Bulletin No. 2010-4January 25, 2010

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

INCOME TAX

Rev. Rul. 2010–4, page 309.Section 7216—Disclosure or use of information by pre-parers of returns. This ruling provides guidance on whethera tax return preparer is liable for criminal and civil penaltiesunder sections 7216 and 6713 of the Code when the tax re-turn preparer discloses or uses tax return information in certaincircumstances in communicating with taxpayers and in certainother circumstances.

Rev. Rul. 2010–5, page 312.Section 7216—Disclosure or use of information by pre-parers of returns. This ruling provides guidance on whethera tax return preparer is liable for criminal and civil penaltiesunder sections 7216 and 6713 of the Code when the tax re-turn preparer discloses or uses tax return information undercertain circumstances in connection with professional liabilityinsurance.

T.D. 9474, page 322.Final regulations under 26 CFR Part 1 provide rules relating tothe reduction in taxable income for housing displaced individ-uals under the Katrina Emergency Tax Relief Act of 2005 andthe Heartland Disaster Tax Relief Act of 2008.

T.D. 9475, page 304.Final regulations under section 368 of the Code provide guid-ance regarding the qualification of certain transactions as re-organizations described in section 368(a)(1)(D) where no stockand/or securities of the acquiring corporation is issued and dis-tributed in the transaction.

T.D. 9478, page 315.REG–131028–09, page 332.Final, temporary, and proposed regulations under section 7216of the Code provide rules relating to the disclosure and use oftax return information by tax return preparers. Notice 2009–13obsoleted.

Notice 2010–11, page 326.This notice extends the suspension of the applicability of sec-tion 163(e)(5) of the Code for certain applicable high yield dis-count obligations to December 31, 2010.

Notice 2010–12, page 326.This notice extends the application of Notice 2008–91, whichdescribes an elective exclusion from the definition of “obliga-tion” for purposes of section 956(c) of the Code, to the lasttaxable year of the CFC that immediately follows the last tax-able year of the CFC to which the regulations described inNotice 2008–91 could apply. This notice also extends theapplication of Rev. Proc. 2008–26, which applies to deter-mine whether securities are “readily marketable” for purposesof section 956(c)(2)(J), for an additional year (2010).

(Continued on the next page)

Finding Lists begin on page ii.Index for January begins on page iv.

Notice 2010–13, page 327.This notice provides procedures for corporations, electingsmall business corporations, and organizations required tofile returns under section 6033 to request a waiver of therequirement to electronically file Form 1120, U.S. CorporationIncome Tax Return; Form 1120–F, U.S. Income Tax Return of aForeign Corporation; Form 1120S, U.S. Income Tax Return foran S Corporation; Form 990, Return of Organization ExemptFrom Income Tax; Form 990–PF, Return of Private Foundationor Section 4947(a)(1) Nonexempt Charitable Trust Treatedas a Private Foundation; and returns, amended returns, andsuperseding returns in the Form 1120 and 990 series ofreturns when required by regulations and IRS publications.Notice 2005–88 superseded.

Rev. Proc. 2010–13, page 329.This procedure requires taxpayers to report to the Service theirgroupings and regroupings of activities and the addition of spe-cific activities within their existing groupings of activities forpurposes of section 469 of the Code and section 1.469–4 ofthe Income Tax Regulations.

EMPLOYEE PLANS

Announcement 2010–3, page 333.Automatic approval of changes in funding method fortakeover plans and changes in pension valuation soft-ware. This announcement provides, for plan years beginningon or after January 1, 2009, automatic approval for certainchanges in funding method with respect to single-employer de-fined benefit plans that result either from a change in the valua-tion software used to determine the liabilities for such plans orfrom a change in the enrolled actuary and the business organi-zation providing actuarial services to the plan. This guidance isbeing provided in response to numerous requests from actuar-ies and plan sponsors, many of whom are continuing to modifytheir valuation software in order to implement the changes tothe funding rules made by the Pension Protection Act of 2006,the Worker, Retiree, and Employer Recovery Act of 2008, andguidance regarding these legislative changes.

EXEMPT ORGANIZATIONS

Announcement 2010–1, page 333.The IRS has revoked its determination that Call of the WildSportsmen, Inc., of Mt Airy, MD, qualifies as an organizationdescribed in sections 501(c)(3) and 170(c)(2) of the Code.

ADMINISTRATIVE

Rev. Rul. 2010–4, page 309.Section 7216—Disclosure or use of information by pre-parers of returns. This ruling provides guidance on whethera tax return preparer is liable for criminal and civil penaltiesunder sections 7216 and 6713 of the Code when the tax re-turn preparer discloses or uses tax return information in certaincircumstances in communicating with taxpayers and in certainother circumstances.

Rev. Rul. 2010–5, page 312.Section 7216—Disclosure or use of information by pre-parers of returns. This ruling provides guidance on whethera tax return preparer is liable for criminal and civil penaltiesunder sections 7216 and 6713 of the Code when the tax re-turn preparer discloses or uses tax return information undercertain circumstances in connection with professional liabilityinsurance.

T.D. 9478, page 315.REG–131028–09, page 332.Final, temporary, and proposed regulations under section 7216of the Code provide rules relating to the disclosure and use oftax return information by tax return preparers. Notice 2009–13obsoleted.

January 25, 2010 2010–4 I.R.B.

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

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

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

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

2010–4 I.R.B. January 25, 2010

January 25, 2010 2010–4 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 368.—DefinitionsRelating to CorporateReorganizations26 CFR 1.368–2: Definition of terms.

T.D. 9475

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Corporate Reorganizations;Distributions Under Sections368(a)(1)(D) and 354(b)(1)(B)

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations under section 368 of the In-ternal Revenue Code (Code). The regula-tions provide guidance regarding the quali-fication of certain transactions as reorgani-zations described in section 368(a)(1)(D)where no stock and/or securities of theacquiring corporation is issued and dis-tributed in the transaction. This docu-ment also contains final regulations un-der section 358 that provide guidance re-garding the determination of the basis ofstock or securities in a reorganization de-scribed in section 368(a)(1)(D) where nostock and/or securities of the acquiring cor-poration is issued and distributed in thetransaction. This document also containsfinal regulations under section 1502 thatgovern reorganizations described in sec-tion 368(a)(1)(D) involving members of aconsolidated group. These regulations af-fect corporations engaging in such transac-tions and their shareholders.

DATES: Effective Date: These regulationsare effective on December 18, 2009.

Applicability Date: For dates of appli-cability, see §1.368–2(l)(4)(i).

FOR FURTHER INFORMATIONCONTACT: Bruce A. Decker, (202)622–7790 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The Code provides general nonrecogni-tion treatment for reorganizations specif-ically described in section 368(a). Sec-tion 368(a)(1)(D) describes as a reorgani-zation a transfer by a corporation (trans-feror corporation) of all or a part of its as-sets to another corporation (transferee cor-poration) if, immediately after the transfer,the transferor corporation or one or moreof its shareholders (including persons whowere shareholders immediately before thetransfer), or any combination thereof, is incontrol of the transferee corporation; butonly if stock or securities of the controlledcorporation are distributed in pursuance ofa plan of reorganization in a transactionthat qualifies under section 354, 355, or356.

Section 354(a)(1) provides that no gainor loss shall be recognized if stock or se-curities in a corporation that is a party toa reorganization are, in pursuance of theplan of reorganization, exchanged solelyfor stock or securities in such corporationor in another corporation that is a party tothe reorganization. Section 354(b)(1)(B)provides that section 354(a)(1) shall notapply to an exchange in pursuance of aplan of reorganization described in section368(a)(1)(D) unless the transferee corpo-ration acquires substantially all of the as-sets of the transferor corporation, and thestock, securities, and other properties re-ceived by such transferor corporation, aswell as the other properties of such trans-feror corporation, are distributed in pur-suance of the plan of reorganization.

Further, section 356 provides that if sec-tion 354 or 355 would apply to an ex-change but for the fact that the property re-ceived in the exchange consists not only ofproperty permitted by section 354 or 355without the recognition of gain or loss butalso of other property or money, then thegain, if any, to the recipient shall be recog-nized, but not in excess of the amount ofmoney and fair market value of such otherproperty. Accordingly, in the case of anacquisitive transaction, there can only bea distribution to which section 354 or 356

applies where the target shareholder(s) re-ceive at least some property permitted tobe received by section 354.

On December 19, 2006, the IRS andTreasury Department published a notice ofproposed rulemaking (REG–125632–06,2007–1 C.B. 415) in the Federal Register(71 FR 75898) that included regulationsunder section 368 (the Temporary Reg-ulations) providing guidance regardingwhether the distribution requirement undersections 368(a)(1)(D) and 354(b)(1)(B) issatisfied if there is no actual distributionof stock and/or securities. The TemporaryRegulations provide that the distributionrequirement will be satisfied even thoughno stock and/or securities is actually is-sued in the transaction if the same personor persons own, directly or indirectly, allof the stock of the transferor and transfereecorporations in identical proportions. Insuch cases, the transferee will be deemedto issue a nominal share of stock to thetransferor in addition to the actual con-sideration exchanged for the transferor’sassets. The nominal share is then deemeddistributed by the transferor to its share-holders and, when appropriate, furthertransferred through chains of ownershipto the extent necessary to reflect the actualownership of the transferor and trans-feree corporations. The IRS and TreasuryDepartment issued the Temporary Regu-lations in response to taxpayer requestsregarding whether certain acquisitivetransactions can qualify as reorganizationsdescribed in section 368(a)(1)(D) whereno stock of the transferee corporation isissued and distributed in the transactionpending a broader study of issues relatedto acquisitive section 368(a)(1)(D) reor-ganizations in general. In the notice ofproposed rulemaking, the IRS and Trea-sury Department requested comments onthe Temporary Regulations as well as onseveral broader issues discussed below re-lating to acquisitive section 368(a)(1)(D)reorganizations.

On February 27, 2007, the IRS andTreasury Department published a clarify-ing amendment to the Temporary Regu-lations (REG–157834–06, 2007–1 C.B.840) in the Federal Register (72 FR9284–9285) providing that the deemed is-

2010–4 I.R.B. 304 January 25, 2010

suance of the nominal share of stock of thetransferee corporation in a transaction oth-erwise described in section 368(a)(1)(D)does not apply if the transaction other-wise qualifies as a triangular reorgani-zation described in §1.358–6(b)(2) orsection 368(a)(1)(G) by reason of section368(a)(2)(D).

No public hearing regarding the Tem-porary Regulations was requested or held.However, comments were received. Afterconsideration of all of the comments, theTemporary Regulations are adopted as re-vised by this Treasury decision. The prin-cipal comments and changes are discussedin this preamble.

Explanation of Provisions

These final regulations retain the rulesof the Temporary Regulations, but makecertain modifications to the TemporaryRegulations in response to comments re-ceived. The following paragraphs describethe most significant comments receivedand the extent to which they have beenincorporated into these final regulations.

Meaningless Gesture Doctrine

Notwithstanding the requirement insection 368(a)(1)(D) that “stock or securi-ties of the corporation to which the assetsare transferred are distributed in a trans-action which qualifies under section 354,355, or 356”, the IRS and the courts havenot required the actual issuance and dis-tribution of stock and/or securities of thetransferee corporation in circumstanceswhere the same person or persons ownall the stock of the transferor corporationand the transferee corporation. In suchcircumstances, the IRS and the courtshave viewed an issuance of stock by thetransferee corporation to be a “meaning-less gesture” not mandated by sections368(a)(1)(D) and 354(b). See JamesArmour, Inc. v. Commissioner, 43 T.C.295, 307 (1964); Wilson v. Commissioner,46 T.C. 334 (1966); Rev. Rul. 70–240,1970–1 C.B. 81. In the notice of proposedrulemaking, the IRS and TreasuryDepartment requested comments onwhether the meaningless gesture doctrineis inconsistent with the distributionrequirement in sections 368(a)(1)(D) and354(b)(1)(B), especially in situations inwhich the cash consideration receivedequals the full fair market value of the

property transferred such that there isno missing consideration for which thenominal share of stock deemed receivedand distributed could substitute. See§601.601(d)(2)(ii).

Commentators noted that the doctrine isappropriate in the case where there is someexcess in value of the assets transferredover the amount of cash received. In caseswhere the cash received is equal to thefair market value of the assets transferred,commentators agree that it is the properapproach because as a policy or adminis-trative matter it is inappropriate to requirea different outcome when the only factualdifference is whether there is a nominaldifference between the value of the assetsand the cash consideration received. Com-mentators noted that deeming the distribu-tion requirement to be satisfied in order toprevent an asset sale from being treatedas a taxable exchange is not problematicenough to warrant a change from Rev. Rul.70–240. Commentators have also sug-gested that the final regulations clarify thatthe rules apply to transactions regardless ofwhether the sum paid for the transferor’sassets is exactly equal to their value.

The IRS and Treasury Departmentagree with the comments received re-garding the meaningless gesture doctrine.Accordingly, these final regulations retainthe rules of the Temporary Regulationswhich are based in part on the meaninglessgesture doctrine. In addition, consistentwith the IRS and Treasury Department’sview of such transactions and in responseto comments, the final regulations providethat if no consideration is received, or thevalue of the consideration received in thetransaction is less than the fair marketvalue of the transferor corporation’s assets,the transferee corporation will be treatedas issuing stock with a value equal to theexcess of the fair market value of the trans-feror corporation’s assets over the value ofthe consideration actually received in thetransaction. The final regulations furtherprovide that if the value of the consider-ation received in the transaction is equalto the fair market value of the transferorcorporation’s assets, the transferee corpo-ration will be deemed to issue a nominalshare (discussed in this preamble) of stockto the transferor corporation in addition tothe actual consideration exchanged for thetransferor corporation’s assets.

Issuance of Nominal Share

As described in this preamble, if thesame person or persons own, directly orindirectly, all of the stock of the transferorand transferee corporations in identicalproportions in a transaction otherwise de-scribed in section 368(a)(1)(D), the trans-feree will be deemed to issue a nominalshare of stock to the transferor in addi-tion to the actual consideration exchangedfor the transferor’s assets. The nominalshare is then deemed distributed by thetransferor to its shareholders and, whenappropriate, further transferred throughthe chains of ownership to the extent nec-essary to reflect the actual ownership ofthe transferor and transferee corporations.

Commentators have asked for clarifica-tion as to whether the deemed issuance ofa nominal share has any tax significancebeyond satisfying the distribution require-ment of section 354(b)(1)(B). Commenta-tors have suggested that instead of deem-ing a stock issuance in a purported section368(a)(1)(D) reorganization, the final reg-ulations should simply state that suchtransactions are deemed to be transactionsdescribed in section 356. Furthermore,commentators believe that if the transferorcorporation owns stock of the transfereecorporation before the reorganization andthe transferor corporation distributes suchtransferee corporation stock (and no otherstock) to its shareholders, the transactionwould qualify under section 354(b)(1)(B)and therefore would qualify under sec-tion 368(a)(1)(D). Commentators believethe IRS and Treasury Department havethe authority to reach that result withoutdeeming a nominal share to be issued asthis approach has been adopted elsewhere.See §1.368–2(d)(4) (a subsidiary liquida-tion not subject to section 332 can qualifyas a section 368(a)(1)(C) reorganization byeffectively treating old and cold subsidiarystock that the parent holds as exchangedfor hypothetical parent voting stock issuedin exchange for the subsidiary’s assets).Commentators have suggested that if thefinal regulations retain the nominal shareconcept, then the final regulations shouldclarify that the nominal share has no signif-icance other than to meet the distributionrequirement of section 354(b)(1)(B).

The IRS and Treasury Departmenthave carefully considered the commentsregarding the nominal share concept and

January 25, 2010 305 2010–4 I.R.B.

believe that it is preferable to an approachthat simply deems the statutory require-ments satisfied because the nominal sharealso provides a useful mechanism withrespect to stock basis consequences to theexchanging shareholder. As noted above,following the deemed issuance of the nom-inal share, it is deemed distributed by thetransferor to its shareholders and, whenappropriate, further transferred throughthe chains of ownership to the extent nec-essary to reflect the actual ownership ofthe transferor and transferee corporation(the final regulations provide similar treat-ment where, in a transaction involvingno consideration or partial consideration,the transferee corporation is deemed toissue stock). Beyond satisfying section354(b)(1)(B), the IRS and Treasury De-partment believe that the nominal shareshould be treated as nonrecognition prop-erty under section 358(a), and thus sub-stituted basis property. Following basisadjustments (for example, under section358 or §1.1502–32), the nominal sharepreserves remaining basis, if any, andfacilitates future stock gain or loss recog-nition by the appropriate shareholder.

With respect to the comment regardingpreviously owned stock of the transfereeby the transferor qualifying under section354(b)(1)(B), this raises issues that are be-yond the scope of this regulation projectand therefore are not addressed in this doc-ument. Accordingly, the final regulationsretain the rule that if the same person orpersons own, directly or indirectly, all ofthe stock of the transferor and transfereecorporations in identical proportions, thetransferee will be deemed to issue a nomi-nal share of stock to the transferor in addi-tion to the actual consideration exchangedfor the transferor’s assets.

Basis Allocation

While the IRS and Treasury Depart-ment believe that all of the normal tax con-sequences occur from the issuance of anominal share in a transaction described inthese final regulations, commentators havenoted that such consequences are unclearwith respect to the allocation of basis inthe shares of the stock or securities sur-rendered when the consideration receivedin the transaction consists solely of cash.While commentators believe that the basisin the shares of the stock or securities sur-

rendered should be preserved in the basisof the stock of the transferee, the mechan-ics of achieving this result are unclear.

The regulations under§1.358–2(a)(2)(iii) address how basis isdetermined in the case of a reorganizationin which no property is received orproperty (including property permittedby section 354 to be received without therecognition of gain or “other property” ormoney) with a fair market value less thanthat of the stock or securities surrenderedis received in the transaction. The regu-lations treat the acquiring corporation asissuing an amount of stock equal to thefair market value of the stock surrendered,less any amount of consideration actuallyreceived by the exchanging shareholder inthe form of stock, securities, other prop-erty, or money. The basis of that deemedissued stock is determined by reference tothe basis of the shares surrendered in thereorganization, and adjusted as providedin the regulations. The shareholder’sstock in the acquiring corporation is thentreated as being recapitalized. In therecapitalization, the shareholder is treatedas surrendering all of its shares of theacquiring corporation, including thoseshares owned immediately prior to thereorganization and those shares the share-holder is deemed to receive, in exchangefor the shares that the shareholder actuallyholds immediately after the reorganiza-tion. The basis of the shares that theshareholder actually owns is determinedunder the rules that would have appliedhad the recapitalization actually occurredwith respect to the shareholder’s actualshares and the shares the shareholder isdeemed to have received. However, theserules do not literally apply to a transactioninvolving solely other property or moneybecause the rules address situations inwhich a shareholder of the target corpo-ration receives no property or propertywith a fair market value less than thatof the stock or securities the shareholdersurrendered in the transaction.

The IRS and Treasury Departmentagree with the commentators that the ba-sis in the shares of the stock surrenderedshould be preserved in the basis of thestock of the transferee in a transaction de-scribed in these final regulations. The IRSand Treasury Department also agree thatcurrent law does not adequately addressthe manner in which the basis in the shares

of the stock or securities surrendered ispreserved in the basis of the stock of thetransferee. Accordingly, the regulationsunder §1.358–2(a)(2)(iii) are amended toprovide that in the case of a reorganizationin which the property received consistssolely of non-qualifying property equal tothe value of the assets transferred (as wellas a nominal share described in these finalregulations), the shareholder or securityholder may designate the share of stock ofthe transferee to which the basis, if any,of the stock or securities surrendered willattach. The IRS and Treasury Departmentbelieve this approach is the most con-sistent with current law regarding basisdetermination as a similar result wouldoccur under §1.358–2 if stock was actuallyissued in the transaction. Nonetheless, aspart of its broader study of basis issues, theIRS and Treasury Department will re-ex-amine these regulations and the rules maychange upon completion of this broaderstudy.

Application of Final Regulations toConsolidated Groups

In the notice to proposed rulemak-ing, the IRS and Treasury Departmentrequested comments on whether the Tem-porary Regulations should apply when theparties to the reorganization are membersof a consolidated group. Commentatorshave stated that the Temporary Regu-lations should apply because there isno reason to distinguish a consolidatedgroup member’s reorganization treatmentfrom that of a member of a nonconsol-idated affiliated group. Commentatorshave suggested that the consolidated re-turn regulations should be coordinatedwith the Temporary Regulations. Specif-ically, §1.1502–13(f)(3) provides that, inthe case of an acquisitive intercompanyreorganization involving the receipt ofmoney or other property (boot), boot istaken into account immediately after thereorganization in a separate transaction.See §1.1502–13(f)(7), Example 3 (an in-tercompany reorganization with boot istreated as if the acquirer had issued onlyits stock in the reorganization, and thedeemed shares were then redeemed bythe acquirer in exchange for the boot).The effect of this rule is to remove theboot from section 356 (dividend withingain treatment) and treat it as received in

2010–4 I.R.B. 306 January 25, 2010

a redemption which is in turn taxed as asection 301 distribution.

Commentators have suggested that thenominal share concept under the Tem-porary Regulations is consistent withthe deemed shares in Example 3 under§1.1502–13(f)(7) as the nominal sharefiction deems a transaction to qualify as asection 368 reorganization, and the sharesdeemed issued under the §1.1502–13(f)(3)fiction determine the consequences ofthe reorganization. Commentators haverequested that an example be addedto §1.1502–13 to illustrate the interac-tion of the Temporary Regulations and§1.1502–13(f)(3). Specifically, commen-tators have requested that the exampleclarify that the nominal share does notexist for any purpose other than to satisfythe distribution requirement of section354(b)(1)(B). Therefore, §1.1502–13(f)(3)should apply in the same way to thepost-reorganization deemed redemptionof stock in exchange for the boot actuallyreceived (that is, as if the distributee didnot own the nominal share). Commenta-tors believe that any remaining stock basisor ELA in the deemed shares under the§1.1502–13(f)(3) fiction should shift tothe member(s) that actually own stock inthe transferee corporation under the prin-ciples of §1.302–2(c).

