25, 2007-12 I.R.B. 761
                                                              Ann. 2007-2, 2007-2 I.R.B. 263
Modified and superseded by                                                                                                  2005-69
Notice 2007-4, 2007-2 I.R.B. 260                              REG-125632-06
                                                                                                                            Superseded by
                                                              Corrected by
2005-86                                                                                                                     Rev. Proc. 2007-15, 2007-3 I.R.B. 300
                                                              Ann. 2007-26, 2007-10 I.R.B. 682
Modified by                                                                                                                 2005-74
Notice 2007-22, 2007-10 I.R.B. 670                            REG-127819-06
                                                                                                                            Superseded by
                                                              Corrected by
2005-98                                                                                                                     Rev. Proc. 2007-24, 2007-11 I.R.B. 692
                                                              Ann. 2007-5, 2007-4 I.R.B. 376
Modified and superseded by                                                                                                  2006-1
Notice 2007-26, 2007-14 I.R.B. 870                            REG-136806-06
                                                                                                                            Superseded by
                                                              Corrected by
2006-2                                                                                                                      Rev. Proc. 2007-1, 2007-1 I.R.B. 1
                                                              Ann. 2007-6, 2007-4 I.R.B. 376
Modified and superseded by                                                                                                  2006-2
                                                              Hearing cancelled by
Notice 2007-4, 2007-2 I.R.B. 260                                                                                            Superseded by
                                                              Ann. 2007-19, 2007-7 I.R.B. 521
2006-4                                                                                                                      Rev. Proc. 2007-2, 2007-1 I.R.B. 88
                                                              Revenue Procedures:
Superseded in part by                                                                                                       2006-3
T.D. 9321, 2007-19 I.R.B. 1123                                98-20                                                         Superseded by
2006-13                                                       Superseded by                                                 Rev. Proc. 2007-3, 2007-1 I.R.B. 108
Obsoleted by                                                  Rev. Proc. 2007-12, 2007-4 I.R.B. 354
                                                                                                                            2006-4
T.D. 9315, 2007-15 I.R.B. 891                                 2000-38                                                       Superseded by
2006-50                                                       Modified by                                                   Rev. Proc. 2007-4, 2007-1 I.R.B. 118
Amplified, clarified, and modified by                         Rev. Proc. 2007-16, 2007-4 I.R.B. 358
                                                                                                                            2006-5
Notice 2007-11, 2007-5 I.R.B. 405                             2000-42                                                       Superseded by
2006-64                                                       Obsoleted in part by                                          Rev. Proc. 2007-5, 2007-1 I.R.B. 161
Superseded for taxable years on or after January 1,           T.D. 9315, 2007-15 I.R.B. 891
                                                                                                                            2006-6
2008 by                                                       2000-50                                                       Superseded by
T.D. 9321, 2007-19 I.R.B. 1123                                Modified by                                                   Rev. Proc. 2007-6, 2007-1 I.R.B. 189
2006-77                                                       Rev. Proc. 2007-16, 2007-4 I.R.B. 358
                                                                                                                            2006-7
Clarified, modified, and amplified by                         2001-31                                                       Superseded by
Notice 2007-36, 2007-17 I.R.B. 1000                           Superseded by                                                 Rev. Proc. 2007-7, 2007-1 I.R.B. 227
2006-87                                                       Rev. Proc. 2007-29, 2007-17 I.R.B. 1004
                                                                                                                            2006-8
Modified and supplemented by                                  2001-42                                                       Superseded by
Notice 2007-25, 2007-12 I.R.B. 760                            Modified and amplified by                                     Rev. Proc. 2007-8, 2007-1 I.R.B. 230
2007-19                                                       Rev. Proc. 2007-19, 2007-7 I.R.B. 515
                                                                                                                            2006-17
Amended and supplemented by                                   2002-9                                                        Obsoleted in part by
Notice 2007-31, 2007-16 I.R.B. 971                            Modified and amplified by                                     Rev. Proc. 2007-26, 2007-13 I.R.B. 814
                                                              Rev. Proc. 2007-14, 2007-4 I.R.B. 357


1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,
2006.


