EXEMPT ORGANIZATIONS INCOME TAXBulletin No. 2012-2 January 9, 2012 HIGHLIGHTS OF THIS ISSUE These...

Bulletin No. 2012-2January 9, 2012

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

SPECIAL ANNOUNCEMENT

T.D. 9559, page 252.Final regulations amend the user fee regulations and establisha new user fee for individuals to take the registered tax returnpreparer competency examination.

INCOME TAX

Rev. Rul. 2012–1, page 255.Recurring item exception to the all events test. This rulingclarifies the treatment of certain liabilities under the recurringitem exception to the economic performance requirement un-der section 461(h)(3) of the Code. It also addresses the appli-cation of the “not material” and “better matching” requirementof the recurring item exception in the context of a lease anda service contract each having a term of one year. The rulingdistinguishes contracts for the provision of services from in-surance and warranty contracts and applies the recurring itemexception differently. Rev. Proc. 2011–14 modified and am-plified.


REG–149625–10, page 279.Proposed regulations under section 382 of the Code provideexceptions to the segregation rules, under which certaintransactions may create one or more additional public groupstreated as 5-percent shareholders, for certain sales of losscorporation stock to small shareholders and for certain re-

demptions of small shareholders. The regulations also providethat in certain circumstances certain entities owning the losscorporation generally will be treated as having no more thanone public group.

EXEMPT ORGANIZATIONS

Rev. Proc. 2012–9, page 261.This procedure sets forth issuing determination letters and rul-ings on the exempt status of organizations under sections 501and 521 of the Code. The procedures also apply to the revo-cation and modification of determination letters or rulings, andprovide guidance on the exhaustion of administrative remediesfor purposes of declaratory judgment under section 7428 ofthe Code. Rev. Proc. 2011–9 superseded.

Rev. Proc. 2012–10, page 273.This procedure sets forth updated procedures with respect toissuing rulings and determination letters on private foundationstatus under § 509(a) of the Code, operating foundation sta-tus under § 4942(j)(3), and exempt operating foundation statusunder § 4940(d)(2), of organizations exempt from Federal in-come tax under § 501(c)(3). This procedure also applies tothe issuance of determination letters on the foundation statusunder § 509(a)(3) of nonexempt charitable trusts described in§ 4947(a)(1). Rev. Proc. 2011–10 superseded.

(Continued on the next page)

Finding Lists begin on page ii.

ADMINISTRATIVE


Notice 2012–1, page 260.Optional standard mileage rates for 2012. This notice an-nounces 55.5 cents as the optional standard mileage rate forsubstantiating the amount of the deduction for the businessuse of an automobile, 14 cents as the optional rate for use ofan automobile as a charitable contribution, and 23 cents asthe optional rate for use of an automobile as a medical or mov-ing expense for 2012. The notice also provides the amounta taxpayer must use in calculating reductions to basis for de-preciation taken under the business standard mileage rate andthe maximum standard automobile cost for automobiles undera FAVR allowance. Notice 2010–88, as modified by Announce-ment 2011–40, is superseded.

Rev. Proc. 2012–12, page 275.This procedure describes the procedures and standards thatorganizations must follow to be identified by the Service as aqualifying organization that may accredit continuing educationproviders under section 10.9(a)(1)(iii) of Circular 230 and theprocedures and standards that individuals and entities mustfollow to be approved as continuing education providers undersection 10.9(a)(1) of Circular 230.

Announcement 2012–2, page 285.This announcement contains an update to Publication 1220,Specifications for Filing Forms 1097, 1098, 1099, 3921,3922, 5498, 8935 and W–2G, Electronically, revised 9–2011,concerning the filing of Form 1099–K.

January 9, 2012 2012–2 I.R.B.

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

force the law with integrity and fairness to all.

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

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

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

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.

2012–2 I.R.B. January 9, 2012

January 9, 2012 2012–2 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 198626 CFR 300.0: User fees; in general.