As discussed in this preamble, the IRSand Treasury Department believe that thenominal share has significance beyond sat-isfaction of the distribution requirement ofsection 354(b)(1)(B), most notably for pur-poses of determining stock basis conse-quences to the appropriate shareholder. Inan all cash sale of assets between mem-bers of a consolidated group, the IRS andTreasury Department believe that givingsignificance to the nominal share for pur-poses beyond the distribution requirementis consistent with the fundamental premiseunderlying the intercompany transactiondeferral system which is to preserve thelocation of gain or loss within a consol-idated group. Therefore, if an all cashtransaction described in these final regula-tions occurs between members of a consol-idated group, the selling member (S) willbe treated as receiving the nominal shareand additional stock of the buying member(B) under §1.1502–13(f)(3), which it willdistribute to its shareholder member (M) inliquidation. Immediately after the sale, the

B stock (with the exception of the nominalshare which is still held by M) received byM is treated as redeemed, and the redemp-tion is treated under section 302(d) as a dis-tribution to which section 301 applies. M’sbasis in the B stock will be reduced un-der §1.1502–32(b)(3)(v). Under the rulesof §1.302–2(c), any remaining basis willattach to the nominal share. If applica-ble, the nominal share will be further trans-ferred through chains of ownership to theextent necessary to reflect the actual own-ership of B. An example has been addedto §1.1502–13 to illustrate the interactionof these final regulations and the consoli-dated return regulations.

Additional Comments Received

The IRS and Treasury Departmentalso requested comments on the extent,if any, to which the continuity of interestrequirement should apply to a reorganiza-tion described in section 368(a)(1)(D) aswell as the continued vitality of variousliquidation-reincorporation authorities af-ter the enactment of the Tax Reform Actof 1986, Public Law 99–514 (100 Stat.2085 (1986)). Comments were receivedon these issues. The IRS and TreasuryDepartment continue to study these issuesas part of a broad study of reorganizationsunder section 368(a)(1)(D).

Additional Comments Requested

The IRS and Treasury Department re-quest comments on the application of thefinal regulations to reorganizations in-volving foreign corporations or sharehold-ers, including comments regarding: (1)whether any section 1248 amount attribut-able to the stock of the transferor corpora-tion can be preserved in the nominal sharedeemed issued by the transferee corpora-tion; (2) the manner in which earnings andprofits (E&P) are (or should be) taken intoaccount for purposes of section 902 whenan exchanging shareholder recognizesgain under section 356(a) that is treated asa dividend under section 356(a)(2) fromthe E&P of the transferor and transfereecorporations (including whether the E&Pof the corporation is combined for thispurpose or whether an ordering rule ap-plies); (3) whether and how section 902should apply when an exchanging share-holder does not actually own stock in the

transferee corporation but the exchangingshareholder recognizes gain under section356(a) that is treated as a dividend fromthe E&P of the transferee corporation (in-cluding whether a limitation similar to thatof section 304(b)(5) is appropriate in suchcases); (4) whether and how, under section959, an exchanging shareholder shouldbe able to access previously taxed E&Pof a foreign transferor and/or transfereecorporation before any non-previouslytaxed E&P of either corporation; and (5)whether and how section 897 applies if thetransferor corporation is a United Statesreal property holding corporation with atleast one foreign shareholder.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It is hereby certified thatthese regulations do not have a significanteconomic impact on a substantial numberof small entities. This certification is basedon the fact that these regulations primarilyaffect affiliated groups of corporations thathave elected to file consolidated returns,which tend to be larger businesses, and,moreover, that any burden on taxpayers isminimal. Therefore, a Regulatory Flexi-bility Analysis under the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) is not re-quired. Pursuant to section 7805(f) of theInternal Revenue Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Bruce A. Decker, Office of As-sociate Chief Counsel (Corporate). How-ever, other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

January 25, 2010 307 2010–4 I.R.B.

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805. * * *Par. 2. Section 1.358–2 is amended by

adding a sentence at the end of paragraph(a)(2)(iii) to read as follows:

§1.358–2 Allocation of basis amongnonrecognition property.

(a) * * *(2) * * *(iii) * * * If a shareholder or security

holder surrenders a share of stock or a se-curity in a transaction under the terms ofsection 354 (or so much of section 356as relates to section 354) in which suchshareholder or security holder is deemedto receive a nominal share described in§1.368–2(l), such shareholder may, afteradjusting the basis of the nominal share inaccordance with the rules of this sectionand §1.358–1, designate the share of stockof the issuing corporation to which the ba-sis, if any, of the nominal share will attach.

* * * * *Par. 3. Section 1.368–2 is amended by

revising paragraph (l) to read as follows:

§1.368–2 Definition of terms.

* * * * *(l) Certain transactions treated as

reorganizations described in section368(a)(1)(D)—(1) General rule. In orderto qualify as a reorganization under section368(a)(1)(D), a corporation (transferorcorporation) must transfer all or part of itsassets to another corporation (transfereecorporation) and immediately after thetransfer the transferor corporation, or oneor more of its shareholders (including per-sons who were shareholders immediatelybefore the transfer), or any combinationthereof, must be in control of the trans-feree corporation; but only if, in pursuanceof the plan, stock or securities of the trans-feree are distributed in a transaction whichqualifies under section 354, 355, or 356.

(2) Distribution requirement—(i) Ingeneral. For purposes of paragraph (l)(1)of this section, a transaction otherwisedescribed in section 368(a)(1)(D) will betreated as satisfying the requirements ofsections 368(a)(1)(D) and 354(b)(1)(B)notwithstanding that there is no actual

issuance of stock and/or securities of thetransferee corporation if the same personor persons own, directly or indirectly, allof the stock of the transferor and transfereecorporations in identical proportions. Incases where no consideration is receivedor the value of the consideration receivedin the transaction is less than the fair mar-ket value of the transferor corporation’sassets, the transferee corporation will betreated as issuing stock with a value equalto the excess of the fair market value ofthe transferor corporation’s assets overthe value of the consideration actually re-ceived in the transaction. In cases wherethe value of the consideration received inthe transaction is equal to the fair mar-ket value of the transferor corporation’sassets, the transferee corporation will bedeemed to issue a nominal share of stockto the transferor corporation in additionto the actual consideration exchangedfor the transferor corporation’s assets.The nominal share of stock in the trans-feree corporation will then be deemeddistributed by the transferor corporationto the shareholders of the transferor cor-poration, as part of the exchange for thestock of such shareholders. Where appro-priate, the nominal share will be furthertransferred through chains of ownershipto the extent necessary to reflect the actualownership of the transferor and transfereecorporations. Similar treatment to that ofthe preceding two sentences shall applywhere the transferee corporation is treatedas issuing stock with a value equal to theexcess of the fair market value of the trans-feror corporation’s assets over the value ofthe consideration actually received in thetransaction.

(ii) Attribution. For purposes of para-graph (l)(2)(i) of this section, ownershipof stock will be determined by applyingthe principles of section 318(a)(2) with-out regard to the 50 percent limitation insection 318(a)(2)(C). In addition, an indi-vidual and all members of his family de-scribed in section 318(a)(1) shall be treatedas one individual.

(iii) De minimis variations in owner-ship and certain stock not taken into ac-count. For purposes of paragraph (l)(2)(i)of this section, the same person or personswill be treated as owning, directly or indi-rectly, all of the stock of the transferor andtransferee corporations in identical propor-tions notwithstanding the fact that there is

a de minimis variation in shareholder iden-tity or proportionality of ownership. Addi-tionally, for purposes of paragraph (l)(2)(i)of this section, stock described in section1504(a)(4) is not taken into account.

(iv) Exception. Paragraph (l)(2) of thissection does not apply to a transaction oth-erwise described in §1.358–6(b)(2).

(3) Examples. The following examplesillustrate the principles of paragraph (l) ofthis section. For purposes of these exam-ples, each of A, B, C, and D is an indi-vidual, T is the acquired corporation, Sis the acquiring corporation, P is the par-ent corporation, and each of S1, S2, S3,and S4 is a direct or indirect subsidiary ofP. Further, all of the requirements of sec-tion 368(a)(1)(D) other than the require-ment that stock or securities be distributedin a transaction to which section 354 or 356applies are satisfied. The examples are asfollows:

Example 1. A owns all the stock of T and S. TheT stock has a fair market value of $100x. T sellsall of its assets to S in exchange for $100x of cashand immediately liquidates. Because there is com-plete shareholder identity and proportionality of own-ership in T and S, under paragraph (l)(2)(i) of this sec-tion, the requirements of sections 368(a)(1)(D) and354(b)(1)(B) are treated as satisfied notwithstandingthe fact that no S stock is issued. Pursuant to para-graph (l)(2)(i) of this section, S will be deemed to is-sue a nominal share of S stock to T in addition to the$100x of cash actually exchanged for the T assets, andT will be deemed to distribute all such considerationto A. The transaction qualifies as a reorganization de-scribed in section 368(a)(1)(D).

Example 2. The facts are the same as in Exam-ple 1 except that C, A’s son, owns all of the stock ofS. Under paragraph (l)(2)(ii) of this section, A andC are treated as one individual. Accordingly, thereis complete shareholder identity and proportionalityof ownership in T and S. Therefore, under paragraph(l)(2)(i) of this section, the requirements of sections368(a)(1)(D) and 354(b)(1)(B) are treated as satisfiednotwithstanding the fact that no S stock is issued. Pur-suant to paragraph (l)(2)(i) of this section, S will bedeemed to issue a nominal share of S stock to T inaddition to the $100x of cash actually exchanged forthe T assets, and T will be deemed to distribute allsuch consideration to A. A will be deemed to trans-fer the nominal share of S stock to C. The transac-tion qualifies as a reorganization described in section368(a)(1)(D).

Example 3. P owns all of the stock of S1 and S2.S1 owns all of the stock of S3, which owns all of thestock of T. S2 owns all of the stock of S4, which ownsall of the stock of S. The T stock has a fair marketvalue of $70x. T sells all of its assets to S in exchangefor $70x of cash and immediately liquidates. Underparagraph (l)(2)(ii) of this section, there is indirect,complete shareholder identity and proportionality ofownership in T and S. Accordingly, the requirementsof sections 368(a)(1)(D) and 354(b)(1)(B) are treatedas satisfied notwithstanding the fact that no S stock is

2010–4 I.R.B. 308 January 25, 2010

issued. Pursuant to paragraph (l)(2)(i) of this section,S will be deemed to issue a nominal share of S stock toT in addition to the $70x of cash actually exchangedfor the T assets, and T will be deemed to distribute allsuch consideration to S3. S3 will be deemed to dis-tribute the nominal share of S stock to S1, which, inturn, will be deemed to distribute the nominal share ofS stock to P. P will be deemed to transfer the nominalshare of S stock to S2, which, in turn, will be deemedto transfer such share of S stock to S4. The transac-tion qualifies as a reorganization described in section368(a)(1)(D).

Example 4. A, B, and C own 34%, 33%, and 33%,respectively, of the stock of T. The T stock has a fairmarket value of $100x. A, B, and C each own 33% ofthe stock of S. D owns the remaining 1% of the stockof S. T sells all of its assets to S in exchange for $100xof cash and immediately liquidates. For purposes ofdetermining whether the distribution requirement ofsections 368(a)(1)(D) and 354(b)(1)(B) is met, underparagraph (l)(2)(iii) of this section, D’s ownership ofa de minimis amount of stock of S is disregarded andthe transaction is treated as if there is complete share-holder identity and proportionality of ownership in Tand S. Because there is complete shareholder identityand proportionality of ownership in T and S, underparagraph (l)(2)(i) of this section, the requirementsof sections 368(a)(1)(D) and 354(b)(1)(B) are treatedas satisfied notwithstanding the fact that no S stockis issued. Pursuant to paragraph (l)(2)(i) of this sec-tion, S will be deemed to issue a nominal share of Sstock to T in addition to the $100x of cash actuallyexchanged for the T assets, T will be deemed to dis-tribute all such consideration to A, B, and C, and thenominal S stock will be deemed transferred amongthe S shareholders to the extent necessary to reflecttheir actual ownership of S. The transaction qualifiesas a reorganization described in section 368(a)(1)(D).

Example 5. The facts are the same as in Ex-ample 4 except that A, B, and C own 34%, 33%,and 33%, respectively, of the common stock of Tand S. D owns preferred stock in S described in sec-tion 1504(a)(4). For purposes of determining whetherthe distribution requirement of sections 368(a)(1)(D)and 354(b)(1)(B) is met, under paragraph (l)(2)(iii)of this section, D’s ownership of S stock describedin section 1504(a)(4) is ignored and the transactionis treated as if there is complete shareholder iden-tity and proportionality of ownership in T and S. Be-cause there is complete shareholder identity and pro-portionality of ownership in T and S, under paragraph(l)(2)(i) of this section, the requirements of sections368(a)(1)(D) and 354(b)(1)(B) are treated as satis-fied notwithstanding the fact that no S stock is issued.Pursuant to paragraph (l)(2)(i) of this section, S willbe deemed to issue a nominal share of S stock to Tin addition to the $100x of cash actually exchangedfor the T assets, and T will be deemed to distributeall such consideration to A, B, and C. The transac-tion qualifies as a reorganization described in section368(a)(1)(D).

Example 6. A and B each own 50% of the stockof T. The T stock has a fair market value of $100x. Band C own 90% and 10%, respectively, of the stock ofS. T sells all of its assets to S in exchange for $100x ofcash and immediately liquidates. Because completeshareholder identity and proportionality of ownershipin T and S does not exist, paragraph (l)(2)(i) of thissection does not apply. The requirements of sections

368(a)(1)(D) and 354(b)(1)(B) are not satisfied, andthe transaction does not qualify as a reorganizationdescribed in section 368(a)(1)(D).

(4) Effective/applicability date. (i) Ingeneral. This section applies to trans-actions occurring on or after December18, 2009. For rules regarding transac-tions occurring before December 18, 2009,see section 1.368–2T(l) as contained in26 CFR part 1.

(ii) Transitional rule. A taxpayermay apply the provisions of these reg-ulations to transactions occurring be-fore December 18, 2009. However,the transferor corporation, the transfereecorporation, any direct or indirecttransferee of transferred basis propertyfrom either of the foregoing, and anyshareholder of the transferor or transfereecorporation may not apply the provisionsof these regulations unless all suchtaxpayers apply the provisions of theregulations.

§1.368–2T [Removed]

Par. 4. Section 1.368–2T is removed.Par. 5. Section 1.1502–13 is amended

by:1. Revising the heading and entries for

§1.1502–13(f)(7) in paragraph (a)(6)(ii).2. Redesignating Examples 4, 5, 6, 7,

and 8 as Examples 5, 6, 7, 8, and 9 respec-tively and adding a new Example 4 to para-graph (f)(7)(i).

The revision and addition reads as fol-lows:

§1.1502–13 Intercompany transactions.

(a) * * *(6) * * *(ii) * * *

Stock of members. (§1.1502–13(f)(7))

Example 1. Dividend exclusion andproperty distribution.

Example 2. Excess loss accounts.Example 3. Intercompany reorganiza-

tions.Example 4. All cash intercompany re-

organization under section 368(a)(1)(D).Example 5. Stock redemptions and dis-

tributions.Example 6. Intercompany stock sale

followed by section 332 liquidation.Example 7. Intercompany stock sale

followed by section 355 distribution.

* * * * *(f) * * *(7) * * *(i) * * *Example 4. All cash intercompany reorganization

under section 368(a)(1)(D). (a) Facts. P owns all ofthe stock of M and B. M owns all of the stock of S witha basis of $25. On January 1 of Year 2, the fair marketvalue of S’s assets and its stock is $100, and S sellsall of its assets to B for $100 cash and liquidates. Thetransaction qualifies as a reorganization described insection 368(a)(1)(D). Pursuant to §1.368–2(l), B willbe deemed to issue a nominal share of B stock to S inaddition to the $100 of cash actually exchanged forthe S assets, and S will be deemed to distribute all ofthe consideration to M. M will be deemed to distributethe nominal share of B stock to P.

(b) Treatment as a section 301 distribution. Thesale of S’s assets to B is a transaction to which para-graph (f)(3) of this section applies. In addition to thenominal share issued by B to S under §1.368–2(l), Sis treated as receiving additional B stock with a fairmarket value of $100 (in lieu of the $100) and, un-der section 358, a basis of $25 which S distributes toM in liquidation. Immediately after the sale, the Bstock (with the exception of the nominal share whichis still held by M) received by M is treated as re-deemed for $100, and the redemption is treated un-der section 302(d) as a distribution to which section301 applies. M’s basis of $25 in the B stock is re-duced under §1.1502–32(b)(3)(v), resulting in an ex-cess loss account of $75 in the nominal share. (See§1.302–2(c)). M’s deemed distribution of the nomi-nal share of B stock to P under §1.368–2(l) will resultin M generating an intercompany gain under section311(b) of $75, to be subsequently taken into accountunder the matching and acceleration rules.

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved December 14, 2009.

Michael Mundaca,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 17,2009, 8:45 a.m., and published in the issue of the FederalRegister for December 18, 2009, 74 F.R. 67053)

Section 7216.—Disclosureor Use of Information byPreparers of Returns26 CFR: 301.7216–1: Penalty for disclosure or useof tax return information.(Also § 6713; 301.7216–2.)

Section 7216—Disclosure or use ofinformation by preparers of returns.This ruling provides guidance on whethera tax return preparer is liable for criminal

January 25, 2010 309 2010–4 I.R.B.

and civil penalties under sections 7216and 6713 of the Code when the tax re-turn preparer discloses or uses tax returninformation in certain circumstances incommunicating with taxpayers and in cer-tain other circumstances.

Rev. Rul. 2010–4

PURPOSE

This revenue ruling provides guidanceon whether a tax return preparer is liablefor criminal and civil penalties under Inter-nal Revenue Code sections 7216 and 6713when the tax return preparer discloses oruses tax return information under the cir-cumstances described below.

ISSUES

(1) Is a tax return preparer liable forpenalties under sections 7216 and 6713when the tax return preparer uses tax returninformation to contact taxpayers to informthem of changes in tax law that could af-fect the taxpayers’ income tax liability re-ported in tax returns previously preparedor processed by the tax return preparer?

(2) Is a tax return preparer, who is law-fully engaged in the practice of law or ac-countancy, liable for penalties under sec-tions 7216 and 6713 when the tax returnpreparer uses tax return information of tax-payers whose tax returns the tax return pre-parer has prepared or processed to deter-mine which taxpayers’ future income taxreturn filing obligations may be affected bya prospective change in tax rule or regula-tion and to contact the potentially affectedtaxpayers for whom the tax return preparerreasonably expects to provide accountingservices in the next year to notify themof the changed rule or regulation, explainhow the change may affect them, and ad-vise them with regard to actions they maytake in response to the change?

(3) Is a tax return preparer liable forpenalties under sections 7216 and 6713when the tax return preparer discloses taxreturn information contained in the list per-mitted to be maintained by the tax returnpreparer under section 301.7216–2(n) toa third-party service provider that creates,publishes, or distributes, by mail or e-mail,newsletters, bulletins, or similar commu-nications to taxpayers whose tax returnsthe tax return preparers have prepared orprocessed containing tax information and

general business and economic informa-tion or analysis for educational purposes orfor purposes of soliciting additional tax re-turn preparation services for the tax returnpreparer?

FACTS

Tax Return Preparers A, B, C, D, and Eprepared individual and corporate incometax returns for 2008 and several other pastyears and expect to prepare 2009 incometax returns in the upcoming 2010 filingseason.

Prompted by legislation passed by theCongress in 2009 authorizing net operat-ing losses for 2008 to be carried back up tofive years, Tax Return Preparer A reviewsincome tax returns and other tax return in-formation of taxpayers whose income taxreturns A has prepared or processed, evenif A has not been engaged to prepare thetaxpayers’ most recent returns, in order todetermine which taxpayer clients may beable to benefit from the expanded carry-back rules. Following this review, A con-tacts the affected taxpayers to inform themof the change, advise them with regard towhether an amended return or returns canbe filed for years affected by the change,and offer A’s tax return preparation ser-vices with regard to preparing and filingthe amended returns. A then prepares andfiles amended returns for some of the tax-payers.

Also in 2009, the Internal Revenue Ser-vice issues a temporary regulation inter-preting the manner that a tax credit is tobe calculated in future tax years. Tax Re-turn Preparer B, who is lawfully engagedin the practice of accountancy, is promptedby this temporary regulation to review theincome tax returns of the taxpayers whosetax returns B has prepared or processed,even if B has not been engaged to pre-pare the taxpayers’ most recent returns,to determine who among B’s clients maybe affected by the revised credit calcula-tion for tax year 2009. Following this re-view, B contacts these taxpayers to no-tify them of the change, explain how itmay affect them, and suggest actions thatthe taxpayers may take to properly reportthe credit on their 2009 returns. B onlycontacts those taxpayers for whom B rea-sonably expects to provide accounting ser-vices with respect to the 2009 tax year, in-cluding taxpayers for whom B prepared an

income tax return in previous years andwho have not specifically informed B thatthey do not wish to be contacted by B orwill not be using B’s income tax returnpreparation services in the upcoming filingseason.

Tax Return Preparer C engagesThird-party Service Provider X to pub-lish both paper and electronic monthlynewsletters containing educational tax in-formation, tax tips, tax law updates, anddirect solicitation for C’s tax return prepa-ration business. C discloses to X the namesand mailing addresses of taxpayers whosetax returns C has prepared or processedwho have not provided C with an emailaddress, and X prints those addresses ontothe paper newsletters it publishes for C. Xprovides C with the completed newslet-ters in paper and electronic format, andC then distributes them to C’s tax returnpreparation clients, using a list that con-tains the tax return information authorizedby § 301.7216–2(n), including taxpayernames, addresses and e-mail addresses.