2007–21 I.R.B.                                                                           iv                                                               May 21, 2007
Revenue Procedures— Continued:            Revenue Rulings— Continued:              Treasury Decisions— Continued:
2006-20                                   81-18                                    9298
Obsoleted in part by                      Distinguished by                         Corrected by
Rev. Proc. 2007-31, 2007-19 I.R.B. 1225   Rev. Rul. 2007-32, 2007-21 I.R.B. 1278   Ann. 2007-32, 2007-11 I.R.B. 734

2006-35                                   81-225                                   9303
Modified by                               Clarified and amplified by               Corrected by
Rev. Proc. 2007-22, 2007-10 I.R.B. 675    Rev. Rul. 2007-7, 2007-7 I.R.B. 468      Ann. 2007-25, 2007-10 I.R.B. 682

Revenue Rulings:                          92-19                                    9313
                                          Supplemented in part by                  Corrected by
54-19                                     Rev. Rul. 2007-10, 2007-10 I.R.B. 660    Ann. 2007-48, 2007-20 I.R.B. 1274
Obsoleted in part by
                                          96-51                                    9315
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Amplified by                             Corrected by
55-132                                    Rev. Rul. 2007-12, 2007-11 I.R.B. 685    Ann. 2007-49, 2007-21 I.R.B. 1300
Obsoleted by
                                          2002-41
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Modified by
56-462                                    Notice 2007-22, 2007-10 I.R.B. 670
Obsoleted by
                                          2003-43
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Modified by
56-518                                    Notice 2007-2, 2007-2 I.R.B. 254
Obsoleted by
                                          2003-92
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Clarified and amplified by
57-505                                    Rev. Rul. 2007-7, 2007-7 I.R.B. 468
Obsoleted by
                                          2003-102
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Modified by
58-370                                    Notice 2007-22, 2007-10 I.R.B. 670
Obsoleted by
                                          2003-109
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Superseded by
58-500                                    Rev. Rul. 2007–28, 2007-18 I.R.B. 1039
Obsoleted by
                                          2005-24
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Modified by
69-141                                    Notice 2007-22, 2007-10 I.R.B. 670
Modified by
                                          2005-76
Notice 2007-22, 2007-10 I.R.B. 670
                                          Supplemented and superseded by
69-212                                    Rev. Rul. 2007-4, 2007-4 I.R.B. 351
Obsoleted by
                                          2006-36
Rev. Rul. 2007-14, 2007-12 I.R.B. 747
                                          Modified by
69-587                                    Notice 2007-22, 2007-10 I.R.B. 670
Revoked by
Rev. Rul. 2007-12, 2007-11 I.R.B. 685
                                          Treasury Decisions:

71-477                                    9263
Obsoleted by                              Corrected by
Rev. Rul. 2007-14, 2007-12 I.R.B. 747     Ann. 2007-22, 2007-9 I.R.B. 631

75-161                                    9276
Obsoleted by                              Corrected by
Rev. Rul. 2007-8, 2007-7 I.R.B. 469       Ann. 2007-20, 2007-8 I.R.B. 599
                                          Ann. 2007-21, 2007-9 I.R.B. 630
76-188
Obsoleted by                              9278
Rev. Rul. 2007-8, 2007-7 I.R.B. 469       Corrected by
                                          Ann. 2007-9, 2007-5 I.R.B. 417
78-330
                                          Ann. 2007-10, 2007-6 I.R.B. 464
Modified by
                                          9286
Rev. Rul. 2007-8, 2007-7 I.R.B. 469
                                          Corrected by
                                          Ann. 2007-8, 2007-5 I.R.B. 416




May 21, 2007                                                        v                                      2007–21 I.R.B.
2007–21 I.R.B.   May 21, 2007
May 21, 2007   2007–21 I.R.B.
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