T.D. 9559

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 300

User Fee to Take theRegistered Tax ReturnPreparer CompetencyExamination

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsamendments to the user fee regulations.The final regulations redesignate rulespertaining to fee for obtaining a preparertax identification number. These finalregulations also establish a user fee forindividuals to take the registered tax re-turn preparer competency examination.The final regulations affect individualswho take the registered tax return preparercompetency examination. The charging ofuser fees is authorized by the IndependentOffices Appropriations Act of 1952.

DATES: Effective Date: These regulationsare effective beginning November 25,2011.

Applicability Date: For date of applica-bility, see §300.12(d).

FOR FURTHER INFORMATIONCONTACT: Concerning the final reg-ulations, Emily M. Lesniak at (202)622–4570; concerning cost methodologyEva J. Williams at (202) 435–5514 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regula-tions establishing a user fee to take theregistered tax return preparer competencyexamination. New §300.12 establishes a$27 IRS user fee to take the registered tax

return preparer competency examination;this IRS user fee is in addition to any rea-sonable, IRS-approved fee charged by thethird-party vendor. These regulations alsoredesignate prior §300.12 as §300.13.

The Independent Offices Appropri-ations Act of 1952 (IOAA), which iscodified at 31 U.S.C. 9701, authorizesagencies to prescribe regulations estab-lishing user fees for services providedby the agency. Regulations prescribinguser fees are subject to the policies of thePresident, which are currently set forthin the Office of Management and BudgetCircular A–25 (the OMB Circular), 58 FR38142 (July 15, 1993). The OMB Circularrequires agencies seeking to impose userfees for providing special benefits to iden-tifiable recipients to calculate the full costof providing those benefits.

These regulations are part of a broaderIRS effort to increase the oversight ofthe tax return preparer community. Aspart of this effort, Treasury and the IRSpublished final regulations in the FederalRegister (T.D. 9527, 2011–27 I.R.B. 1[76 FR 32286]) on June 3, 2011, amendingthe regulations governing practice beforethe IRS. These regulations are found in31 CFR part 10 and have been reprintedas Treasury Department Circular No.230 (Circular 230). The amendments toCircular 230, in part, include registeredtax return preparers as practitioners underCircular 230. Registered tax returnpreparers must demonstrate the necessaryqualifications and competency, whichincludes passing a minimum competencyexamination. Registered tax returnpreparers receive the special benefit ofbeing able to prepare and sign tax returns,claims for refund, and other documents asprovided in forms, instructions, or otherappropriate guidance.

On September 26, 2011, Treasury andthe IRS published a notice of proposedrulemaking (REG–116284–11, 2011–43I.R.B. 598) in the Federal Register(76 FR 59239) proposing a user fee totake the registered tax return preparercompetency examination. The notice ofproposed rulemaking also proposed toestablish a user fee to be fingerprintedin conjunction with the preparer tax

identification number, acceptance agent,and authorized e-file provider programs.These regulations only finalize the user feeto take the registered tax return preparercompetency examination.

The notice of proposed rulemaking an-nounced a public hearing on October 7,2011. Four individuals testified at the pub-lic hearing. The testimony at the hear-ing focused on the proposed fingerprintinguser fee. No individual at the hearing of-fered testimony on the competency exam-ination user fee.

Treasury and the IRS received writ-ten comments responding to the noticeof proposed rulemaking. These com-ments are available for public inspectionat http://www.regulations.gov or uponrequest. After consideration of all thecomments, the proposed regulations areadopted as modified by this Treasury de-cision.