Tax Return Preparer D has in the pastperiodically published and delivered to D’stax return preparation clients newsletterscontaining general educational tax infor-mation, tax tips, tax law updates, and di-rect solicitations for D’s tax return prepa-ration business. Due to growth experi-enced by D’s tax return preparation busi-ness, D begins to outsource all aspectsof this client communication activity toThird-party Service Provider X so that Dmay focus primarily on the business of taxreturn preparation. D discloses to X taxreturn information consisting solely of thenames, addresses, and e-mail addresses oftaxpayers whose income tax returns D hasprepared or processed, and X then createsand distributes the newsletters to these tax-payers as directed by D.

Twice a month Tax Return Preparer Epublishes her own newsletter containinggeneral educational tax information, taxtips, tax law updates, and direct solicita-tions of E’s tax return preparation business.After publication, E sends the newslettersto Third-Party Service Provider X, and Xthen distributes the newsletters to taxpay-ers whose income tax returns E has pre-pared or processed, as instructed by E. Toallow X to distribute the newsletters, Eprovides X with the names, addresses, ande-mail addresses of E’s tax return prepara-tion clients.

2010–4 I.R.B. 310 January 25, 2010

Tax Return Preparers C, D, and E eachhave procedures in place that are consis-tent with good business practices and de-signed to maintain the confidentiality ofthe disclosed tax return information, andby following these procedures each con-cludes that X has sufficient data confiden-tiality procedures in place to protect thedisclosed tax return information.

Third-party Service Provider X, locatedin the United States, is in the businessof creating, publishing, and distributingnewsletters, bulletins, advertisements,and similar communications. X does notprovide substantive determinations or ad-vice affecting the tax liability reportedby taxpayers. X provides its services totax professionals, including income taxreturn preparers. X creates, customizes,prints, and publishes newsletters contain-ing general educational tax law updates ithas aggregated from various sources, in-formation on general filing requirements,general educational business or economicinformation and analysis, and tax com-pliance tips. X may also include in thesecommunications any specific updates orsolicitations submitted by its tax profes-sional clients. X will also distribute thesecommunications to taxpayers by mail ore-mail as directed by its clients.

LAW

Section 7216(a) establishes a criminalpenalty that is applicable to tax return pre-parers who knowingly or recklessly dis-close or use any information furnished tothem for, or in connection with, the prepa-ration of income tax returns for any pur-pose other than to prepare, or assist inpreparing, any such returns.

Section 7216(b)(3) establishes an ex-ception to the penalty for disclosures oruses of information which are permitted byregulations prescribed by the Secretary.

Section 6713(a) establishes a civilpenalty that is applicable to tax return pre-parers who disclose or use any informationfurnished to them for, or in connectionwith, the preparation of tax returns for anypurpose other than to prepare, or assist inpreparing, any such returns.

Section 6713(b) provides that the rulesof section 7216(b) shall apply for purposesof section 6713.

Section 301.7216–1(a) states that sec-tion 7216 imposes a criminal penalty for

tax return preparers who “knowingly orrecklessly disclose or use tax return infor-mation for a purpose other than preparinga tax return.”

Section 301.7216–1(b)(1) defines “taxreturn” as any return, or amended return,of income tax imposed by chapter 1 of theInternal Revenue Code.

Section 301.7216–1(b)(2)(i)(B) defines“tax return preparer” for purposes of sec-tion 7216 and the regulations thereunderas including “[a]ny person who is engagedin the business of providing auxiliary ser-vices in connection with the preparation oftax returns....”

Section 301.7216–1(b)(2)(iii) providesthat a person is engaged in the business ofproviding auxiliary services in connectionwith the preparation of tax returns if, in thecourse of the person’s business, the personholds himself out to tax return preparersor to taxpayers as a person who performsauxiliary services, whether or not provid-ing the auxiliary services is the person’ssole business activity and whether or notthe person charges a fee for the auxiliaryservices.

Section 301.7216–1(b)(3)(i) generallydefines tax return information to mean“any information, including, but not lim-ited to, a taxpayer’s name, address, oridentifying number, which is furnished inany form or manner for, or in connectionwith, the preparation of a tax return of thetaxpayer.”

Section 301.7216–2(d)(1) provides thata tax return preparer may disclose, with-out taxpayer consent, tax return informa-tion of a taxpayer to another tax return pre-parer located in the United States for thepurpose of obtaining auxiliary services inconnection with the preparation of any taxreturn, so long as the services provided arenot substantive determinations or adviceaffecting the tax liability reported by tax-payers.

Section 301.7216–2(h)(1)(i) allows atax return preparer who is lawfully en-gaged in the practice of law or accountancyto use tax return information for purposesof providing other legal or accountingservices to the taxpayer consistent withapplicable legal and ethical responsibili-ties.

Section 301.7216–2(n) allows a tax re-turn preparer to compile and maintain aseparate list containing certain informationregarding taxpayers whose tax returns the

tax return preparer has prepared or pro-cessed. This list may be used by the com-piler solely to contact the taxpayers onthe list for the purpose of providing taxinformation and general business or eco-nomic information or analysis for educa-tional purposes, or soliciting additional taxreturn preparation services to such tax-payers. The list may not be used to so-licit non-tax return preparation services tothese taxpayers.

ANALYSIS

Issue 1. A change in the tax law thataffects previously filed tax returns may re-quire a tax return preparer to review tax-payer clients’ income tax return informa-tion to determine which of those clientsmay be affected by the change. Taxpay-ers who engage a tax return preparer canreasonably expect that their tax return pre-parer will advise them regarding a changein tax law that affects them and whetherthe change supports the filing of amendedreturns or other actions by the taxpayer re-lated to any affected returns. A tax re-turn preparer who performs this type of re-view in response to a change in tax law willcontact the affected taxpayers to advise thetaxpayers about the change in tax law andon a course of action to be taken, and canuse a variety of mechanisms to do so (in-cluding direct contact, newsletters, e-mail,and other forms of communication).

Section 7216 does not prohibit the useof tax return information when the use isfor the purpose of preparing a “tax re-turn,” which is defined as “any return (oramended return) of income tax imposed bychapter 1 of the Internal Revenue Code.”Section 301.7216–1(b)(1) specifically in-cludes amended returns in the definitionof tax return. Accordingly, A’s use ofclient tax return information to identifyaffected taxpayers, inform them regard-ing the change in tax law, advise whetherit would be appropriate for them to fileamended income tax returns, and assist inthe preparation and filing of any amendedreturns is permitted under section 7216,because those uses are for the purpose ofpreparing a tax return as defined in the reg-ulations.

Issue 2. Section 301.7216–2(h)(1)(i) al-lows a tax return preparer who is lawfullyengaged in the practice of law or accoun-tancy to use tax return information “for

January 25, 2010 311 2010–4 I.R.B.

the purpose of providing other legal or ac-counting services to the taxpayer,” consis-tent with applicable legal and ethical re-sponsibilities. “Other legal or accountingservices” that are consistent with applica-ble legal or ethical responsibilities can in-clude advice related to current and futureincome tax compliance. Taxpayers whoengage a tax return preparer lawfully en-gaged in the practice of law or accoun-tancy can reasonably expect that the taxreturn preparer will advise them regardingchanges in tax rules and regulations thatmight affect a tax return being prepared orfuture income tax return filing obligations.

Accordingly, B, who is lawfully en-gaged in the practice of accountancy, mayuse tax return information of taxpayerswhose tax returns B has prepared or pro-cessed, regardless of whether B preparedor processed the most recent tax returnsfor a taxpayer, to determine whether thetaxpayers may be affected by the tempo-rary regulations issued by the Internal Rev-enue Service, and to contact the potentiallyaffected taxpayers in order to explain theregulations and to advise them regardingtheir response to the regulations. B’s useof tax return information is permitted by§ 301.7216–2(h)(1)(i) because it is for thepurpose of providing other accounting ser-vices to taxpayers. B does not, however,use the tax return information of those tax-payers who have specifically informed Bthat they do not wish to be contacted by Bor will not be using B’s income tax prepa-ration services in the upcoming filing sea-son.

Issue 3. Third-party service providersthat create, publish, or distribute tax-fo-cused newsletters, bulletins, or similarpublication or communication servicestypically hold themselves out to tax re-turn preparers and other tax professionalsas persons who perform services that areauxiliary to tax return preparation. Theseservice providers also may monitor cur-rent tax events and have access to a broadrange of knowledgeable tax and businessprofessionals; they are able to providecurrent and relevant information to a taxreturn preparer’s clients while allowingthe tax return preparer to focus on thebusiness of tax return preparation.

X holds itself out as providing servicesthat are auxiliary to tax return prepara-tion. X’s services are provided in connec-tion with the preparation of tax returns by

C, D, and E because the services are in-tended to offer additional tax informationand tax preparation services to the prepar-ers’ clients. Section 301.7216–2(n) specif-ically allows a tax return preparer to of-fer such information and additional ser-vices to clients. Because it provides ser-vices in connection with the preparation oftax returns by C, D, and E, and becauseC, D, and E have procedures in place thatare consistent with good business prac-tices and designed to maintain the confi-dentiality of the disclosed tax return in-formation and, by following these proce-dures, they concluded that X has sufficientdata confidentiality procedures in place,X qualifies as both an auxiliary serviceprovider and a tax return preparer under§ 301.7216–1(b)(2)(i)(B).

C, D, and E may disclose to an aux-iliary service provider, without taxpayerconsent, tax return information to the ex-tent necessary to obtain auxiliary servicesin connection with the preparation of anytax return under § 301.7216–2(d)(1), pro-vided the service provider is located inthe United States and the services pro-vided are not substantive determinations oradvice affecting the tax liability reportedby taxpayers. X is located in the UnitedStates and does not provide substantivedeterminations or advice affecting the taxliability reported by taxpayers. As di-rected by C, D, and E, X may use thenames and mailing or e-mail addresses dis-closed to it to contact the taxpayers forthe purpose of creating, publishing, or dis-tributing newsletters, or similar bulletinsor communications, containing tax infor-mation and general business or economicinformation and analysis for educationalpurposes. The newsletters may include taxlaw developments, information on filingrequirements, and tax compliance tips, to-gether with solicitations for additional taxreturn preparation services by C, D, or E,under § 301.7216–2(n). The disclosureto X does not constitute a transfer under§ 301.7216–2(n) but rather a disclosure toan auxiliary service provider pursuant to§ 301.7216–2(d)(1). X, however, is pro-hibited from the further use or disclosureof the tax return information provided toit by C, D, and E for purposes other thanthose related to the provision of the auxil-iary services provided to C, D and E or asotherwise expressly permitted under sec-tions 7216 and 6713.

HOLDINGS

(1) Tax Return Preparer A is not liablefor penalties under sections 7216 and 6713when A uses tax return information to con-tact taxpayer to inform them of a change intax law that could affect the income tax li-ability on the taxpayers’ returns that werepreviously prepared or processed by A.

(2) Tax Return Preparer B, who is law-fully engaged in the practice of accoun-tancy, is not liable for penalties under sec-tions 7216 and 6713 when B uses tax returninformation of taxpayers whose tax returnsB has prepared or processed to determinewho might be affected by the temporaryregulation and to contact the potentially af-fected taxpayers for whom B reasonablyexpects to provide accounting services inthe next year to notify them of the changedregulation, explain how the change may af-fect them, and advise them with regard toactions they may take in response to thechange.

(3) Tax Return Preparers C, D, and Eare not liable for penalties under sections7216 and 6713 when they disclose tax re-turn information limited to the informa-tion listed in § 301.7216–2(n) to Third-party Service Provider X, which holds it-self out as providing services that includecreation, publication, and distribution ofnewsletters, bulletins, or similar commu-nications to taxpayers whose tax returnsthe tax return preparers have prepared orprocessed containing tax information andgeneral business and economic informa-tion or analysis for educational purposes orfor purposes of soliciting additional tax re-turn preparation services for the tax returnpreparer.

DRAFTING INFORMATION

The principal author of this revenueruling is Molly K. Donnelly of the Officeof Associate Chief Counsel (Procedure& Administration). For further informa-tion regarding this revenue ruling, contactMs. Donnelly at (202) 622–4940 (not atoll-free call).

Section 7216—Disclosure or use ofinformation by preparers of returns.This ruling provides guidance on whethera tax return preparer is liable for criminaland civil penalties under sections 7216

2010–4 I.R.B. 312 January 25, 2010

and 6713 of the Code when the tax re-turn preparer discloses or uses tax returninformation under certain circumstancesin connection with professional liabilityinsurance.

Rev. Rul. 2010–5

PURPOSE

This revenue ruling provides guidanceon whether a tax return preparer is liablefor criminal and civil penalties under In-ternal Revenue Code sections 7216 and6713 when the preparer discloses tax re-turn information under the circumstancesdescribed below.

ISSUES

(1) Is a tax return preparer liable forpenalties under sections 7216 and 6713when the preparer discloses to a profes-sional liability insurance carrier tax returninformation required by the insurance car-rier to obtain or maintain professional lia-bility insurance coverage?

(2) Is a tax return preparer liable forpenalties under sections 7216 and 6713when the preparer discloses to the pre-parer’s professional liability insurance car-rier tax return information required by theinsurance carrier to promptly and accu-rately report a claim or a potential claimagainst the tax return preparer, or to aidin the investigation of a claim or potentialclaim against the tax return preparer?

(3) Is a tax return preparer liable forpenalties under sections 7216 and 6713when the preparer discloses tax return in-formation to the preparer’s professional li-ability insurance carrier in order to securelegal representation under the terms of theinsurance policy or to an unrelated attor-ney for the purpose of evaluating a claim orpotential claim against the tax return pre-parer?

FACTS

Tax Return Preparer A prepared in-come tax returns during the 2009 filingseason and expects to prepare income taxreturns in the 2010 filing season. During2010, A expects to disclose to insuranceagents or other insurance company repre-sentatives tax return information requiredto obtain or maintain professional liability

insurance coverage, including informationnecessary to obtain price quotes from theinsurance companies. The disclosed in-formation would include a list of clientnames and descriptions of the services Aprovided to those clients. A also expectsto disclose to its professional liabilityinsurance carrier tax return informationrequired by the terms of the insurancepolicy to promptly and accurately report,and to aid in the investigation of, a claimor potential claim against A, includingclient names, descriptions of services Aprovided to the named clients, a descrip-tion of the claim or potential claim ofprofessional negligence, misconduct, orfraud, and, when necessary, copies of taxreturns relevant to the claim or potentialclaim. Finally, A expects to disclose to itsprofessional liability insurance carrier taxreturn information required by the termsof the insurance policy to obtain legalrepresentation provided by the insurancecarrier under the terms of the insurancepolicy related to a claim or potential claimof professional negligence, misconduct, orfraud, or to an unrelated attorney for thepurpose of evaluating a claim or potentialclaim of professional negligence, miscon-duct, or fraud.

All of the professional liability insur-ance carriers contacted by A, includingtheir agents and representatives, are lo-cated within the United States or its territo-ries or possessions, and all hold themselvesout as providing professional liability in-surance with respect to potential claimsarising in connection with the preparationof tax returns. None of the insurance carri-ers provide substantive determinations oradvice affecting the tax liability reportedby taxpayers or the preparation of tax re-turns. The professional liability insurancecarrier that issued the policy purchased byA is one these insurance carriers.

LAW

Section 7216(a) establishes a criminalpenalty that is applicable to tax return pre-parers who knowingly or recklessly dis-close or use any information furnished tothem for, or in connection with, the prepa-ration of tax returns for any purpose otherthan to prepare, or assist in preparing, anysuch returns.

Section 7216(b)(3) establishes an ex-ception to the penalty for disclosures or

uses of information which are permitted byregulations prescribed by the Secretary.

Section 6713(a) establishes a civilpenalty that is applicable to tax return pre-parers who disclose or use any informationfurnished to them for, or in connectionwith, the preparation of tax returns for anypurpose other than to prepare, or assist inpreparing, any such returns.

Section 6713(b) provides that the rulesof section 7216(b) shall apply for purposesof section 6713.

Section 301.7216–1(a) states that sec-tion 7216 imposes a criminal penalty fortax return preparers who “knowingly orrecklessly disclose or use tax return infor-mation for a purpose other than preparinga tax return.”

Section 301.7216–1(b)(2)(i)(B) defines“tax return preparer” for purposes of sec-tion 7216 and the regulations thereunderas including “[a]ny person who is engagedin the business of providing auxiliary ser-vices in connection with the preparation oftax returns....”

Section 301.7216–1(b)(2)(iii) providesthat a person is engaged in the business ofproviding auxiliary services in connectionwith the preparation of tax returns if, in thecourse of the person’s business, the personholds himself out to tax return preparersor to taxpayers as a person who performsauxiliary services, whether or not provid-ing the auxiliary services is the person’ssole business activity and whether or notthe person charges a fee for the auxiliaryservices.

Section 301.7216–2(d)(1) provides thata tax return preparer may disclose, with-out taxpayer consent, tax return informa-tion of a taxpayer to another tax return pre-parer located in the United States for thepurpose of obtaining auxiliary services inconnection with the preparation of any taxreturn, so long as the services provided arenot substantive determinations or adviceaffecting the tax liability reported by tax-payers.

Section 301.7216–2(g) provides that atax return preparer may disclose, withouttaxpayer consent, tax return informationto an attorney for the purpose of securinglegal advice.

ANALYSIS

Issue 1. Obtaining and MaintainingProfessional Liability Insurance.

January 25, 2010 313 2010–4 I.R.B.

Insurance companies offer professionalliability coverage to tax return preparersto insure against potential claims arisingfrom the tax return preparers’ negligence,misconduct, or fraud in connection withthe preparation or processing of tax re-turns. A tax return preparer may obtainprofessional liability insurance coveragein order to protect itself from such claimsof negligence, misconduct, or fraud. Aprofessional liability insurance carrierprovides auxiliary services in connectionwith the preparation of tax returns becauseit provides liability coverage for claimsor potential claims that relate directly tothe tax returns prepared or processed bythe tax return preparers it insures. In thecourse of obtaining professional liabilityinsurance, various insurance companiesmay routinely offer, and tax return pre-parers may routinely receive, price quotesfor such coverage in the ordinary courseof their tax return preparation businesses.The tax return information required to bedisclosed to an insurance provider in orderto obtain and maintain insurance coverage(including obtaining a price quote) mightinclude a list of client names and descrip-tions of the services provided to thoseclients by the tax return preparer.

The professional liability insurance pol-icy purchased by A is an auxiliary serviceprovided in connection with the prepara-tion of tax returns, and the insurance car-riers are tax return preparers within themeaning of § 301.7216–1(b)(2)(i)(B) and(iii). Under § 301.7216–2(d)(1), A maydisclose to these insurance carriers, with-out taxpayer consent, the tax return in-formation required to obtain and maintainthe auxiliary services provided by the in-surance carriers, including the informationnecessary to obtain price quotes from var-ious professional liability insurance carri-ers. Disclosure by a tax return preparer oftax return information beyond that neces-sary to obtain or maintain insurance cover-age would constitute a violation of sections7216 and 6713 and would result in the taxreturn preparer’s liability for penalties un-der those sections. The insurance carrierswho receive a list of client names or anyother tax return information from A areprohibited from the further use or disclo-sure of the tax return information for pur-poses other than those related to the pro-vision of the auxiliary services to A or as

otherwise expressly permitted under sec-tions 7216 and 6713.

Issue 2. Reporting and InvestigatingClaims.

Services provided by a professional li-ability insurance carrier include investiga-tion and management of claims or poten-tial claims arising in connection with thepreparation of tax returns by the coveredtax return preparer. In order to requestcoverage for a claim or potential claim, atax return preparer is required to promptlyand accurately report claims or potentialclaims to its professional liability insur-ance carrier. In order to properly evalu-ate all claims or potential claims, aid inclaim investigation and management, andprocess the payment of valid claims, a pro-fessional liability insurance carrier may re-quire the tax return preparer to disclose ad-ditional information, such as client names,descriptions of the services provided to thenamed clients containing tax return infor-mation, tax return information describingthe circumstances of the claim or poten-tial claim, and copies of tax returns rele-vant to a claim or potential claim. Disclo-sure of tax return information in connec-tion with these communications is requiredto allow A to obtain the auxiliary servicesprovided by its professional liability insur-ance carrier, and is permitted without tax-payer consent under § 301.7216–2(d)(1),provided the information is necessary inorder to obtain those services. Disclosureby a tax return preparer of tax return infor-mation beyond that necessary to obtain theauxiliary services would constitute a viola-tion of sections 7216 and 6713 and wouldresult in the tax return preparer’s liabilityfor penalties under those sections.

Issue 3. Obtaining Legal Advice orRepresentation.

A typical benefit provided to a tax re-turn preparer by the terms of a professionalliability insurance policy issued in connec-tion with the preparation of tax returns in-cludes the selection and engagement, bythe insurance carrier, of an attorney to rep-resent the preparer during the pendency ofa claim investigation or litigation relatedto a claim, with the cost of the attorneypaid for by the insurance carrier. When Aseeks to have the professional liability in-surance carrier provide this legal represen-tation under the terms of the professionalliability insurance policy, A does so for thepurpose of obtaining auxiliary services in

connection with the preparation of a tax re-turn and may disclose relevant tax returninformation, without taxpayer consent, tothe insurance carrier as an auxiliary ser-vices provider under § 301.7216–2(d)(1).Disclosure by a tax return preparer of taxreturn information beyond the scope of thelegal representation constitutes a violationof sections 7216 and 6713 and would re-sult in the tax return preparer’s liabilityfor penalties under those sections. Afterthe professional liability insurance carrierselects an attorney to represent A in re-lation to the claim or potential claim, Amay disclose to that attorney tax return in-formation related to the claim or poten-tial claim without taxpayer consent under§ 301.7216–2(g)(1).

When a tax return preparer seeks le-gal advice or representation in relation toany claim or potential claim of negligence,misconduct, or fraud from an attorney whois not a representative of the professionalliability insurance carrier, the tax returnpreparer may disclose tax return informa-tion to that attorney without taxpayer con-sent under § 301.7216–2(g)(1).

HOLDINGS

(1) Tax Return Preparer A is not liablefor penalties under sections 7216 and 6713when A discloses to a professional liabil-ity insurance carrier tax return informationrequired by the insurance carrier to obtainor maintain professional liability insurancecoverage, including obtaining price quotesfor such insurance coverage.

(2) Tax Return Preparer A is not liablefor penalties under sections 7216 and 6713when A discloses to A’s professional lia-bility insurance carrier tax return informa-tion relevant to a claim or potential claimof professional negligence, misconduct, orfraud that is required by the insurance car-rier to promptly and accurately report theclaim or potential claim against A or to aidin the investigation of that claim or poten-tial claim.

(3) Tax Return Preparer A is not liablefor penalties under sections 7216 and 6713when A discloses to its professional liabil-ity insurance carrier tax return informationrequired by the insurance carrier in orderto secure legal representation relating to aprofessional liability claim, or tax returninformation relevant to a claim or poten-tial claim of professional negligence, mis-

2010–4 I.R.B. 314 January 25, 2010

conduct, or fraud to the attorney selectedby the insurance carrier or to an unrelatedattorney for the purpose of evaluating aclaim or potential claim against A.

DRAFTING INFORMATION

The principal author of this revenueruling is Molly K. Donnelly of the Officeof Associate Chief Counsel (Procedure& Administration). For further informa-tion regarding this revenue ruling, contactMs. Donnelly at (202) 622–4940 (not atoll-free call).

26 CFR 301.7216–2: Permissible disclosures or useswithout consent of the taxpayer.

T.D. 9478

DEPARTMENT OF TREASURYInternal Revenue Service26 CFR Part 301

Amendments to the Section7216 Regulations—Disclosureor Use of Information byPreparers of Returns

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document contains fi-nal and temporary regulations that providerules relating to the disclosure and use oftax return information by tax return pre-parers. These regulations provide updatedguidance affecting tax return preparersregarding the use of information relatedto lists for solicitation of tax return busi-ness; the disclosure or use of statisticalcompilations of data under section 7216of the Internal Revenue Code (Code) bya tax return preparer in connection with,or in support of, a tax return preparer’stax return preparation business, includingidentification of additional limited cir-cumstances when a tax return preparerwho compiles statistical information maydisclose the compilation without taxpayerconsent, and the placement of additionalrestrictions on the content of the compi-lation that may be disclosed under those

circumstances without taxpayer consent;and the disclosure or use of informationfor the purpose of performing conflictreviews. The text of these temporaryregulations also serves as the text of theproposed regulations (REG–131028–09)set forth in the notice of proposed rule-making on this subject in this issue of theBulletin.

DATES: Effective Date: These regulationsare effective on January 4, 2010.

Applicability Date: For date of applica-bility, see §301.7216–2T(s).

FOR FURTHER INFORMATIONCONTACT: Molly K. Donnelly, (202)622–4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends 26 CFR part301 to provide modified rules relatingto the ability of a tax return preparer touse tax return information for the pur-poses of compiling, maintaining and usinglists for solicitation of tax return busi-ness under §301.7216–2(n), disclose anduse statistical compilations of data de-scribed in §301.7216–1(b)(3)(i)(B) under§301.7216–2(o), and disclose and usetax return information for the purposeof performing conflict reviews under§301.7216–2(p), without taxpayer con-sent. These three paragraphs are beingmodified to expand the ability of tax returnpreparers to disclose or use certain limitedtax return information under specific andlimited circumstances in a manner thatis expected to benefit taxpayers, tax re-turn preparers, and the general public, asmore fully described in the Explanationof Provisions section of this preamble.One set of these modifications, those to§301.7216–2(o), is being made followingthe issuance of Notice 2009–13 and thereceipt of comments submitted in responseto that notice, while the modificationsto the other two paragraphs are beingmade as a result of the Treasury Depart-ment’s and the IRS’s efforts to regularlyreview the effect of the recently issuedfinal regulations on taxpayers and tax re-turn preparers. In the accompanying andcross-referenced notice of proposed rule-making, the Treasury Department and the

IRS request comments on the proposedrules from all interested parties.

On January 7, 2008, the TreasuryDepartment and the IRS issued fi-nal regulations under section 7216(T.D. 9375, 2008–1 C.B. 344) (73FR 1058) applicable to disclosures oruses of tax return information occur-ring on or after January 1, 2009. Thefinal regulations replaced previouslyissued final regulations that remainedapplicable to disclosures or uses of taxreturn information occurring prior toJanuary 1, 2009. The final regulationsincluded §301.7216–1(b)(3)(i)(B)which, for disclosures and uses oftax return information occurring onor after January 1, 2009, providesthat tax return information includesstatistical compilations of tax returninformation. The final regulationsincluded §301.7216–2(n), which providesthat tax return preparers may use,without taxpayer consent, certainlimited taxpayer contact informationconstituting tax return information forthe purposes of compiling, maintaining,and using lists for the solicitationof tax return business, incorporatingits predecessor, §301.7216–2(m), butproviding a minor expansion of the contactinformation allowed to be used. Thefinal regulations included the addition ofnew §301.7216–2(o), which describes thelimited circumstances when a tax returnpreparer may use tax return informationto produce statistical compilations, andwhen the preparer may use or disclose theproduced statistical compilation withoutwritten consent. The final regulationsincluded §301.7216–2(p), which providesthat tax return preparers may discloseand use tax return information withouttaxpayer consent in the performance ofquality or peer reviews, incorporating itspredecessor, §301.7216–2(o), with onlyminor, non-technical adjustments.

The Treasury Department and the IRSsubsequently issued Notice 2009–13,2009–6 I.R.B. 447 (February 9, 2009),(see §601(d)(2)(ii)(b)), to provide interimguidance relating to the ability of a taxreturn preparer to disclose and use sta-tistical compilations of anonymous taxreturn information in support of a taxreturn preparer’s tax return preparationbusiness. The notice provides guidanceon the tax return information a tax return

January 25, 2010 315 2010–4 I.R.B.

preparer may use to compile anonymousstatistical information, and on the circum-stances when the tax return preparer maydisclose the anonymous statistical infor-mation without taxpayer consent. Notice2009–13 sets forth rules to be appliedby the Treasury Department and the IRSduring 2009 while they consider whetherthe interim guidance should be adoptedby regulations or further modified, takinginto account public comments submittedin response to the notice.

Written comments were received in re-sponse to the notice. All comments wereconsidered and are available for publicinspection upon request. This preamblesummarizes the responsive comments re-ceived by the Treasury Department andthe IRS.

These temporary regulations mod-ify the rules under §§301.7216–2(n),301.7216–2(o), and 301.7216–2(p), andsupersede the interim guidance providedby Notice 2009–13.

Summary of Comments in Response toNotice 2009–13

1. Purpose and use.

One commentator recommended thatthe regulations specifically provide thatall tax preparation firms may use tax re-turn information to connect taxpayers tofree government programs and services,provided they have obtained the consentof their clients. This comment was notadopted. Under the regulations in force,this use would be permitted because thetax return preparer obtained the consentof its clients. Consents must conform tothe requirements of §301.7216–3 of theregulations and any other guidance issuedpursuant to §301.7216–3.

2. Disclosure requirements.

Several commentators recommendedthat the prohibition on disclosing cellscontaining data from fewer than 25 taxreturns be eliminated as long as the data isanonymous and free of all taxpayer-iden-tifying information. Some commentatorsrecommended that return preparers be ableto disclose, without consent, all aggregatedata that is stripped of personal identi-fying information, noting that volunteertax preparation programs utilize aggre-gate data to demonstrate and track the tax

preparation and financial service needsof their clients. Additional commentatorsrecommended that the 25 tax return thresh-old be modified to allow for the disclosureof cells containing data from ten or moretax returns. These commentators indicatedthat removal of all taxpayer-identifyinginformation provides sufficient taxpayerprotection and implied that it may not befeasible for tax return preparers who oper-ate small tax return preparation businessesto always produce a statistical compilationthat meets the 25 tax return threshold.These recommendations were adopted inpart, and the temporary regulations nowpermit the disclosure of cells containingdata from ten or more tax returns.

3. Research and public policy discussions.

One commentator recommended that,for purposes of the guidance, the term “taxreturn preparation business” should in-clude “bona fide research or public policydiscussions (i) concerning state or federaltaxation or (ii) utilizing data acquired dur-ing the tax return preparation process.”The commentator was concerned thatthe interim guidance would inhibit taxreturn preparers from cooperating withscholars or sharing anonymous data withbona fide academic researchers studyingconsumer financial behavior because thistopic arguably might not be viewed assupporting a tax return preparation busi-ness. This comment was considered andthe temporary regulations now clarify thata tax return preparer is allowed to disclosean anonymous statistical compilation forbona fide research or public policy discus-sions concerning state or federal taxationor requiring data acquired during the taxreturn preparation process.

One commentator stated that govern-ment agencies’ presentation of aggre-gated refund data and other statisticalcompilations in press releases, public pre-sentations, reports, Web sites, or otherelectronic communications should au-tomatically fall within the meaning ofbona fide research and public policy dis-cussions. This recommendation was notadopted because it would not be appropri-ate in this context to create particularizedrules for government agencies, and inclu-sion of this specific circumstance in theexception might require the creation of anexhaustive list of the circumstances that

would be considered bona fide researchor public policy discussions. Instead,tax return preparers must determine on acase-by-case basis whether a disclosure isin support of bona fide research or publicpolicy discussions.

4. Sale of a statistical compilation.

One commentator recommended thatthe regulations should allow for the dis-closure of a statistical compilation inconjunction with the sale or dispositionof a tax return preparation business onlywhen the entire tax return preparationbusiness is being sold or disposed. Thisrecommendation was not adopted becausecircumstances can exist when a tax returnpreparer may in good faith sell or disposeof less than the preparer’s entire tax returnpreparation business.

Explanation of Provisions

1. §301.7216–2(n).

The Treasury Department and the IRSare amending the regulations under sec-tion 7216 to provide a limited expansion ofthe information tax return preparers may,without taxpayer consent, use and includein lists for solicitation of tax return busi-ness pursuant to §301.7216–2(n). The reg-ulations also clarify that lists for solici-tation of tax return business may not beused to solicit non-tax return preparationservices. Finally, the regulations clarifythe meanings of the phrases “tax informa-tion” and “in conjunction with the sale orother disposition of the compiler’s tax re-turn business” for purposes of the excep-tion provided by §301.7216–2(n).

The current regulations allow a tax re-turn preparer to compile and maintain alist for solicitation of tax return businessconsisting solely of the names, addresses,e-mail addresses, and phone numbers oftaxpayers whose tax returns the preparerhas prepared or processed. The currentregulations allow a tax return preparer touse this list to contact the taxpayers onthe list to offer “tax information or ad-ditional tax return preparation services tosuch taxpayers,” and limit the transfer ofthe list to transfers occurring “in conjunc-tion with the sale or other disposition ofthe compiler’s tax return preparation busi-ness.” Section 301.7216–2(n) in its current

2010–4 I.R.B. 316 January 25, 2010

form is identical to its form in prior ver-sions of the regulations, with the excep-tion that an additional type of information,e-mail addresses, was added to the shortlist of information allowed to be includedin §301.7216–2(n) lists.

Upon further consideration, the Trea-sury Department and the IRS conclude that§301.7216–2(n) should be amended, in theform of temporary regulations, to provideadditional flexibility to tax return prepar-ers and benefits to taxpayers without com-promising the rights of taxpayers to con-trol the use or disclosure of their tax re-turn information. These regulations ex-pand the information that may be com-piled and maintained in a list for solicita-tion of tax return business to include thetaxpayer entity classification or type, in-cluding individual status, and taxpayer in-come tax return form number (for exam-ple, Form 1040, “U.S. Individual IncomeTax Return”, or Form 1120, “U.S. Corpo-ration Income Tax Return”). Determin-ing the information that may be used toprovide targeted newsletters and market-ing under §301.7216–2(n) requires balanc-ing the benefits from taxpayers receivingthe tax information most relevant to themagainst the ability of taxpayers to con-trol the use of their tax return information.The Treasury Department and the IRS con-clude that the current amendments madeto §301.7216–2(n) strike the proper cur-rent balance between these competing in-terests, but also recognize that future infor-mation and needs may require permittingadditional information to be included inthe list maintained under §301.7216–2(n).Accordingly, the regulations are amendedto allow the IRS to identify additional in-formation that may be included in the listby issuing guidance to be published in theInternal Revenue Bulletin.

These regulations clarify the phrase“tax information” by replacing that phrasewith the phrase “tax information and gen-eral business or economic information oranalysis for educational purposes.” It iscontemplated that tax information includesexplanations of current developments intax law. The regulations also clarify that alist for solicitation of tax return businessmay not be used to solicit non-tax returnpreparation services.

The additions to the tax return infor-mation allowed to be compiled and main-tained in §301.7216–2(n) lists, along with

the clarification of the phrase “tax infor-mation,” will provide additional flexibilityto tax return preparers permitting them tomore efficiently and effectively furnishrelevant tax information and lawful solic-itations to their taxpayer clients, and willbenefit taxpayers by helping ensure thatthe taxpayers receive only information thatmay be useful to them and that specificallyaddresses tax issues relevant to them, thusimproving taxpayer education and aware-ness and reducing the amount of needlessinformation being received by taxpayers.By expressly prohibiting the use of theselists to solicit non-tax return preparationservices, the regulation makes clear thatthe exception provided by §301.7216–2(n)is limited to solicitations of tax returnpreparation services only. The phrase “inconjunction with the sale or other dispo-sition of the compiler’s tax return prepa-ration business” is clarified to include duediligence performed in contemplation ofa sale or other disposition of a tax returnpreparation business. The regulations alsoclarify that tax return information madeavailable to a potential purchaser for duediligence purposes constitutes a disclosureof that information and not a transfer ofthat information.

The Treasury Department and the IRShave also amended the regulations to clar-ify that a person who is a tax return pre-parer solely because he provides auxiliaryservices to another tax return preparer maynot use the tax return information he re-ceives from such other tax return preparerto compile and maintain for his own usea list of taxpayers under §301.7216–2(n).For example, a software company could insome cases market tax return preparationsoftware to taxpayers directly and to taxreturn preparers. In connection with aux-iliary services provided to tax return pre-parers, the software provider may receiveinformation regarding the taxpayer clientsof the tax return preparers. In such cir-cumstances, the software provider couldnot use the tax return information it re-ceived from tax return preparers in the per-formance of auxiliary services to compilea list under §301.7216–2(n) to market itssoftware directly to the clients of the taxreturn preparers.

In light of these considerations,the Treasury Department and the IRS,pursuant to these regulations, amend§301.7216–2(n) of the final regulations

published on January 7, 2008, as describedin this preamble.

2. §301.7216–2(o).

The Treasury Department and the IRSare amending the regulations under section7216 to provide additional exceptions tothe general rule that a tax return preparermay not disclose or use statistical compi-lations of tax return information withouttaxpayer consent. Section 301.7216–2(o)currently prohibits the disclosure of statis-tical compilations unless the disclosure ismade in order to comply with financial ac-counting or regulatory reporting require-ments or occurs in conjunction with thesale or other disposition of the compiler’stax return preparation business; therefore,under the current regulations, tax returnpreparers may not disclose statistical com-pilations for other purposes that may pro-vide benefits to taxpayers generally or tothe public as a whole.

Responding to public comments re-ceived in response to Notice 2009–13,the Treasury Department and the IRSconclude that §301.7216–2(o) should beamended, in the form of temporary reg-ulations, to allow a tax return preparerto disclose statistical compilations of taxreturn information without taxpayer con-sent for additional limited purposes, withcertain additional requirements.

While taxpayer consent regarding dis-closure or use is a primary focus of thesection 7216 regulations, the flexibility re-sulting from these temporary regulationswill enable tax return preparers to discloseanonymous data for limited purposes thatmay provide benefit to both taxpayers ingeneral and the public at large. Anony-mous statistical data disclosed within theconstraints provided by these temporaryregulations can be used by tax return pre-parers for marketing purposes and to as-sist taxpayers in making informed choicesabout tax return preparers. The availabilityof anonymous statistical data can be usefulfrom a public policy perspective, as the useand availability of such data can assist law-makers, academics, non-profits, and otheragencies in the facilitation of sound taxpolicy analysis and decisions. In addition,volunteer tax return preparers who providefree tax return preparation services to low-and moderate-income taxpayers and fami-lies would be able to demonstrate the im-

January 25, 2010 317 2010–4 I.R.B.

pact of their efforts in order to obtain andadminister funding necessary for their con-tinued operation.

One concern that has been expressed re-garding the disclosure of statistical compi-lations of tax return information by tax re-turn preparers is that incentives will be cre-ated that encourage maximization of cred-its or refunds at the expense of tax re-turn accuracy. To address this concern,while the amendment provides additionallimited exceptions to the requirement thattaxpayer consent be obtained in order todisclose or use tax return information, thetemporary regulations prohibit, in the con-text of marketing or advertising, the use ordisclosure of statistical compilations, or apart thereof, that identify dollar amounts ofrefunds, credits, or deductions associatedwith tax returns, whether or not the data arestatistical, averaged, aggregated, or anony-mous. The IRS will continue to rely onall existing enforcement powers to addressconcerns regarding advertising and mar-keting claims by tax return preparers.

In light of these considerations,the Treasury Department and the IRS,pursuant to these regulations, amend§301.7216–2(o) of the final regulationspublished on January 7, 2008. The tempo-rary regulations require that any disclosureof a statistical compilation, other thanto satisfy reporting requirements or inconjunction with the disposition of a taxreturn business, be anonymous as to tax-payer identity, meaning that it must be in aform which cannot be associated with, orotherwise identify, directly or indirectly, aparticular taxpayer. Under these circum-stances, the temporary regulations prohibitthe disclosure of statistical compilationswith cells containing data from fewerthan ten tax returns. In addition to thedisclosure exceptions set forth currentlyin §301.7216–2(o), the temporary regu-lations authorize the disclosure by a taxreturn preparer in conjunction with bonafide research or public policy discussionsconcerning state or federal taxation or re-quiring data acquired during the tax returnpreparation process, and to provide taxinformation to the public regarding tax re-turn preparation services. The temporaryregulations allow section 501(c) organiza-tions whose program services include thefree preparation of tax returns to disclosestatistical compilations in order to complywith reporting requirements in connection

with the receipt of grants or to facilitatethe solicitation of grants. The temporaryregulations also allow lawful recipientsof statistical compilations to disclose oruse such tax return information, subject tothe provisions of §301.7216–2T(o). Thetemporary regulations continue to allowthe disclosure of statistical compilationsin order to comply with financial account-ing or regulatory reporting requirementsor in conjunction with the sale or otherdisposition of the compiler’s tax returnpreparation business. Finally, the tempo-rary regulations prohibit, in the context ofmarketing or advertising, use or disclo-sure of statistical compilations, or a partthereof, that identify dollar amounts ofrefunds, credits, or deductions associatedwith tax returns, or percentages relatingthereto, whether or not the data are statisti-cal, averaged, aggregated, or anonymous.

3. §301.7216–2(p).

The Treasury Department and the IRSare amending the regulations under section7216 to clarify that tax return preparersmay use and disclose tax return informa-tion to the extent necessary to accomplisha conflict of interest review undertaken tocomply with the requirements establishedby any federal, state, or local law, agency,board, or commission, or by a professionalassociation ethics committee or board, toidentify, evaluate, and monitor actual orpotential legal and ethical conflicts of in-terest that may arise when a tax return pre-parer or tax return preparation business isemployed or acquired by another tax returnpreparer or tax return preparation business,or when a tax return preparer is consider-ing engaging a new client.

Upon further consideration, the Trea-sury Department and the IRS concludethat §301.7216–2(p) should be amended,in the form of temporary regulations, toclarify that tax return preparers may useand disclose tax return information to theextent necessary to accomplish conflict re-views without compromising the rights oftaxpayers to control the use or disclosureof their tax return information. Conflictreviews allow tax return preparers to fulfilllegal and ethical requirements to iden-tify and avoid client conflicts of interest.Conflict reviews also benefit taxpayersbecause these reviews provide taxpayerswith the knowledge and comfort that their

tax return preparers are acting in the tax-payers’ best interests when providing taxreturn preparation services to them.

These regulations amend§301.7216–2(p) by adding an exceptionto the written consent rules to allowdisclosures of tax return information bya tax return preparer without taxpayerconsent for the purpose of conductingconflict reviews, but only to the extentnecessary to accomplish the reviews. Forexample, if the tax return preparer onlyneeds to disclose the names of taxpayers,and nothing more, to allow the conflictreview to be completed, then the tax returnpreparer shall not disclose any tax returninformation other than the taxpayers’names.

The regulations describe conflict re-views to include reviews that are un-dertaken to comply with requirementsestablished by any federal, state, or locallaw, agency, board or commission, or bya professional association ethics commit-tee or board, to either identify, evaluate,and monitor actual or potential legal andethical conflicts of interest that may arisewhen a tax return preparer is employed oracquired by another tax return preparer, orto identify, evaluate, and monitor actualor potential legal and ethical conflicts ofinterest that may arise when a tax returnpreparer is considering engaging a newclient. The regulations contemplate thatthe information necessary to accomplisha conflict review shall be disclosed toand used by only those persons permittedto be involved in the conflict review asdescribed in the applicable law or regu-lations or as authorized by the relevantagency, board, commission, or profes-sional association. The regulations alsocontemplate that, in order for tax returnpreparers to fulfill the required conflictreviews, circumstances may require thepreparer to disclose the information nec-essary to perform a conflict review outsideof the United States or a territory or pos-session of the United States. If disclosureoutside of the United States is required toconduct a conflict review, the disclosure isauthorized by these regulations providedthe disclosing and receiving tax returnpreparers have procedures in place that areconsistent with good business practicesand designed to maintain the confiden-tiality of the disclosed information. Theregulations also include specific restric-

2010–4 I.R.B. 318 January 25, 2010

tions on the further use and disclosure ofinformation disclosed under this excep-tion.