Summary of Comments andExplanation of Revisions

Treasury and the IRS received morethan twenty written comments in responseto the notice of proposed rulemaking.Treasury and the IRS received four writ-ten comments relating to the user fee totake the registered tax return preparercompetency examination. The majorityof the written comments concerned theuser fee to be fingerprinted in conjunc-tion with the preparer tax identificationnumber, acceptance agent, and authorizede-file provider programs. Treasury andthe IRS also received a few commentsregarding other aspects of the IRS’s ef-forts to regulate tax return preparers. Tothe extent that comments address otheraspects of the IRS’s increased oversightof the tax return preparation industry, thecomments will be addressed, as appropri-ate and practicable, in future guidance.Further, some of the comments receivedrelated to testing locations and whetheran online examination would be offered.The IRS received similar comments inresponse to Notice 2011–48, 2011–26I.R.B. 927 (June 27, 2011) available atwww.irs.gov/pub/irs-irbs/irb11–26.pdf,which specifically requested commentsregarding the registered tax return preparer

2012–2 I.R.B. 252 January 9, 2012

competency examination. The IRS andthe competency examination vendor con-tinue to consider these comments, alongwith other comments received in responseto Notice 2011–48, as they implement thecompetency testing program. The IRSis committed to addressing the concernsexpressed in these comments to the extentpractical and appropriate.

One comment regarding the proposeduser fee to take the registered tax returnpreparer competency examination encour-aged Treasury and the IRS to monitor thefee charged by the third-party vendor. Thethird-party vendor’s fee is approved by theIRS, including any changes to the vendor’sfee. Thus, the IRS will be aware of anypossible fee changes and will approve thefinal vendor fee.

Three comments related to the totalcost and the components of the user feeto take the registered tax return preparercompetency examination. These com-ments expressed a general concern that thefee may be a financial burden on tax returnpreparation businesses. One commenta-tor requested that a definitive, specificfee amount be provided and expressedconfusion over whether a single user feecovers multiple attempts to take the ex-amination. Another commentator statedthat the fee was duplicative for preparerswho are independently tested under anemployer’s program, and requested thatthe IRS develop a process to review andcertify employer testing programs.

Treasury and the IRS have consideredthese comments, and for the reasons de-scribed in this preamble, the portion of theproposed regulations relating to the userfee for the competency examination is fi-nalized without substantive change.

As stated earlier in this preamble, theOMB Circular generally requires agen-cies to recover the full cost of providing aspecial benefit to an identifiable recipient.The full cost to the IRS to administer theregistered tax return preparer competencyexamination is $27 per applicant each timethe applicant takes the examination. Thecosts to the IRS to administer the com-petency examination include conductingbackground checks on employees of thethird-party vendor who are involved inthe administration of the examination andthe personnel, administrative, manage-ment, and information technology coststo the IRS for developing and reviewing

the competency examination, overseeingthe competency examination, validatingthe competency examination results, andestablishing a review procedure for ap-plicants who contest any portion of thecompetency examination. The IRS willmake expenditures for all of these costsassociated with the competency exami-nation and, thus, is generally required torecover these costs through a user fee asprovided by the OMB Circular. The IRSwill inform the public of the total finalizedtesting fee amount before the test becomesavailable. Because each examination-sit-ting will involve the same costs, a userfee will be charged each time an applicanttakes the examination.

Further, these regulations are part ofTreasury’s and the IRS’s effort to increaseoversight of the tax return preparer indus-try based upon findings and recommenda-tions made by the IRS in Publication 4832,“Return Preparer Review” (the Report),which was published on January 4, 2010.All individuals who wish to become a reg-istered tax return preparer must pass thecompetency examination because, duringthe implementation process, Treasury andthe IRS concluded that all registered taxreturn preparers should be subject to uni-form standards of qualification and prac-tice, which includes demonstrating a min-imum level of competency. When obtain-ing tax return preparation services, taxpay-ers should know that all registered tax re-turn preparers are subject to the same fed-eral regulations and standards, regardlessof where the registered tax return prepareris employed or in what state the individualresides. Requiring all registered tax returnpreparers to fulfill the same competencyexamination requirements ensures that allregistered tax return preparers have metthe same minimum competency standards.Additionally, requiring all registered taxreturn preparers to pass the IRS approvedcompetency examination addresses con-cerns raised by several commentators dur-ing the IRS’s study of the tax return prepa-ration industry about the potential for un-fairness if certain tax return preparers areexempt from these requirements. Accord-ingly, Treasury and the IRS do not believethat a process to review and certify em-ployer testing is appropriate.