In light of these considerations,the Treasury Department and the IRS,pursuant to these regulations, amend§301.7216–2(p) of the final regulationspublished on January 7, 2008, as describedin this preamble.

4. Conclusion.

The Treasury Department and the IRSanticipate that allowing tax return pre-parers to disclose and use the limitedtax return information and anonymousstatistical compilations for the limitedpurposes previously cited should providethe taxpayer and the public the policybenefits discussed above. The TreasuryDepartment and the IRS also concludethat the amendments to §§301.7216–2(n),301.7216–2(o), and 301.7216–2(p) ap-propriately balance concerns regardingsafeguarding of sensitive tax return in-formation against the tax industry’s needto evaluate and use or disclose tax returninformation. In a separate notice of pro-posed rulemaking published with theseregulations, the Treasury Department andIRS invite comments on the proposedrules.

Effect on Other Documents

The following publication is obso-lete on or after January 4, 2010: Notice2009–13, 2009–6 I.R.B. 447.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations because theyare excepted from the notice and commentrequirements of section 553(b) and (c)of the Administrative Procedure Act bysection 7805(e) of the Internal RevenueCode and under the interpretative ruleand good cause exceptions provided bysections 553(b)(3)(A) and (B) of that Act.These regulations are necessary to providetax return preparers and taxpayers withimmediate guidance on the application

of the section 7216 rules regarding per-missible disclosures and uses without theconsent of the taxpayer, disclosures anduses that are currently required and neces-sary to allow the ongoing and beneficialeducational, informational, operational,and funding efforts of tax return preparersand taxpayers to prepare for the imminenttax filing season, and to allow tax returnpreparers to comply with all legal andethical requirements placed upon them byrelevant government or professional agen-cies, boards, commissions or committees.These regulations are intended to provideadditional limited exceptions to, and relieffrom, the rules prohibiting disclosure oftax return information, including statisti-cal compilations of tax return informationand information necessary to accomplishconflict reviews, because these regula-tions provide tangible benefits to bothtaxpayers and tax return preparers andappropriately balance concerns regard-ing safeguarding of sensitive tax returninformation with appropriate disclosuresand uses of that information. In addition,the regulations regarding §301.7216–2(o)have been publicly noticed and subjectto comment through the publication ofNotice 2009–13. For these reasons, goodcause exists for dispensing with noticeand public comment pursuant to section553(b) and (c) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5). Forapplicability of the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6), refer to theSpecial Analyses section of the preambleto the cross-referenced notice of proposedrulemaking published in this issue of theBulletin. Pursuant to section 7805(f) ofthe Internal Revenue Code, this regulationhas been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Molly K. Donnelly, Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7216–0 is amended

by revising the entries for §301.7216–2,paragraphs (n), (o), and (p) to read as fol-lows:

§301.7216–0 Table of contents.

* * * * *

§301.7216–2 Permissible disclosures oruses without consent of the taxpayer.

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

see entry for §301.7216–2T(n).(o) [Reserved]. For further guidance,

see entry for §301.7216–2T(o).(p) [Reserved]. For further guidance,

see entry for §301.7216–2T(p).

* * * * *Par. 3. Section 301.7216–0T is added

to read as follows:

§301.7216–0T Table of contents.

This section lists captions contained in§301.7216–2T.

§301.7216–2T Permissible disclosuresor uses without consent of the taxpayer(temporary).

(a) through (m) [Reserved]. For furtherguidance, see entries for §301.7216–2(a)through (m).

(n) Lists for solicitation of tax returnbusiness.

(o) Producing statistical informationin connection with tax return preparationbusiness.

(p) Disclosure or use of information forquality, peer, or conflict reviews.

(q) through (r) [Reserved]. For furtherguidance, see entries for §301.7216–2(q)through (r).

(s) Effective/applicability date.(t) Expiration date.Par. 4. Section 301.7216–2 is amended

by revising paragraphs (n), (o), and (p) toread as follows:

January 25, 2010 319 2010–4 I.R.B.

§301.7216–2 Permissible disclosures oruses without consent of the taxpayer.

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

see §301.7216–2T(n).(o) [Reserved]. For further guidance,

see §301.7216–2T(o).(p) [Reserved]. For further guidance,

see §301.7216–2T(p).

* * * * *Par. 5. Section 301.7216–2T is added

to read as follows:

§301.7216–2T Permissible disclosuresor uses without consent of the taxpayer(temporary).

(a) through (m) [Reserved]. For fur-ther guidance, see §301.7216–2(a) through(m).

(n) Lists for solicitation of tax re-turn business. (1) A tax return preparer,other than a person who is a tax returnpreparer solely because the person pro-vides auxiliary services as defined in§301.7216–1(b)(2)(i)(B), may compileand maintain a separate list containingsolely the names, addresses, e-mail ad-dresses, phone numbers, taxpayer entityclassification (including “individual” orthe specific type of business entity), and in-come tax return form number of taxpayerswhose tax returns the tax return preparerhas prepared or processed. The InternalRevenue Service may issue guidance, bypublication in the Internal Revenue Bul-letin (see §601.601(d)(2)(ii)(b)), describ-ing other types of information that may beincluded in a list compiled and maintainedpursuant to this paragraph. This list maybe used by the compiler solely to contactthe taxpayers on the list for the purposeof providing tax information and generalbusiness or economic information or anal-ysis for educational purposes, or solicitingadditional tax return preparation services.The list may not be used to solicit anyservice or product other than tax returnpreparation services. The compiler of thelist may not transfer the taxpayer list, orany part thereof, to any other person un-less the transfer takes place in conjunctionwith the sale or other disposition of thecompiler’s tax return preparation busi-ness. Due diligence conducted prior to aproposed sale of a compiler’s tax returnpreparation business is in conjunction with

the sale or other disposition of a com-piler’s tax return preparation business andwill not constitute a transfer of the list ifconducted pursuant to a written agreementthat requires confidentiality of the tax re-turn information disclosed and expresslyprohibits the further use or disclosure ofthe tax return information for any purposeother than that related to the purchase ofthe tax return preparation business. Thetax return information submitted for thepurpose of due diligence as authorized inthis paragraph is a disclosure of tax returninformation subject to the provisions ofthis section. A person who acquires ataxpayer list, or a part thereof, in conjunc-tion with a sale or other disposition of atax return preparation business is subjectto the provisions of this paragraph withrespect to the list. The term list, as used inthis paragraph (n), includes any record orsystem whereby the names and addressesof taxpayers are retained. The provisionsof this paragraph (n) also apply to thetransfer of any records and related papersto which this paragraph (n) applies.

(2) Examples. The following examplesillustrate this paragraph (n):

Example 1. Preparer A is a tax return prepareras defined by §301.7216–1(b)(2)(i)(A). Preparer A’soffice is located in southeast Pennsylvania, and Pre-parer A prepares federal and state income tax returnsfor taxpayers who live in Pennsylvania, New Jersey,Maryland, and Delaware. Preparer A maintains alist of taxpayer clients containing the information al-lowed by this paragraph (n). Preparer A providesquarterly state income tax information updates to hisindividual taxpayer clients by e-mail or U.S. Mail. Toensure that his clients only receive the informationupdates that are relevant to them, Preparer A uses hislist to direct his outreach efforts towards clients byzip code and income tax return form number (Form1040 and corresponding state income tax return formnumber). Preparer A may use the list information inthis manner without taxpayer consent because he isproviding tax information for educational or informa-tional purposes and is targeting clients based solelyupon tax return information that is authorized by thisparagraph (n), by zip code, which is part of a tax-payer’s address, and by income tax return form num-ber. Preparer A also may deliver this information tohis clients by e-mail or by U.S. Mail without taxpayerconsent because those delivery methods use informa-tion authorized by this paragraph (n).

Example 2. Preparer B is a tax return prepareras defined by §301.7216–1(b)(2)(i)(A). Preparer Bmaintains a list of taxpayer clients containing the in-formation allowed by this paragraph (n). PreparerB provides monthly federal income tax informationupdates in the form of a newsletter to all of her tax-payer clients by e-mail or U.S. Mail. When PreparerB hires a new employee, she announces each hire inthe newsletter for the month that follows the hiring.Each announcement includes a photograph of the new

employee, the employee’s name, the employee’s tele-phone number, a brief listing of the employee’s qual-ifications, and a brief listing of the employee’s em-ployment responsibilities. Preparer B may use thetax return information described in this paragraph (n)in this manner without taxpayer consent because sheis providing tax information for educational or infor-mational purposes, to provide general federal incometax information updates. Preparer B may include thenew employee announcements in the form describedbecause this is considered tax information for edu-cational or informational purposes, provided the an-nouncements do not contain solicitations for non-taxreturn preparation services. Preparer B also may de-liver this information to her clients by e-mail or byU.S. Mail without taxpayer consent because thosedelivery methods use information authorized by thisparagraph (n).

(o) Producing statistical informationin connection with tax return preparationbusiness. (1) A tax return preparer mayuse tax return information, subject to thelimitations specified in this paragraph (o),to produce a statistical compilation of datadescribed in §301.7216–1(b)(3)(i)(B). Thepurpose and use or disclosure of the sta-tistical compilation must relate directly tothe internal management or support of thetax return preparer’s tax return preparationbusiness, or to bona fide research or pub-lic policy discussions concerning state orfederal taxation or requiring data acquiredduring the tax return preparation process.A tax return preparer may not disclosethe compilation, or any part thereof, toany other person unless disclosure of thestatistical compilation is anonymous as totaxpayer identity, does not disclose cellscontaining data from fewer than ten taxreturns, and is in direct support of the taxreturn preparer’s tax return preparationbusiness or of bona fide research or pub-lic policy discussions concerning state orfederal taxation or requiring data acquiredduring the tax return preparation process.A statistical compilation is anonymousas to taxpayer identity if it is in a formwhich cannot be associated with, or oth-erwise identify, directly or indirectly, aparticular taxpayer. For purposes of thisparagraph, marketing and advertising is indirect support of the tax return preparer’stax return preparation business providedthe marketing and advertising is not false,misleading, or unduly influential. Thisparagraph, however, does not authorizethe use or disclosure in marketing or ad-vertising of any statistical compilations, orpart thereof, that identify dollar amountsof refunds, credits, or deductions asso-

2010–4 I.R.B. 320 January 25, 2010

ciated with tax returns, or percentagesrelating thereto, whether or not the dataare statistical, averaged, aggregated, oranonymous. Disclosures made in sup-port of fundraising activities conductedby Volunteer Return Preparation programsand other organizations described in sec-tion 501(c) of the Internal Revenue Code(Code) in direct support of their tax returnpreparation businesses are not marketingand advertising under this paragraph. Atax return preparer who produces a sta-tistical compilation of data described in§301.7216–1(b)(3)(i)(B) may disclose thecompilation in order to comply with fi-nancial accounting or regulatory reportingrequirements whether or not the statisticalcompilation is anonymous as to taxpayeridentity or discloses cells containing datafrom fewer than ten tax returns.

A tax return preparer may notsell or exchange for value a statisti-cal compilation of data described in§301.7216–1(b)(3)(i)(B), in whole or inpart, except in conjunction with the trans-fer of assets made pursuant to the saleor other disposition of the tax return pre-parer’s tax return preparation business.The provisions of paragraph (n) of thissection regarding the transfer of a taxpayerlist also apply to the transfer of any sta-tistical compilations of data to which thisparagraph applies. A person who acquiresa statistical compilation, or a part thereof,pursuant to the operation of this paragraph(o) or in conjunction with a sale or otherdisposition of a tax return preparationbusiness, is subject to the provisions ofthis paragraph with respect to the compi-lation.

(2) Examples. The following examplesillustrate this paragraph (o):

Example 1. Preparer A is a tax return preparer asdefined by §301.7216–1(b)(2)(i)(A). In 2009, A usedtax return information to produce a statistical compi-lation of data for both internal management purposesand to support A’s tax return preparation business.The statistical compilation included a cell contain-ing the information that A prepared 32 S corporationtax returns in 2009. In 2010, A decides to embarkupon a new marketing campaign emphasizing its ex-perience preparing small business tax returns. In thecampaign, A discloses the cell containing the num-ber of S corporation tax returns prepared in 2009. A’sdisclosure does not include any information that canbe associated with or that can identify any specifictaxpayers. A may disclose the anonymous statisticalcompilation without taxpayer consent.

Example 2. Preparer B is a tax return preparer asdefined by §301.7216–1(b)(2)(i)(A). In 2010, in sup-port of B’s tax return preparation business, B wants to

advertise that the average tax refund obtained for itsclients in 2009 was $2,800. B may not disclose thisinformation because it contains a statistical compila-tion reflecting average refund amounts.

Example 3. Preparer C is a tax return prepareras defined by §301.7216–1(b)(2)(i)(A) and is a Vol-unteer Income Tax Assistance program. In 2010,in support of C’s tax return preparation business, Csubmits a grant application to a charitable founda-tion to fund C’s operations providing free tax returnpreparation services to low- and moderate-incomefamilies. In support of C’s request, C includesanonymous statistical data from cells containing datafrom ten or more tax returns showing that, in 2009,C provided services to 500 taxpayers, that 95 percentof the taxpayer population served by C receivedthe Earned Income Tax Credit (EITC), and that theaverage amount of the EITC received was $3,300.Despite the fact that this information constitutes anaverage credit amount, C may disclose the informa-tion to the charitable foundation because disclosuresmade in support of fundraising activities conductedby Volunteer Income Tax Assistance programs andother organizations described in section 501(c) of theCode in direct support of their tax return preparationbusiness are not considered marketing and advertis-ing for purposes of §301.7216–2(o)(1).

Example 4. Preparer D is a tax return prepareras defined by §301.7216–1(b)(2)(i)(A). In December2009, D produced an anonymous statistical compi-lation of tax return information obtained during the2009 filing season. In 2010, D wants to disclose por-tions of the anonymous statistical compilation fromcells containing data from ten or more tax returns inconnection with the marketing of its financial advi-sory and asset planning services. D is required toreceive taxpayer consent under §301.7216–3 beforedisclosing the tax return information contained in theanonymous statistical compilation because the dis-closure is not being made in support of D’s tax returnpreparation business.

(p) Disclosure or use of informationfor quality, peer, or conflict reviews. (1)The provisions of section 7216(a) and§301.7216–1 shall not apply to any dis-closure for the purpose of a quality orpeer review to the extent necessary to ac-complish the review. A quality or peerreview is a review that is undertaken toevaluate, monitor, and improve the qualityand accuracy of a tax return preparer’stax preparation, accounting, or auditingservices. A quality or peer review maybe conducted only by attorneys, certifiedpublic accountants, enrolled agents, andenrolled actuaries who are eligible to prac-tice before the Internal Revenue Service.See Department of the Treasury Circular230, 31 CFR part 10. Tax return informa-tion may also be disclosed to persons whoprovide administrative or support servicesto an individual who is conducting a qual-ity or peer review under this paragraph(p), but only to the extent necessary for

the reviewer to conduct the review. Taxreturn information gathered in conductinga review may be used only for purposes ofa review. No tax return information iden-tifying a taxpayer may be disclosed in anyevaluative reports or recommendationsthat may be accessible to any person otherthan the reviewer or the tax return preparerbeing reviewed. The tax return preparerbeing reviewed will maintain a recordof the review including the informationreviewed and the identity of the personsconducting the review. After completionof the review, no documents containing in-formation that may identify any taxpayerby name or identification number may beretained by a reviewer or by the reviewer’sadministrative or support personnel.

(2) The provisions of section 7216(a)and §301.7216–1 shall not apply to anydisclosure necessary to accomplish a con-flict review. A conflict review is a reviewundertaken to comply with requirementsestablished by any federal, state, or locallaw, agency, board or commission, or bya professional association ethics commit-tee or board, to either identify, evaluate,and monitor actual or potential legal andethical conflicts of interest that may arisewhen a tax return preparer is employed oracquired by another tax return preparer, orto identify, evaluate, and monitor actual orpotential legal and ethical conflicts of in-terest that may arise when a tax return pre-parer is considering engaging a new client.Tax return information gathered in con-ducting a conflict review may be used onlyfor purposes of a conflict review. No taxreturn information identifying a taxpayermay be disclosed in any evaluative reportsor recommendations that may be accessi-ble to any person other than those respon-sible for identifying, evaluating, and mon-itoring legal and ethical conflicts of inter-est. No tax return information identifyinga taxpayer may be disclosed outside of theUnited States or a territory or possession ofthe United States unless the disclosing andreceiving tax return preparers have proce-dures in place that are consistent with goodbusiness practices and designed to main-tain the confidentiality of the disclosed re-turn information.

(3) Any person (including administra-tive and support personnel) receiving taxreturn information in connection with aquality, peer, or conflict review is a taxreturn preparer for purposes of sections

January 25, 2010 321 2010–4 I.R.B.

7216(a) and 6713(a). Tax return informa-tion disclosed and used for purposes of aquality, peer, or conflict review shall notbe used or disclosed for any other purpose.

(q) through (r) [Reserved]. For furtherguidance, see §301.7216–2(q) through (r).

(s) Effective/applicability date. Thissection applies to disclosures or uses oftax return information occurring on or af-ter January 4, 2010.

(t) Expiration date. The applicability ofthis section expires on or before December28, 2012.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved December 24, 2009.

Michael Mundaca,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 29,2009, 4:15 p.m., and published in the issue of the FederalRegister for January 4, 2010, 75 F.R. 48)

Section 9300.—Reductionin Taxable Income forHousing DisplacedIndividuals26 CFR 1.9300–1: Reduction in taxable income forhousing displaced individuals.

T.D. 9474

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Reduction in Taxable Incomefor Housing Hurricane KatrinaDisplaced Individuals

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document containsfinal regulations relating to the reduc-tion in taxable income under section 302of the Katrina Emergency Tax ReliefAct of 2005. The final regulations alsoreflect legislation under section 702 of the

Heartland Disaster Tax Relief Act of 2008.The final regulations affect taxpayerswho provide housing in their principalresidences to individuals displaced bycertain major disasters.

DATES: Effective Date: These regulationsare effective on December 14, 2009.

Applicability Date: For date of applica-bility, see §1.9300–1(h).

FOR FURTHER INFORMATIONCONTACT: Shareen S. Pflanz,202–622–4920 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

This document contains final regula-tions that replace the temporary regula-tions in 26 CFR Part 1 relating to the re-duction in taxable income for housing pro-vided to displaced individuals under sec-tion 302 of the Katrina Emergency Tax Re-lief Act of 2005 (Public Law 109–73, 119Stat. 2016) (KETRA). This document alsoapplies these rules to individuals displacedin a Midwestern disaster area, as defined insection 702 of the Heartland Disaster TaxRelief Act of 2008 (Title VII of DivisionC of Public Law 110–343, 122 Stat. 3912)(HDTRA).

On December 12, 2006, temporaryregulations (T.D. 9301, 2007–1 C.B. 244)were published in the Federal Register(71 FR 74467). A notice of proposedrulemaking (REG–152043–05, 2007–1C.B. 263) cross-referencing the temporaryregulations was also published in the Fed-eral Register (71 FR 74482). No publichearing was requested or held. No writ-ten comments responding to the noticeof proposed rulemaking were received.The proposed regulations are adopted asamended by this Treasury decision to im-plement section 702 of HDTRA.

Section 702 of HDTRA, enacted onOctober 3, 2008, applies section 302 ofKETRA to the Midwestern disaster area.The Midwestern disaster area is the areafor which the President declared (afterMay 19, 2008, and before August 1,2008) a major disaster under the Robert T.Stafford Disaster Relief and EmergencyAssistance Act (42 U.S.C. 5170) (StaffordAct). The disaster occurred by reason ofsevere storms, tornados, or flooding in the

states of Arkansas, Illinois, Indiana, Iowa,Kansas, Michigan, Minnesota, Missouri,Nebraska, and Wisconsin. The applicabledisaster date for each state in the Midwest-ern disaster area is the date of the severestorm, tornado, or flooding giving rise tothe Presidential declaration for that state.See Federal Register notices for eachstate at www.FEMA.gov. The reductionin taxable income for providing housingto a displaced individual in a Midwesterndisaster area applies to taxable years be-ginning in 2008 or 2009.

Accordingly, the final regulations ex-pand the scope of the temporary regula-tions to include taxpayers who providehousing in their principal residences toMidwestern disaster displaced individ-uals. The final regulations expand thedefinitions under §1.9300–1T(e) of thetemporary regulations relating to Hurri-cane Katrina to include the Midwesterndisaster area.

The final regulations also clarify thatthe limitations on the reduction in tax-able income apply separately to the Hur-ricane Katrina disaster area and the Mid-western disaster area. Thus, for exam-ple, a taxpayer may reduce taxable incomeby up to $2,000 for providing housing toMidwestern disaster displaced individualseven though the taxpayer reduced taxableincome for providing housing to one ormore Hurricane Katrina displaced individ-uals.

The temporary regulations providedthat the maximum dollar limitation for amarried individual who files a separateincome tax return is $1,000. The final reg-ulations provide that the maximum dollarlimitation is $2,000 for married taxpayersfiling jointly or separately. Married tax-payers filing separate income tax returnsmay allocate the $2,000 between the re-turns.

The final regulations authorize theCommissioner to apply these rules in ad-ditional guidance of general applicability,see §601.601(d)(2) of the Internal RevenuePractice Regulations, if Congress extendsrelief under section 302 of KETRA toother disaster areas in the future.

Effective/Applicability Date

These regulations apply to taxable yearsending after December 11, 2006. Taxpay-ers who, after filing their tax returns for

2010–4 I.R.B. 322 January 25, 2010

2006 or 2008 as married filing separately,want to apply the rule allowing them to al-locate the $2,000 maximum limitation be-tween them, may do so by filing amendedreturns if the period of limitations on creditor refund under section 6511 has not ex-pired.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations and, becausethe regulations do not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking that preceded thesefinal regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Drafting Information

The principal author of these regula-tions is Shareen S. Pflanz of the Office ofthe Associate Chief Counsel (Income Taxand Accounting). However, other person-nel from the IRS and the Treasury Depart-ment participated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by removing the entryfor §1.9300–1T to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.9300–1 is added to

read as follows:

§1.9300–1 Reduction in taxable incomefor housing displaced individuals.

(a) In general. For a taxable year be-ginning in the applicable taxable year (asdefined in paragraph (f)(1) of this section),

a taxpayer who is a natural person may re-duce taxable income by $500 for each dis-placed individual (as defined in paragraph(f)(2) of this section) to whom the taxpayerprovides housing free of charge in, or onthe site of, the taxpayer’s principal resi-dence for a period of at least 60 consecu-tive days. A taxpayer may claim the reduc-tion in taxable income for any applicabletaxable year in which a consecutive 60-dayperiod ends. A taxpayer may not claim thereduction in taxable income unless the tax-payer includes the taxpayer identificationnumber of the displaced individual on thetaxpayer’s income tax return.

(b) Provision of housing—(1) Principalresidence. For purposes of this section,the term principal residence has the samemeaning as in section 121 and the associ-ated regulations. See §1.121–1(b)(1) and(b)(2).

(2) Legal interest required. A taxpayeris treated as providing housing for pur-poses of this section only if the taxpayer isan owner or lessee (including a co-owneror co-lessee) of the principal residence.

(3) Compensation for providing hous-ing. No reduction in taxable income isallowed under this section to a taxpayerwho receives rent or any reimbursement orcompensation (whether in cash, services,or property) from any source for providinghousing to the displaced individual. Forthis purpose, lodging, utilities, and othersimilar items are treated as housing, buttelephone calls, food, clothing, transporta-tion, and other similar items are not treatedas housing.

(c) Limitations—(1) Dollar limita-tion—(i) In general. The reduction intaxable income under paragraph (a) of thissection may not exceed the maximum dol-lar limitation, and must be reduced by thetotal amount of all reductions under thissection for all prior taxable years (exceptas provided in paragraph (c)(5) of thissection). The maximum dollar limitationis—

(A) $2,000 in the case of an unmarriedindividual; or

(B) $2,000 in the case of a husband andwife, whether the husband and wife filea joint income tax return or separate in-come tax returns; married taxpayers filingseparate income tax returns may allocatethis amount in $500 increments betweentheir respective returns, provided that each

spouse is otherwise eligible to claim thatreduction in taxable income.

(ii) Married individuals with separateprincipal residences. The limitation inparagraph (c)(1)(i)(B) of this section ap-plies whether or not the married individ-uals occupy the same principal residence.A person is treated as married for purposesof this section if the individual is treated asmarried under section 7703.

(2) Spouse or dependent of the tax-payer. No reduction of taxable income isallowed for a displaced individual who isthe spouse or a dependent of the taxpayer.

(3) One reduction per displaced indi-vidual. Except as provided in paragraph(c)(5) of this section, a taxpayer may notreduce taxable income under paragraph (a)of this section for a displaced individualfor whom the taxpayer or any taxpayer re-siding in the same principal residence hasreduced taxable income under this sectionfor any prior taxable year.

(4) Taxpayers occupying the same prin-cipal residence. Except as provided inparagraph (c)(5) of this section, for all tax-able years, only one taxpayer occupyingthe same principal residence may reducetaxable income for a particular displacedindividual.

(5) Limitations applied separately toeach disaster. The limitations of this para-graph (c) apply separately to each disasterarea. Thus, a taxpayer may reduce taxableincome by $2,000 for providing housingto Midwestern disaster displaced individu-als even though the taxpayer reduced tax-able income for providing housing to oneor more Hurricane Katrina displaced indi-viduals. For this purpose, all areas withinthe Midwestern disaster area are treated asone disaster area.

(d) Substantiation. A taxpayer claiminga reduction of taxable income under thissection must maintain records sufficient toshow entitlement to the reduction as pro-vided in forms, instructions, publicationsor other guidance published by the IRS.

(e) The Commissioner may apply thissection in additional guidance of generalapplicability, see §601.601(d)(2) of thischapter, to other disaster areas to whichCongress extends relief under section 302of the Katrina Emergency Tax Relief Actof 2005.

(f) In general. The following defini-tions apply for all purposes of this section.

January 25, 2010 323 2010–4 I.R.B.

(1) Applicable taxable year. The termapplicable taxable year means—

(i) A taxable year beginning in 2005 or2006, in the case of housing provided toa Hurricane Katrina displaced individual(as defined in paragraph (f)(2)(ii) of thissection); and

(ii) A taxable year beginning in 2008 or2009, in the case of housing provided toa Midwestern disaster displaced individual(as defined in paragraph (f)(2)(iii) of thissection).

(2) Displaced individual—(i) Scope.The term displaced individual means aHurricane Katrina displaced individualas defined in paragraph (f)(2)(ii) of thissection and a Midwestern disaster dis-placed individual as defined in paragraph(f)(2)(iii) of this section.

(ii) Hurricane Katrina displaced indi-vidual. The term Hurricane Katrina dis-placed individual means any natural per-son (other than the spouse or a dependentof the taxpayer) if the following require-ments are met—

(A) The person’s principal place ofabode on August 28, 2005, was in the Hur-ricane Katrina disaster area (as defined inparagraph (f)(4)(ii) of this section);

(B) The person was displaced from thatabode; and

(C) If the abode was located outsidethe Hurricane Katrina core disaster area(as defined in paragraph (f)(5)(ii) of thissection)—

(1) The abode was damaged by Hurri-cane Katrina; or

(2) The person was evacuated from thatabode by reason of Hurricane Katrina.

(iii) Midwestern disaster displaced in-dividual. The term Midwestern disasterdisplaced individual means any naturalperson (other than the spouse or a de-pendent of the taxpayer) if the followingrequirements are met—

(A) The person’s principal place ofabode on the Midwestern disaster date (asdefined in paragraph (f)(3) of this section),was in any Midwestern disaster area (asdefined in paragraph (f)(4)(iii) of this sec-tion);

(B) The person was displaced from thatabode; and

(C) If the abode was located outside theMidwestern core disaster area (as definedin paragraph (f)(5)(iii) of this section)—

(1) The abode was damaged by anyMidwestern disaster; or

(2) The person was evacuated from thatabode by reason of any Midwestern disas-ter.

(3) Midwestern disaster date. The termMidwestern disaster date means—

(i) In Arkansas, May 2 through May 12,2008;

(ii) In Illinois, June 1 through July 22,2008;

(iii) In Indiana, May 30 throughJune 27, 2008;

(iv) In Iowa, May 25 throughAugust 13, 2008;

(v) In Kansas, May 22 through June 16,2008;

(vi) In Michigan, June 6 throughJune 13, 2008;

(vii) In Minnesota, June 6 throughJune 12, 2008;

(viii) In Missouri, May 10 throughMay 11, 2008, and June 1 throughAugust 13, 2008;

(ix) In Nebraska, April 23 throughApril 26, 2008, May 22 through June 24,2008, and June 27, 2008; or

(x) In Wisconsin, June 5 throughJuly 25, 2008.

(4) Disaster area—(i) Scope. Theterm disaster area means the Hurri-cane Katrina disaster area as defined inparagraph (f)(4)(ii) of this section and theMidwestern disaster area as defined inparagraph (f)(4)(iii) of this section.

(ii) Hurricane Katrina disaster area.The term Hurricane Katrina disaster areameans the states of Alabama, Florida,Louisiana, and Mississippi.

(iii) Midwestern disaster area. Theterm Midwestern disaster area means anarea for which the President declared amajor disaster on or after May 20, 2008,and before August 1, 2008, under section401 of the Robert T. Stafford DisasterRelief and Emergency Assistance Act(42 U.S.C. 5170) (Stafford Act) by reasonof severe storms, tornados, or floodingoccurring in any of the states of Arkansas,Illinois, Indiana, Iowa, Kansas, Michigan,Minnesota, Missouri, Nebraska, andWisconsin.

(5) Core disaster area—(i) Scope. Theterm core disaster area means the Hurri-cane Katrina core disaster area as definedin paragraph (f)(5)(ii) of this section andthe Midwestern core disaster area as de-fined in paragraph (f)(5)(iii) of this section.

(ii) Hurricane Katrina core disasterarea. The term Hurricane Katrina core

disaster area means the portion of theHurricane Katrina disaster area designatedby the President to warrant individual orindividual and public assistance from thefederal government under the StaffordAct.

(iii) Midwestern core disaster area.The term Midwestern core disaster areameans the portion of the Midwestern dis-aster area designated by the President towarrant individual or individual and pub-lic assistance from the federal governmentunder the Stafford Act for damages attrib-utable to the severe storms, tornados, orflooding in the Midwestern disaster area.

(g) Examples. The provisions of thissection are illustrated by the following ex-amples. In each example, a taxpayer pro-vides housing within the meaning of para-graph (b) of this section in, or on the siteof, the taxpayer’s principal residence for aperiod of at least 60 consecutive days (the60th day being in the applicable taxableyear) for each displaced individual, noneof whom is a spouse or dependent of thetaxpayer. The examples are as follows:

Example 1. Taxpayer A provides housing toN, a Hurricane Katrina displaced individual, fromSeptember 1, 2005, until March 10, 2006. Underparagraphs (a) and (c)(3) of this section, A mayreduce A’s taxable income by $500 on A’s incometax return for calendar year 2005 or 2006 (but notboth) for providing housing to N.

Example 2. The facts are the same as in Example1, except that A and A’s unmarried roommate B areco-lessees of their principal residence. Both A and Bprovide housing to N. Under paragraphs (a) and (c)(4)of this section, either A or B, but not both, may reducetaxable income by $500 for 2005 or 2006 for provid-ing housing to N. If A or B reduces taxable incomefor 2005 for providing housing to N, neither A norB may reduce taxable income for 2006 for providinghousing to N.

Example 3. The facts are the same as in Example2, except that in 2009 A and B provide housing toN, who in 2009 is a Midwestern disaster displacedindividual. Under paragraph (c)(5) of this section, thelimitation of paragraph (c)(4) of this section appliesseparately to each disaster. Therefore, either A orB may reduce taxable income by $500 for 2009 forproviding housing to N.

Example 4. During 2008, unmarried roommatesand co-lessees C and D provide housing to eight Mid-western disaster displaced individuals. Under para-graphs (a) and (c)(1)(i)(A) of this section, C may re-duce taxable income by $2,000 on C’s 2008 incometax return for providing housing to any four of thesedisplaced individuals and D may reduce taxable in-come by $2,000 on D’s 2008 income tax return forproviding housing to the other four displaced individ-uals.

Example 5. (i) In 2008, a married couple, Hand W, provide housing to a Midwestern disaster dis-placed individual, O. H and W file their 2008 income

2010–4 I.R.B. 324 January 25, 2010

tax return as married filing jointly. Under paragraphs(a) and (c)(4) of this section, H and W may reducetaxable income by $500 on their 2008 income tax re-turn for providing housing to O.

(ii) In 2009, H and W provide housing to O andto another Midwestern disaster displaced individual,P. H and W file their 2009 income tax returns as mar-ried filing separately. Because H and W reduced their2008 taxable income for providing housing to O, un-der paragraph (c)(3) of this section, neither H nor Wmay reduce taxable income on their 2009 income taxreturns for providing housing to O. Under paragraphs(a) and (c)(4) of this section, either H or W but notboth, may reduce taxable income by $500 on his orher 2009 income tax return for providing housing toP.

Example 6. The facts are the same as in Exam-ple 5, except that in 2009 H and W provide housingto five Midwestern disaster displaced individuals inaddition to O. H and W together may reduce taxableincome on their 2009 income tax returns by a total of

$2,000 for the Midwestern disaster displaced individ-uals (other than O). Under paragraph (c)(1)(i)(B) ofthis section, H and W may allocate the $2,000 in in-crements of $500 between their separate returns. Forexample, either one may reduce taxable income by$500 and the other may reduce taxable income by$1,500, or H and W each may reduce taxable incomeby $1,000.

(h) Effective/applicability date. Thissection applies for taxable years ending af-ter December 11, 2006.

§1.9300–1T [Removed]

Par. 3. Section 1.9300–1T is removed.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved December 8, 2009.

Michael F. Mundaca,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 11,2009, 8:45 a.m., and published in the issue of the FederalRegister for December 14, 2009, 74 F.R. 66048)

January 25, 2010 325 2010–4 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousExtension of TemporarySuspension of AHYDO Rules

Notice 2010–11

This notice extends the temporarysuspension of the rules for certain ap-plicable high yield discount obligations(“AHYDOs”) pursuant to § 163(e)(5)(F)of the Internal Revenue Code.

Under § 163(e)(5), in the case of anAHYDO as defined in § 163(i), a corpora-tion is not allowed a deduction for the dis-qualified portion of the original issue dis-count (“OID”) on the obligation, and thecorporation’s deduction for the remainingportion of the OID is deferred until theOID is paid in cash or in property (otherthan debt of the issuer or a related per-son within the meaning of § 453(f)(1)).Section 163(e)(5)(F)(i), which was addedto the Internal Revenue Code by section1232(a) of the American Recovery andReinvestment Tax Act of 2009, Pub. L.No. 111–5, 123 Stat. 115 (2009), generallyprovides that § 163(e)(5) does not apply toany AHYDO issued during the period be-ginning on September 1, 2008, and end-ing on December 31, 2009, in exchange(including an exchange resulting from amodification of the debt instrument) for anobligation which is not an AHYDO and theissuer (or obligor) of which is the same asthe issuer (or obligor) of such AHYDO.

Section 163(e)(5)(F)(iii) permits theSecretary to suspend the applicability of§ 163(e)(5) for AHYDOs issued afterDecember 31, 2009, if the Secretary deter-mines that such application is appropriatein light of distressed conditions in the debtcapital markets.

Pursuant to the authority granted in§ 163(e)(5)(F)(iii), the suspension of theapplicability of § 163(e)(5) provided forin § 163(e)(5)(F)(i) is extended to Decem-ber 31, 2010 for any AHYDO that is aqualified obligation. For purposes of thepreceding sentence, an AHYDO is a qual-ified obligation only if: (1) the AHYDOis issued after December 31, 2009, and onor before December 31, 2010, in exchange(including an exchange resulting from amodification of the debt instrument) foran obligation that is not an AHYDO; (2)the issuer (or obligor) of the AHYDO is

the same as the issuer (or obligor) of theobligation exchanged for the AHYDO;(3) the AHYDO does not pay interest thatwould be treated as contingent interestfor purposes of § 871(h)(4) (without re-gard to § 871(h)(4)(D)); (4) the AHYDOis not issued to a related person (withinthe meaning of § 108(e)(4)); (5) the issueprice of the AHYDO is determined un-der § 1273(b)(1), 1273(b)(2), 1273(b)(3),or 1274(b)(3), whichever is applicable,and the regulations thereunder; and (6)the AHYDO would not otherwise be anAHYDO if its issue price were increasedby the amount of any discharge of indebt-edness income realized by the issuer (orobligor) upon the exchange.

For example, assume that prior to 2010Corporation X issued a debt instrumentthat was not an AHYDO. In 2010, Cor-poration X exchanges the debt instrumentissued prior to 2010, which has an ad-justed issue price of $100x as of the ex-change date, for a new debt instrumentthat is an AHYDO with an issue price of$80x (determined under § 1273(b)(3)) anda stated redemption price at maturity of$100x. Corporation X realizes $20x of dis-charge of indebtedness income on the ex-change. To determine whether the newdebt instrument is a qualified obligation,the issue price of the new debt instrumentis increased from $80x to $100x ($80xplus $20x) and this deemed issue price isused to determine whether the new debtinstrument is an AHYDO for purposes ofthis notice. If the new debt instrumentwould be an AHYDO if the issue pricewere $100x, then the new debt instrumentis not a qualified obligation and the newdebt instrument does not qualify for therelief provided by § 163(e)(5)(F) and thisnotice. If the new debt instrument wouldnot be an AHYDO if the issue price were$100x, then the new debt instrument is aqualified obligation and the new debt in-strument does qualify for the relief pro-vided by § 163(e)(5)(F) and this notice,provided that the other requirements to bea qualified obligation are satisfied.

The principal author of this noticeis William E. Blanchard of the Officeof Associate Chief Counsel (FinancialInstitutions & Products). For further in-formation regarding this notice, contact

William E. Blanchard at (202) 622–3950(not a toll-free call).

Treatment of CertainObligations Under Section956(c)

Notice 2010–12

1. On October 27, 2008, the TreasuryDepartment and the Internal Revenue Ser-vice (Service) published Notice 2008–91,2008–43 I.R.B. 1001, which describes reg-ulations that the Treasury Department andthe Service intend to issue that will pro-vide an elective exclusion from the defi-nition of “obligation” for purposes of sec-tion 956 of the Internal Revenue Code forthe first two taxable years of a controlledforeign corporation ending after October 3,2008. Notice 2008–91, however, does notapply to taxable years of a controlled for-eign corporation beginning after Decem-ber 31, 2009. The Treasury Departmentand the Service subsequently issued No-tice 2009–10, 2009–1 C.B. 419, to pro-vide that the regulations described in No-tice 2008–91 will also apply to the thirdconsecutive taxable year of a controlledforeign corporation, if any, that ends afterOctober 3, 2008, and that ends on or beforeDecember 31, 2009.

This notice provides that the regulationsdescribed in Notice 2008–91 will also ap-ply to the taxable year of a controlled for-eign corporation that immediately followsthe last taxable year of such controlled for-eign corporation to which the regulationsdescribed in Notice 2008–91 could applywithout regard to this notice. In no caseshall the regulations described in Notice2008–91 apply to a taxable year of a con-trolled foreign corporation beginning onor after January 1, 2011. The TreasuryDepartment and the Service do not antici-pate extending the application of the regu-lations described in Notice 2008–91 to anyadditional periods.

2. On May 27, 2008, the Treasury De-partment and the Service published Rev.Proc. 2008–26, 2008–1 C.B. 1014, whichapplies to determine whether securities are“readily marketable” for purposes of sec-tion 956(c)(2)(J) for any day during calen-

2010–4 I.R.B. 326 January 25, 2010

dar years 2007 or 2008, for which it is rel-evant whether securities are readily mar-ketable for purposes of that section. InNotice 2009–10, the Treasury Departmentand the Service subsequently extended thatperiod to include any such day during cal-endar year 2009. This notice extends theapplication of Rev. Proc. 2008–26 toany day during calendar year 2010, forwhich it is relevant whether securities arereadily marketable for purposes of section956(c)(2)(J) (in addition to any day duringcalendar years 2007, 2008 or 2009).

DRAFTING INFORMATION

The principal author of this notice isPhyllis E. Marcus of the Office of Asso-ciate Chief Counsel (International). Forfurther information regarding this no-tice, contact Phyllis E. Marcus at (202)622–3840 (not a toll-free call).

Form 1120, Form 1120–F,Form 1120S, Form 990, andForm 990–PF Electronic FilingWaiver Request Procedures

Notice 2010–13

Background

This notice provides procedures for cor-porations, electing small business corpo-rations, and organizations required to filereturns under section 6033 (filers) to re-quest a waiver of the requirement to elec-tronically file Form 1120, U.S. Corpora-tion Income Tax Return; Form 1120–F,U.S. Income Tax Return of a Foreign Cor-poration; Form 1120S, U.S. Income TaxReturn for an S Corporation; Form 990,Return of Organization Exempt From In-come Tax; Form 990–PF, Return of PrivateFoundation or Section 4947(a)(1) Nonex-empt Charitable Trust Treated as a PrivateFoundation; and returns, amended returns,and superseding returns in the Form 1120and 990 series of returns when required byregulations and IRS publications. This no-tice also includes guidance on the timelyfiling of a return required to be electroni-cally filed that is rejected.

Section 6011(e) authorizes the InternalRevenue Service (Service) to issue regula-tions that require an entity to file returns

on electronic media when the entity is re-quired to file at least 250 returns during thecalendar year. On November 13, 2007, theTreasury Department and the Service is-sued final regulations that require certainlarge corporations, electing small businesscorporations, and organizations required tofile returns under section 6033 to electron-ically file their income tax or annual infor-mation returns. T.D. 9363, 2007–2 C.B.1084, 72 F.R. 63807.

Under the final regulations, corpora-tions that meet this 250 return thresh-old and that have assets of $10 millionor more generally must file their Form1120 or Form 1120S returns electroni-cally for taxable years ending on or afterDecember 31, 2006. Foreign corporationsthat meet this 250 return threshold andthat have assets of $10 million or moregenerally must file their Form 1120–Felectronically for taxable years ending onor after December 31, 2008.

The final regulations also generallyrequire that tax exempt organizationswith assets of $10 million or more thatare required to file returns under sec-tion 6033 and that meet the 250 returnthreshold file their Form 990 electroni-cally for taxable years ending on or afterDecember 31, 2006. The final regulationsfurther generally require certain taxexempt organizations, private foundations,or section 4947(a)(1) trusts (regardless ofasset size) that are required to file returnsunder section 6033 and that meet the 250return threshold to file their Form 990–PFelectronically for taxable years ending onor after December 31, 2006.

Exclusions from the e-file Requirement

Final regulations sections 301.6011–5,301.6033–4, and 301.6037–2 and IRSpublications provide for exceptions andhardship waivers from the electronic filingrequirement for corporations, organiza-tions required to file returns under section6033, and electing small business corpora-tions. IRS Publication 4163, Modernizede-File (MeF) Information for AuthorizedIRS e-file Providers for Business Returns,and IRS Publication 4164, Modernizede-File (MeF) Guide for Software Develop-ers And Transmitters, contain instructionsfor filing corporate and tax-exempt organ-ization returns electronically, and excludecertain types of returns from the electronic

filing requirement. For a complete and upto date list of the exclusions or for furtherinformation on electronic filing, refer toPublication 4163, Publication 4164, andthe IRS.gov Internet site. The Service willpost answers to Frequently Asked Ques-tions on this site.

Timely Filing of Rejected e-filed Returnsand Perfection Procedures

If the return required to be filed elec-tronically is transmitted on or before thedue date (including extensions) and is re-jected, but the electronic return originatoror the filer comply with the following re-quirements for timely submission of the re-turn, the return will be considered timelyfiled and any elections attached to the re-turn will be considered valid. For returnsfiled on or after January 1, 2010, the Ser-vice will allow the filer 10 calendar daysfrom the date of first transmission to per-fect the return for electronic resubmission.

If the electronic return cannot be ac-cepted for processing electronically, thefiler must file a paper return with theService Center where it would normallybe filed. In order for the paper returnto be considered timely, it must be post-marked by the U.S. Postal Service (or aforeign postal service, or in the case ofprivate delivery services designated byNotice 2004–83, 2004–2 C.B. 1030, havea postmark date as determined by Notice97–26, 1997–1 C.B. 413), or delivered tothe Service by the later of the due date ofthe return (including extensions), or 10calendar days after the date the Servicelast gives notification to the filer that thereturn has been rejected, as long as:

(1) The first transmission was made onor before the due date of the return (includ-ing extensions) and

(2) The last transmission was madewithin 10 calendar days of the first trans-mission.

The paper return must be completedconsistent with the instructions to file thereturn, including providing required in-formation from the taxpayer and includethe signature of the tax return preparer,if any. The PIN that was used on theelectronically filed return that was re-jected may not be used as the signatureon the paper return. Corporations, part-nerships, and tax-exempt organizationsthat are required to e-file must contact

January 25, 2010 327 2010–4 I.R.B.

the e-Help Desk ((866) 255–0654) forassistance in correcting rejected returnsbefore filing a paper return. If thetaxpayer cannot correct the rejected returnerrors, they must receive authorizationfrom the e-Help Desk prior to filing apaper return. However, the taxpayer is nototherwise required to complete a waiverrequest as discussed below.

If the paper return is postmarked afterits due date (including extensions), thenthe paper return should include an expla-nation of why the return is being filed af-ter the due date and include a copy of theService’s final rejection notification. Sim-ilarly, if the paper return is being submittedby a corporation, partnership, or tax-ex-empt entity that is required to e-file the re-turn, then the return should include an ex-planation of why the return is being filed inpaper form and include a copy of the Ser-vice’s final rejection notification. A paperreturn filed in accordance with the aboveprocedures will be considered timely filed,any elections attached to the return will beconsidered valid, and no penalty will beimposed for failing to e-file the return.

The procedures set forth in the preced-ing paragraphs apply to submissions of pa-per returns only when the filer has unsuc-cessfully attempted to e-file. Filers whoare required to e-file but desire to seek awaiver of that requirement under a claimof undue hardship must use the proceduresdiscussed below in order to receive IRS ap-proval of a waiver request.

Requests for Waiver of Electronic FilingRequirement Due to Undue Hardship

When certain filers required to file over250 returns fail to file electronically as re-quired, those filers may be liable for fail-ure to file penalties under I.R.C. §§ 6651or 6652, unless the filer can establish thatthe failure to file the return electronicallywas due to reasonable cause and not dueto willful neglect. The final regulationspermit the Service to waive the electronicfiling requirement if the filer demonstratesthat undue hardship would result if it wererequired to file its return electronically.The regulations require that filers seekinga waiver should request that waiver in themanner prescribed in applicable revenueprocedures or publications.

The Service will approve or deny re-quests for a waiver of the electronic fil-

ing requirement based on each filer’s par-ticular facts and circumstances. In de-termining whether to approve or deny awaiver request, the Service will considerthe filer’s ability to timely file its returnelectronically without incurring an undueeconomic hardship. The Service will gen-erally grant a waiver where the filer candemonstrate the undue hardship that wouldresult by complying with the electronicfiling requirement, including any incre-mental costs to the filer. Mindful of thesoftware and technological issues in fil-ing electronically, the Service also gener-ally will grant a waiver where technologyissues prevent the filer from filing its re-turn electronically. Guidance on situationsin which deviations or exclusions from theelectronic filing requirement can be madewithout a waiver is available in IRS Publi-cation 4163, IRS Publication 4164, and onthe IRS.gov Internet site.

Elements of a Waiver Request ClaimingUndue Hardship

To request a waiver, the filer must filea written request containing the followinginformation:

(1) A notation at the top of the requeststating, in large letters, the type of formfollowed by the words “e-file Waiver Re-quest” (e.g., “Form 1120 e-file Waiver Re-quest” or “Form 990 e-file Waiver Re-quest”).

(2) The filer’s name, federal tax identi-fication number, mailing address, contactname, phone number and e-mail address.

(3) The type of form for which thewaiver is requested.

(4) The taxable year for which thewaiver is requested.

(5) The value of the filer’s total assets atthe end of the taxable year as reported (orto be reported) on the entity’s return.

(6) A detailed statement which lists:a) the steps the filer has taken in an

attempt to meet its requirement to timelyfile its return electronically,

b) why the steps were unsuccessful,c) the undue hardship that would re-

sult by complying with the electronic fil-ing requirement, including any incremen-tal costs to the filer of complying with theelectronic filing requirement. Incrementalcosts are those costs that are above and be-yond the costs to file on paper. The incre-mental costs must be supported by a de-

tailed computation. The detailed computa-tion must include a schedule detailing thecosts to file on paper and the costs to fileelectronically.

(7) A statement as to what steps the filerwill take to assure its ability to file futurereturns electronically.

(8) A statement (signed by an officerauthorized to sign the return, as defined insection 6062 of the Code) with the follow-ing language:

Under penalties of perjury, I declarethat the information contained in thiswaiver request is true, correct and com-plete to the best of my knowledge andbelief.

Requests made by an authorized repre-sentative of the filer must include a validpower of attorney.

The waiver request should not be at-tached to the filer’s paper tax return. Ex-tension requests or payments should not besubmitted with the waiver request.

Time for Filing a Waiver Request

Filers are encouraged to file electronicfiling waiver requests for failure to file areturn electronically as soon as possibleafter it is determined that the filer is unableto electronically file the return or amendedreturn. This will give the Service time toprocess the waiver request.

Place for Filing a Waiver Request

Until the Service issues further guid-ance, filers should file a waiver requestwith the Ogden Submission ProcessingCenter.

Use the following address if using theU.S. Postal Service:

Internal Revenue ServiceOgden Submission Processing CenterAttn: Forms 1120 and 990 e-fileWaiver Request, Stop 1057

Ogden, UT 84201

Use the following address if using anovernight delivery service:

Internal Revenue ServiceOgden Submission Processing CenterAttn: Forms 1120 and 990 e-file WaiverRequest, Stop 1057

1973 N. Rulon White Blvd.Ogden, UT 84404

2010–4 I.R.B. 328 January 25, 2010

Filers may also fax the waiver requestto the following number: (877) 477–0575.

Approval of the Waiver Request

The Service will review and processwaiver requests in a timely manner andwill send the filer written notice of anyapproval or rejection of the filer’s waiverrequest. The Service will not be consid-ered to have waived the e-filing require-ment unless the filer receives written ap-proval from the Service that the waiver re-quest has been approved. In the absence ofwritten approval, a failure to e-file may besubject to penalty unless such failure wasdue to reasonable cause and not willful ne-glect.

Effect on Other Documents

This notice supersedes Notice 2005–88,2005–2 C.B. 1060.

Effective Date

This notice is effective for all returns,including amended and superseding re-turns, filed after December 31, 2009.

Contact Information

Software developers and vendors maycontact the e-Help Desk at (866) 255–0654with questions about corporate e-file. Fur-ther information is available on the e-filefor Charities and Nonprofits webpage atthe IRS.gov Internet site.

The principal author of this announce-ment is Michael Hara of the Office of As-sociate Chief Counsel (Procedure & Ad-ministration). For questions concerning arequest for waiver, you may contact thee-Help Desk at (866) 255–0654. To haveyour call directed to the appropriate area,select the options for e-file questions, busi-ness returns, and the form type for whichyou are calling.

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, §§ 469, 1.469–4.)

Rev. Proc. 2010–13

SECTION 1. PURPOSE

This revenue procedure requires tax-payers to report to the Internal RevenueService their groupings and regroupings ofactivities and the addition of specific activ-ities within their existing groupings of ac-tivities for purposes of section 469 of theInternal Revenue Code and § 1.469–4 ofthe Income Tax Regulations.

On August 4, 2008, Notice 2008–64,2008–31 I.R.B. 268, (the notice) was pub-lished in the Internal Revenue Bulletin.The notice proposed a disclosure regimefor taxpayer groupings under section 469and solicited comments both on whetherthe proposal sufficiently balanced the needfor disclosure with taxpayer burden, andon alternative approaches. In response, theService received several comments sug-gesting ways in which the proposal couldbe improved. This revenue procedure re-flects some of the changes suggested bythe comments received. Specifically, theregime proposed in the notice requiredtaxpayers to make a disclosure wheneverthere is a disposition of an activity withina chosen grouping; this requirement hasbeen removed. In addition, the notice didnot contain a relief provision for taxpay-ers that, in a given year, fail to make therequired disclosure. Section 4.07 of thisrevenue procedure contains a relief pro-vision for taxpayers that can meet certainadditional criteria to demonstrate theirgroupings of activities.

SECTION 2. BACKGROUND

.01 Section 469 generally provides thatlosses from and credits attributable topassive trade or business activities, to theextent they exceed, respectively, incomefrom or the regular tax liability associatedwith all such passive activities, are dis-allowed for the taxable year and carriedforward to the subsequent taxable year,subject to certain exceptions.

.02 Section 469(g)(1)(A) generally pro-vides that if during the taxable year a tax-payer disposes of his entire interest in any

passive activity (or former passive activ-ity), and all gain or loss realized on suchdisposition is recognized, the excess of (i)any loss from such activity for such tax-able year (determined after the applicationof section 469(b)), over (ii) any net in-come or gain for such taxable year fromall other passive activities (determined af-ter the application of section 469(b)), shallbe treated as a loss which is not from a pas-sive activity.

.03 Section 1.469–4 sets forth the rulesfor grouping a taxpayer’s trade or businessactivities and rental activities for purposesof applying the passive activity loss andcredit limitation rules of section 469.

.04 Section 1.469–4(c)(1) provides thatone or more trade or business activities orrental activities may be treated as a singleactivity if the activities constitute an ap-propriate economic unit for the measure-ment of gain or loss for purposes of section469.

.05 Section 1.469–4(c)(2) providesguidelines for determining whether activ-ities constitute an appropriate economicunit and, therefore, may be treated as a sin-gle activity. Section 1.469–4(d) describeslimitations on grouping certain activi-ties. Section 1.469–4(d)(5) provides thata C corporation subject to section 469, anS corporation, or a partnership (a section469 entity) must group its activities underthe rules of § 1.469–4. Once a section 469entity groups its activities, a shareholderor partner may group those activities witheach other, with the activities conducteddirectly by the shareholder or partner, andwith activities conducted through othersection 469 entities, in accordance withthe rules of this section. The shareholderor partner may not treat activities groupedtogether by a section 469 entity as separateactivities.

.06 Section 1.469–4(e)(1) provides thatexcept as provided in § 1.469–4(e)(2)and § 1.469–11 (providing three periodsof time, all of which are now closed, inwhich a taxpayer could have regroupedits activities without having to establishthat the original grouping was clearly in-appropriate under § 1.469–4(e)(2)), oncea taxpayer has grouped activities under§ 1.469–4, the taxpayer generally may notregroup those activities in subsequent tax-able years. Taxpayers must comply withdisclosure requirements that the Commis-sioner may prescribe with respect to both

January 25, 2010 329 2010–4 I.R.B.

their original groupings and the additionand disposition of specific activities withinthose existing groupings in subsequenttaxable years.

.07 Section 1.469–4(e)(2) provides thatif it is determined that a taxpayer’s origi-nal grouping was clearly inappropriate ora material change in the facts and circum-stances has occurred that makes the origi-nal grouping clearly inappropriate, the tax-payer must regroup the activities and mustcomply with the disclosure requirementsthat the Commissioner may prescribe.

.08 Section 1.469–4(f) provides that theCommissioner may regroup a taxpayer’sactivities if any of the activities result-ing from the taxpayer’s grouping is notan appropriate economic unit and a princi-pal purpose of the taxpayer’s grouping (orfailure to regroup under paragraph (e) of§ 1.469–4) is to circumvent the underlyingpurposes of section 469.

SECTION 3. SCOPE

This revenue procedure applies to alltaxpayers to which the rules in § 1.469–4apply. Special rules apply for groupings bypartnerships and S corporations and are de-scribed in section 4.05 of this revenue pro-cedure. This revenue procedure does notapply to the rental real estate activities (asdefined in § 1.469–9(b)(3)) of a taxpayer ina year in which the taxpayer is a qualifyingtaxpayer (as defined in § 1.469–9(b)(6))if it has made the election provided for in§ 1.469–9(g).

SECTION 4. APPLICATION

.01 Disclosure Requirements for Tax-payer Groupings.

Sections 4.02 through 4.04 of this rev-enue procedure require taxpayers to re-port to the Service, as part of their an-nual income tax return, certain changes tothe taxpayer’s groupings that occur dur-ing the taxable year. Section 4.05 of thisrevenue procedure provides special rulesfor groupings by partnerships and S cor-porations. Section 4.06 of this revenueprocedure governs the treatment of group-ings existing prior to the effective date ofthis revenue procedure. Section 4.07 ofthis revenue procedure stipulates the con-sequences for failing to make the disclo-sures required by sections 4.02 through4.04.

.02 Statement Required for New Group-ings.

A taxpayer shall file a written state-ment with its original income tax returnfor the first taxable year in which two ormore trade or business activities or rentalactivities are originally grouped as a sin-gle activity. This statement must identifythe names, addresses, and employer iden-tification numbers, if applicable, for thetrade or business activities or rental activ-ities that are being grouped as a single ac-tivity. In addition, any statement report-ing a new grouping of two or more tradeor business activities or rental activities asa single activity must contain a declarationthat the grouped activities constitute an ap-propriate economic unit for the measure-ment of gain or loss for purposes of section469.

.03 Statement Required for Addition ofNew Activities to Existing Groupings.

If a taxpayer adds a new trade or busi-ness activity or a rental activity to an ex-isting grouping for a taxable year, the tax-payer shall file a written statement withthe taxpayer’s original income tax returnfor that taxable year. This statement mustidentify the names, addresses, and em-ployer identification numbers, if applica-ble, for the new trade or business activ-ity or rental activity that is being addedto the existing grouping, as well as thenames, addresses, and employer identifi-cation numbers, if applicable, for the activ-ity or activities within the existing group-ing. In addition, the statement reporting anaddition to an existing grouping must con-tain a declaration that the activities consti-tute an appropriate economic unit for themeasurement of gain or loss for purposesof section 469.

.04 Statement Required for Regroup-ings.

Under § 1.469–4(e)(2), if it is deter-mined that the taxpayer’s original group-ing was clearly inappropriate or a materialchange in the facts and circumstances hasoccurred that makes the original groupingclearly inappropriate, the taxpayer must re-group the activities. If such a determina-tion and regrouping is made, the taxpayershall file a written statement with the tax-payer’s original income tax return for thetaxable year in which the trade or busi-ness activities or rental activities are re-grouped. This statement must identify thenames, addresses, and employer identifi-

cation numbers, if applicable, for the tradeor business or rental activities that are be-ing regrouped. If two or more activities areregrouped into a single activity, the state-ment reporting a regrouping must also con-tain a declaration that the regrouped ac-tivities constitute an appropriate economicunit for the measurement of gain or lossfor purposes of section 469. Furthermore,the statement reporting a regrouping mustcontain an explanation of why the tax-payer’s original grouping was determinedto be clearly inappropriate or the nature ofthe material change in the facts and cir-cumstances that makes the original group-ing clearly inappropriate.

.05 Special Rules for Groupings byPartnerships and S Corporations.

Under § 1.469–4(d)(5), a section 469entity must group its activities under therules of that section. However, partner-ships and S corporations are not subjectto the requirements of §§ 4.02, 4.03, and4.04 of this revenue procedure. Instead,partnerships and S corporations must com-ply with the disclosure instructions forgrouping activities provided for on Form1065, U.S. Return of Partnership Incomeand Form 1120S, U.S. Income Tax Returnfor an S Corporation, respectively. Gener-ally, compliance with the applicable formrequires disclosing the entity’s groupingsto the partner or shareholder by separatelystating the amounts of income and lossfor each grouping conducted by the en-tity on attachments to the entity’s annualSchedule K–1. The partner or shareholderis not required to make a separate dis-closure of the groupings disclosed by theentity under §§ 4.02, 4.03, and 4.04 ofthis revenue procedure unless the partneror shareholder (1) groups together any ofthe activities that the entity does not grouptogether, (2) groups the entity’s activitieswith activities conducted directly by thepartner or shareholder, or (3) groups theentity’s activities with activities conductedthrough other section 469 entities. Pur-suant to § 1.469–4(d)(5)(i), a shareholderor partner may not treat activities groupedtogether by a section 469 entity as separateactivities.

.06 Reporting of Pre-Existing Group-ings Required only upon Change.

A taxpayer is not required to file a writ-ten statement reporting the grouping of thetrade or business activities and rental activ-ities that have been made prior to the effec-

2010–4 I.R.B. 330 January 25, 2010

tive date of this revenue procedure (pre-ex-isting groupings) until the taxpayer makesa change to the grouping as described insections 4.03 and 4.04 of this revenue pro-cedure.

.07 Effect of Failure to Report.Except as provided in § 4.05, if a tax-

payer is engaged in two or more trade orbusiness activities or rental activities andfails to report whether the activities havebeen grouped as a single activity in accor-dance with this revenue procedure, theneach trade or business activity or rentalactivity will be treated as a separate ac-tivity for purposes of applying the pas-sive activity loss and credit limitation rulesof section 469. Notwithstanding the pre-vious sentence, a timely disclosure shallbe deemed made by a taxpayer who hasfiled all affected income tax returns con-sistent with the claimed grouping of activ-ities and makes the required disclosure onthe income tax return for the year in whichthe failure to disclose is first discoveredby the taxpayer. If the failure to discloseis first discovered by the Service, how-ever, the taxpayer must also have reason-able cause for not making the disclosuresrequired by this revenue procedure. Al-though the default rule established by thissection 4.07 will generally result in unre-ported activities being treated as separateactivities, the Commissioner may still re-group a taxpayer’s activities to prevent taxavoidance pursuant to § 1.469–4(f). Thisrevenue procedure provides alternative re-

lief for untimely filing of the disclosuresrequired by this revenue procedure; there-fore, relief for untimely disclosures under§ 301.9100 of the Procedure and Admin-istration Regulations is not available pur-suant to § 301.9100–1(d)(2).

SECTION 5. EFFECTIVE DATE

This revenue procedure is effectivefor taxable years beginning on or afterJanuary 25, 2010.

SECTION 6. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–2156.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validOMB control number.

The collections of information in thisrevenue procedure are in section 4. Thisinformation is required to be submitted inorder to disclose a taxpayer’s grouping ofactivities. This information will be used tomeasure gain or loss for purposes of sec-tion 469. The collection of information isrequired to assist in compliance with tax

obligations. The likely respondents are in-dividuals and section 469 entities, includ-ing certain C corporations, S corporations,and partnerships.

The estimated total annual reportingburden for the taxable years in which thisrevenue procedure applies is 36,000 hours.

The estimated annual burden per re-spondent for the taxable years in which thisrevenue procedure applies varies from 10minutes to 20 minutes, depending on in-dividual circumstances, with an estimatedaverage burden of 15 minutes. The esti-mated annual number of respondents forthe taxable years in which this revenueprocedure applies is 144,000.

The estimated annual frequency of re-sponses is regular.

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

DRAFTING INFORMATION

The principal authors of this revenueprocedure are Bryan A. Rimmke andJonathan E. Cornwell of the Office ofAssociate Chief Counsel (Passthroughs& Special Industries). For further in-formation regarding this notice, contactMr. Rimmke or Mr. Cornwell at (202)622–3050 (not a toll-free call).

January 25, 2010 331 2010–4 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulations

Amendments to the Section7216 Regulations—Disclosureor Use of Information byPreparers of Returns

REG–131028–09

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: In this issue of the Bulletin,the IRS is issuing temporary regulations(T.D. 9478) that provide updated guidanceaffecting tax return preparers regarding theuse of information related to lists for solici-tation of tax return business; the disclosureor use of statistical compilations of dataunder section 7216 of the Internal RevenueCode (Code) by a tax return preparer inconnection with, or in support of, a tax re-turn preparer’s tax return preparation busi-ness, including identification of additionallimited circumstances when a tax returnpreparer who compiles statistical informa-tion may disclose the compilation withouttaxpayer consent, and the placement of ad-ditional restrictions on the content of thecompilation that may be disclosed underthose circumstances without taxpayer con-sent; and the disclosure or use of informa-tion for the purpose of performing conflictreviews. The text of those temporary regu-lations also serves as the text of these pro-posed regulations. This document invitescomments from the public on these regu-lations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by March 5, 2010.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–131028–09),room 5203, Internal Revenue Service, POBox 7604, Ben Franklin Station, Wash-ington, D.C. 20044. Submissions may be

hand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–131028–09),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, N.W.,Washington, D.C., or sent electronically,via the Federal eRulemakingPortal at www.regulations.gov (IRSREG–131028–09).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Molly K. Donnelly, (202)622–4940; concerning the submissionsof comments and requests for hearing,Richard Hurst, (202) 622–7180 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

This document contains proposedamendments to 26 CFR part 301 undersection 7216 to provide modified rulesrelating to the ability of a tax returnpreparer to use tax return information,without taxpayer consent, for the pur-poses of compiling, maintaining, andusing lists for solicitation of tax returnbusiness under §301.7216–2(n); discloseand use statistical compilations of datadescribed in §301.7216–1(b)(3)(i)(B) un-der §301.7216–2(o), and disclose anduse tax return information for the pur-pose of performing conflict reviews under§301.7216–2(p). Temporary regulations inthe Procedure and Administration sectionof this issue of the Bulletin amend 26 CFRpart 301. The text of those regulationsalso serves as the text of these regulations.The preamble to the temporary regulationsexplains the temporary regulations andthese proposed regulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regu-lations, and because the regulation does

not impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The IRS and the Treasury Department re-quest comments on the clarity of the pro-posed rules, how they can be made easierto understand, and the administrability ofthe rules in the proposed regulations. Allcomments will be made available for pub-lic inspection and copying. A public hear-ing will be scheduled if requested in writ-ing by any person that timely submits writ-ten comments. If a public hearing is sched-uled, notice of the date, time and place forthe public hearing will be published in theFederal Register.

Drafting Information

The principal author of these regula-tions is Molly K. Donnelly, Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7216–2 is amended

by revising paragraphs (n), (o), and (p) toread as follows:

2010–4 I.R.B. 332 January 25, 2010

§301.7216–2 Permissible disclosures oruses without consent of the taxpayer.

* * * * *(n) [The text of proposed amendments

to §301.7216–2(n) is the same as the textfor §301.7216–2T(n) published elsewherein this issue of the Bulletin].

(o) [The text of proposed amendmentsto §301.7216–2(o) is the same as the textfor §301.7216–2T(o) published elsewherein this issue of the Bulletin].

(p) [The text of proposed amendmentsto §301.7216–2(p) is the same as the textfor §301.7216–2T(p) published elsewherein this issue of the Bulletin].

* * * * *

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on December 29,2009, 4:15 p.m., and published in the issue of the FederalRegister for January 4, 2010, 75 F.R. 94)

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

Announcement 2010–1

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

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

activities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on January 25, 2010,and would end on the date the court firstdetermines that the organization is not de-scribed in section 170(c)(2) as more partic-ularly set forth in section 7428(c)(1). Forindividual contributors, the maximum de-duction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that were thebasis for revocation.

Call of the Wild Sportsmen, IncMt Airy, MD

Automatic Approval ofChanges in Funding Methodfor Takeover Plans andChanges in Pension ValuationSoftware

Announcement 2010–3

This announcement provides, for planyears beginning on or after January 1,2009, automatic approval for certainchanges in funding method with respectto single-employer defined benefit plansthat result either from a change in thevaluation software used to determine theliabilities for such plans or from a changein the enrolled actuary and the businessorganization providing actuarial servicesto the plan. This guidance is being pro-vided in response to numerous requestsfrom actuaries and plan sponsors, manyof whom are continuing to modify theirvaluation software in order to implementthe changes to the funding rules made bythe Pension Protection Act of 2006 (PPA’06), the Worker, Retiree, and EmployerRecovery Act of 2008 (WRERA ’08),and guidance regarding these legislativechanges.

Background

A change in funding method can oc-cur when the business organization pro-viding actuarial services to a plan modi-fies its valuation software. A change infunding method can also occur when theenrolled actuary and business organizationproviding actuarial services for a plan ischanged and the new enrolled actuary usesdifferent valuation software than the priorenrolled actuary, or otherwise applies theoverall funding method in a different man-ner (plans for which both the enrolled actu-ary and the business organization provid-ing actuarial services are changed are re-ferred to as “takeover plans”).

Under § 412(c)(5) of the Code (andits counterpart in section 302(c)(5) ofERISA) as in effect prior to PPA ‘06, anychange of funding method required theapproval of the Secretary. Revenue Proce-dure 2000–40, 2000–2 C.B. 357, providedautomatic approval for certain changes infunding method resulting from changesin valuation software (section 4.04) andfor changes in funding method that oc-curred with respect to takeover plans(section 4.03). With respect to changesin funding method resulting from changesin valuation software, Revenue Proce-dure 2000–40 provided approval for thechanges if: (1) net charges to the fundingstandard account determined using thenew valuation software did not differ bymore than 2% from the net charges de-termined using the old valuation software(the “pre-PPA 2% test”); (2) the modifica-tion to the computations in the valuationsoftware or the use of a different valuationsoftware system were designed to produceresults that were no less accurate than theresults produced prior to the modifica-tion or change; and (3) the approval fortakeover plans described in the next para-graph was not applicable.

With respect to takeover plans, Rev-enue Procedure 2000–40 provided ap-proval for changes in funding method if:(1) there was both a change in the enrolledactuary for the plan and a change in thebusiness organization providing actuarialservices to the plan; and (2) the methodused by the new actuary was applied to theprior plan year and that the absolute valueof each resulting difference in normal cost,accrued liability (if directly computed un-der the method), and actuarial value of

January 25, 2010 333 2010–4 I.R.B.

assets, that was attributable to the changein method did not exceed 5% of the re-spective amounts calculated by the prioractuary for that prior year (the “pre-PPA5% test”).

PPA ‘06 Funding Rules

Section 412 of the Code and section302 of ERISA, as amended by PPA ‘06,retain the requirement that a change infunding method be approved by the Sec-retary. Under PPA ‘06, a single fund-ing method must be used for any single-employer defined benefit plan, but theremay be some variation in the manner themethod is applied. Final regulations wereissued under § 430 on October 15, 2009,T.D. 9467, 2009–50 I.R.B. 760, 74 FR53004, (the “October 2009 regulations”)and are generally effective for plan yearsbeginning on or after January 1, 2010.Under § 1.430(d)–1(f)(1)(iv) of the Oc-tober 2009 regulations, a plan’s fundingmethod includes not only the overall fund-ing method used by the plan, but also eachspecific method of computation used in ap-plying the overall method. Accordingly, achange in valuation software can result ina change in funding method that requiresthe approval of the Secretary.

The October 2009 regulations provideapproval for a number of changes in fund-ing method and for changes in the inter-est rate. For the first plan year beginningon or after January 1, 2008, any changesin funding method that are not inconsis-tent with the requirements of § 430 aretreated as having been approved by theCommissioner and do not require specificprior approval. For plan years beginning in2009 and 2010, certain changes in fundingmethod (concerning the methodology ofallocating liabilities to years, the selectionof the valuation date, and the selection ofthe asset valuation method) and in the se-lection of interest rates are also approved.Section 1.430(d)–1(g)(3) provides generalapproval for a change in funding method(which would include a change in fundingmethod resulting from a change in valua-tion software) for the first plan year begin-ning on or after January 1, 2010. However,if certain sections of the regulations wereapplied to a plan for a plan year beginningon or after January 1, 2009, but before Jan-uary 1, 2010, approval is provided with re-spect to such a plan for a change in fund-

ing method (including a change in fundingmethod resulting from a change in valu-ation software) for that plan year, in lieuof the general approval for changes for thefirst plan year beginning on or after Jan-uary 1, 2010.

Even though approval was provided forcertain changes for the 2009 and 2010 planyears, actuaries and plan sponsors have ex-pressed concern that changes in valuationsoftware may encompass changes in fund-ing method for which the October 2009regulations do not provide automatic ap-proval. Furthermore, forthcoming regula-tions under § 430 may result in additionalchanges in valuation software.

Revenue Procedure 2000–40 has notbeen updated to reflect the changes madeby PPA ‘06. Moreover, the calculationsthat were used for the pre-PPA 2% testand the pre-PPA 5% test are not used un-der § 430 of the Code and section 303 ofERISA.

Automatic Approval for Takeover Plansand Valuation Software Changes

For plan years beginning on or af-ter January 1, 2009, automatic approvalis provided for any change in fundingmethod under § 430 if the following con-ditions are satisfied:

(1) There has been a change both in theenrolled actuary for the plan and in thebusiness organization providing actuarialservices to the plan;

(2) The new method is substantiallythe same as the method used by the priorenrolled actuary and is consistent with thedescription of the method contained in theprior actuarial valuation report or priorSchedule SB of Form 5500;

(3) The funding target and target normalcost (without regard to any adjustments foremployee contributions and plan-relatedexpenses), as determined for the prior planyear by the new enrolled actuary (using theactuarial assumptions of the prior enrolledactuary), are both within 5% of those val-ues as determined by the prior enrolled ac-tuary; and

(4) For plan years beginning on or af-ter January 1, 2011, the actuarial value ofplan assets, as determined for the prior planyear by the new enrolled actuary (using theactuarial assumptions of the prior enrolledactuary), is within 5% of the value as de-termined by the prior enrolled actuary.

Conditions (2), (3), and (4) are each ap-plied by disregarding any change in fund-ing method for which approval has beenautomatically provided (without regard tothis announcement) for the current planyear. For example, automatic approval isprovided under § 1.430(d)–1(g)(3)(ii)(C)for changes in the allocation of liabilitiesthat are necessary to apply the rules of§ 1.430(d)–1(c)(1)(iii) for a plan year be-ginning before January 1, 2010. Thus, ifsuch a change in funding method is madefor a takeover plan for the 2009 plan year,the 5% test of condition (3) with respect tothe prior plan year (2008) is determined us-ing the allocation of liabilities used by theprior enrolled actuary.

For plan years beginning on or af-ter January 1, 2009, automatic approvalis provided for any change in fundingmethod under § 430 resulting from achange in valuation software if the follow-ing conditions are satisfied:

(1) There has not been both a changein the enrolled actuary for the plan and achange in the business organization pro-viding actuarial services to the plan;

(2) Except to the extent automatic ap-proval has been provided for a change infunding method without regard to this an-nouncement, the underlying method is un-changed and is consistent with the infor-mation contained in the prior actuarial val-uation report and prior Schedule SB ofForm 5500;

(3) The new valuation software is gen-erally used by the enrolled actuary for thesingle-employer plans to which the en-rolled actuary provides actuarial services;

(4) The funding target and target normalcost (without regard to any adjustments foremployee contributions and plan-relatedexpenses) under the new valuation soft-ware (for either the current plan year or theprior plan year) are each within 2% of therespective values under the prior valuationsoftware (all other factors being held con-stant);

(5) For plan years beginning on or af-ter January 1, 2011, the actuarial value ofassets for the plan under the new valuationsoftware (for either the current plan yearor the prior plan year) is within 2% of thevalue under the prior valuation software(all other factors being held constant); and

(6) The modifications to the computa-tions in the valuation software or the useof a different valuation software system are

2010–4 I.R.B. 334 January 25, 2010

designed to produce results that are no lessaccurate than the results produced prior tothe modifications or change.

The automatic approval provided bythis announcement will apply until it issuperseded by future guidance.

The principal authors of this announce-ment are James E. Holland, Jr. and

Carolyn E. Zimmerman of the EmployeePlans, Tax Exempt and GovernmentEntities Division. For further informationregarding this announcement, please emailRetirementPlanQuestions@irs.gov.

January 25, 2010 335 2010–4 I.R.B.

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

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

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

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

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

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

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

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

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

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

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

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

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

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

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

2010–4 I.R.B. i January 25, 2010

Numerical Finding List1

Bulletins 2010–1 through 2010–4

Announcements:

2010-1, 2010-4 I.R.B. 333

2010-2, 2010-2 I.R.B. 271

2010-3, 2010-4 I.R.B. 333

Notices:

2010-1, 2010-2 I.R.B. 251

2010-2, 2010-2 I.R.B. 251

2010-3, 2010-2 I.R.B. 253

2010-4, 2010-2 I.R.B. 253

2010-5, 2010-2 I.R.B. 256

2010-6, 2010-3 I.R.B. 275

2010-7, 2010-3 I.R.B. 296

2010-8, 2010-3 I.R.B. 297

2010-9, 2010-3 I.R.B. 298

2010-10, 2010-3 I.R.B. 299

2010-11, 2010-4 I.R.B. 326

2010-12, 2010-4 I.R.B. 326

2010-13, 2010-4 I.R.B. 327

Proposed Regulations:

REG-131028-09, 2010-4 I.R.B. 332

Revenue Procedures:

2010-1, 2010-1 I.R.B. 1

2010-2, 2010-1 I.R.B. 90

2010-3, 2010-1 I.R.B. 110

2010-4, 2010-1 I.R.B. 122

2010-5, 2010-1 I.R.B. 165

2010-6, 2010-1 I.R.B. 193

2010-7, 2010-1 I.R.B. 231

2010-8, 2010-1 I.R.B. 234

2010-9, 2010-2 I.R.B. 258

2010-10, 2010-3 I.R.B. 300

2010-11, 2010-2 I.R.B. 269

2010-12, 2010-3 I.R.B. 302

2010-13, 2010-4 I.R.B. 329

Revenue Rulings:

2010-1, 2010-2 I.R.B. 248

2010-2, 2010-3 I.R.B. 272

2010-3, 2010-3 I.R.B. 272

2010-4, 2010-4 I.R.B. 309

2010-5, 2010-4 I.R.B. 312

Treasury Decisions:

9474, 2010-4 I.R.B. 322

9475, 2010-4 I.R.B. 304

9478, 2010-4 I.R.B. 315

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2009–27 through 2009–52 is in Internal Revenue Bulletin2009–52, dated December 28, 2009.

January 25, 2010 ii 2010–4 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2010–1 through 2010–4

Notices:

2005-88

Superseded by

Notice 2010-13, 2010-4 I.R.B. 327

2008-41

Modified by

Notice 2010-7, 2010-3 I.R.B. 296

2008-55

Modified by

Notice 2010-3, 2010-2 I.R.B. 253

2008-88

Modified by

Notice 2010-7, 2010-3 I.R.B. 296

2008-113

Modified by

Notice 2010-6, 2010-3 I.R.B. 275

2008-115

Modified by

Notice 2010-6, 2010-3 I.R.B. 275

2009-11

Amplified by

Notice 2010-9, 2010-3 I.R.B. 298

2009-13

Obsoleted by

T.D. 9478, 2010-4 I.R.B. 315REG-131028-09, 2010-4 I.R.B. 332

2009-38

Amplified and superseded by

Notice 2010-2, 2010-2 I.R.B. 251

Revenue Procedures:

80-59

Modified and superseded by

Rev. Proc. 2010-11, 2010-2 I.R.B. 269

87-35

Obsoleted by

Rev. Proc. 2010-3, 2010-1 I.R.B. 110

2009-1

Superseded by

Rev. Proc. 2010-1, 2010-1 I.R.B. 1

2009-2

Superseded by

Rev. Proc. 2010-2, 2010-1 I.R.B. 90

2009-3

Superseded by

Rev. Proc. 2010-3, 2010-1 I.R.B. 110

Revenue Procedures— Continued:

2009-4

Superseded by

Rev. Proc. 2010-4, 2010-1 I.R.B. 122

2009-5

Superseded by

Rev. Proc. 2010-5, 2010-1 I.R.B. 165

2009-6

Superseded by

Rev. Proc. 2010-6, 2010-1 I.R.B. 193

2009-7

Superseded by

Rev. Proc. 2010-7, 2010-1 I.R.B. 231

2009-8

Superseded by

Rev. Proc. 2010-8, 2010-1 I.R.B. 234

2009-9

Superseded by

Rev. Proc. 2010-9, 2010-2 I.R.B. 258

2009-15

Amplified and superseded by

Rev. Proc. 2010-12, 2010-3 I.R.B. 302

2009-25

Superseded by

Rev. Proc. 2010-3, 2010-1 I.R.B. 110

Revenue Rulings:

2008-52

Supplemented and superseded by

Rev. Rul. 2010-2, 2010-3 I.R.B. 272

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–27 through 2009–52 is in Internal Revenue Bulletin 2009–52, dated December 28,2009.

2010–4 I.R.B. iii January 25, 2010

INDEXInternal Revenue Bulletins 2010–1 through2010–4

The abbreviation and number in parenthesis following the index entryrefer to the specific item; numbers in roman and italic type followingthe parenthesis refers to the Internal Revenue Bulletin in which the itemmay be found and the page number on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSCorrection of certain failures of nonqualified deferred compen-

sation plans to comply with the plan document requirementsof section 409A (Notice 6) 3, 275

Determination letters, issuing procedures (RP 6) 1, 193Letter rulings:

And determination letters, areas which will not be issuedfrom:Associates Chief Counsel and Division Counsel (TE/GE)

(RP 3) 1, 110Associate Chief Counsel (International) (RP 7) 1, 231

And general information letters, procedures (RP 4) 1, 122User fees, request for letter rulings (RP 8) 1, 234

Technical advice to IRS employees (RP 5) 1, 165Qualified plans, changes in funding method (Ann 3) 4, 333

EMPLOYMENT TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions(RP 1) 1, 1

Technical Advice Memoranda (TAMs) (RP 2) 1, 90

ESTATE TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions(RP 1) 1, 1

Technical Advice Memoranda (TAMs) (RP 2) 1, 90

EXCISE TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions(RP 1) 1, 1

Technical Advice Memoranda (TAMs) (RP 2) 1, 90

EXEMPT ORGANIZATIONSLetters rulings:

And determination letters:Areas which will not be issued from Associates Chief

Counsel and Division Counsel (TE/GE) (RP 3) 1, 110Exemption application determination letter rulings under sec-

tions 501 and 521 (RP 9) 2, 258And general information letters, procedures (RP 4) 1, 122User fees, request for letter rulings (RP 8) 1, 234

Revocations (Ann 1) 4, 333Technical advice to IRS employees (RP 5) 1, 165

GIFT TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions(RP 1) 1, 1

Technical Advice Memoranda (TAMs) (RP 2) 1, 90

INCOME TAXArbitrage treatment of certain perpetual funds (Notice 5) 2, 256Bonds:

Reissuance of tax-exempt bonds (Notice 7) 3, 296Midwestern Disaster Area Bonds, Hurricane Ike Bonds, Gulf

Opportunity Zone Bonds (Notice 10) 3, 299Consumer Price Index (CPI) adjustments, certain loans under

section 1274A for 2010 (RR 2) 3, 272Corporate reorganizations, distribution under sections

368(a)(1)(D) and 354(b)(1)(B) (TD 9475) 4, 304Disclosure of activity grouping under Code section 469 (RP 13)

4, 329Disclosure or use of information by return preparers:

Amendments to section 7216 regulations (TD 9478) 4, 315;(REG–131028–09) 4, 332

In communicating with taxpayers (RR 4) 4, 309In connection with professional liability insurance (RR 5) 4,

312Electronic filing, waiver request procedures (Notice 13) 4, 327Employer-provided vehicles, cents-per-mile rule, maximum ve-

hicle values for 2010 (RP 10) 3, 301Extension of timeframe for disclosures to persons designated in a

written request or consent pursuant to section 6103(c) (Notice8) 3, 297

Information reporting, deadline to furnish payee statements(Notice 9) 3, 298

January 25, 2010 iv 2010–4 I.R.B.

INCOME TAX—Cont.Interest:

Certain applicable high yield discount obligations issued in2010 (Notice 11) 4, 326

Investment:Federal short-term, mid-term, and long-term rates for:

January 2010 (RR 1) 2, 248Investment in U.S. property, extension of regulations (Notice 12)

4, 326Letter rulings:

And determination letters, areas which will not be issuedfrom:Associates Chief Counsel and Division Counsel (TE/GE)

(RP 3) 1, 110Associates Chief Counsel (International) (RP 7) 1, 231

And information letters issued by Associate Offices, determi-nation letters issued by Operating Divisions (RP 1) 1, 1

Personal exemption, additional for Hurricane Katrina displacedindividual (TD 9474) 4, 322

Proposed Regulations:26 CFR 301.7216–2, amended; amendments to section 7216

regulations-disclosure or use of information by preparers ofreturns (REG–131028–09) 4, 332

Regulations:26 CFR 1.358–2, amended; 1.368–2, amended; 1.368–2T,

removed; 1.1502–13, amended; corporate reorganizations,distribution under sections 368(a)(1)(D) and 354(b)(1)(B)(TD 9475) 4, 304

26 CFR 1.9300–1, added; 1.9300–1T, removed; reduction intaxable income for housing Hurricane Katrina displaced in-dividuals (TD 9474) 4, 322

26 CFR 301.7216–0, –2, amended; 301.7216–0T, –2T, added;amendments to section 7216 regulations-disclosure or useof information by preparers of returns (TD 9478) 4, 315

Requirements, trustee of a blind trust (RP 11) 2, 269Revocations, exempt organizations (Ann 1) 4, 333Section 305 distributions of stock (RP 12) 3, 302Section 338 election, qualified foreign contract (Notice 1) 2, 251Section 382 limitation, ownership changes, pre-change losses

(Notice 2) 2, 251Section 385, auction rate preferred stock (Notice 3) 2, 253Section 1256(g)(7)(C) qualified board or exchange (RR 3) 3, 272Technical Advice Memoranda (TAMs) (RP 2) 1, 90Tax conventions:

U.S.-Germany agreement with respect to consular employees(Ann 2) 2, 271

Widely held fixed investment trusts (WHIFT) transition guid-ance (Notice 4) 2, 253

SELF-EMPLOYMENT TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions(RP 1) 1, 1

Technical Advice Memoranda (TAMs) (RP 2) 1, 90

2010–4 I.R.B. v January 25, 2010

January 25, 2010 2010–4 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNETYou may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select

More Topics. Then select Internal Revenue Bulletins.

INTERNAL REVENUE BULLETINS ON CD-ROMInternal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be

purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two tosix weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE INTERNALREVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, wewould be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov)or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.

Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300