The comments on the user fee to be fin-gerprinted in conjunction with the preparertax identification number, acceptance

agent, and authorized e-file provider pro-grams by and large expressed concern withthe IRS’s plan to fingerprint participantsin these programs generally, as well as theimposition and amount of the proposeduser fee. In light of the significant issuesraised at the hearing and in the writtencomments received on the fingerprintinguser fee, Treasury and the IRS have de-cided not to finalize the proposed user feeto be fingerprinted in conjunction with thepreparer tax identification number, accep-tance agent, and authorized e-file providerprograms at this time. Rather, Treasuryand the IRS will consider alternatives asto how the IRS can best implement theCircular 230 provision authorizing the IRSto conduct a suitability check to becomea registered tax return preparer. In eval-uating these alternatives, considerationwill be given to how the suitability checkachieves the goals of increasing oversightof the tax return preparer community andhow the suitability check can be conductedmost efficiently while not creating undueburden on the individual applicants andthe firms or other entities that employthem. Thus, Treasury and the IRS are stillinterested in receiving further commentsregarding the use of fingerprinting as partof the suitability check to become a reg-istered tax return preparer. If the resultof this reconsideration will require anyindividual to pay a user fee in conjunctionwith the implementation of the suitabilitycheck, including a possible fingerprintingrequirement, Treasury and the IRS willpublish a new notice of proposed rulemak-ing with respect to this user fee.

Treasury and the IRS adopt the pro-posed regulations after eliminating theproposed user fee to be fingerprinted inconjunction with the preparer tax iden-tification number, acceptance agent, andauthorized e-file provider programs. Theportion of the proposed regulations per-taining to the user fee to take the registeredtax return preparer competency exam-ination is adopted without substantivemodification.

Effective/Applicability Date

The Administrative Procedure Act pro-vides that substantive rules will not be ef-fective until thirty days after the final reg-ulations are published in the Federal Reg-ister (5 U.S.C. 553(d)). Final regulations

January 9, 2012 253 2012–2 I.R.B.

may be effective prior to thirty days afterpublication if the publishing agency findsthat there is good cause for an earlier ef-fective date.

This regulation is part of the IRS’s con-tinued efforts to implement the recommen-dations in the Report. The recently pub-lished amendments to Circular 230 estab-lished registered tax return preparers aspractitioners under Circular 230 and re-quired that individuals must pass a compe-tency examination, among other require-ments, to become a registered tax returnpreparer. Before the competency exami-nation can be offered, the competency ex-amination user fee must be in place. Fur-ther, to enable the IRS to begin designatingindividuals as registered tax return prepar-ers in time for the 2012 filing season, thecompetency examination user fee must befinalized significantly before the 2012 fil-ing season.

Thus, the Treasury and the IRS find thatthere is good cause for these regulations tobe effective upon the publication of thesefinal regulations in the Federal Register.

Special Analyses

It has been determined that these fi-nal regulations are not a significant regu-latory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563.

It has been determined that a final reg-ulatory flexibility analysis under 5 U.S.C.603 is required for this final rule. The anal-ysis is set forth under the heading, “FinalRegulatory Flexibility Analysis.”

Pursuant to 26 U.S.C. 7805(f), the no-tice of proposed rulemaking precedingthese final regulations was submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business. TheChief Counsel for Advocacy did not sub-mit comments on the notice of proposedrulemaking.

FINAL REGULATORY FLEXIBILITYANALYSIS

When an agency either promulgates afinal rule that follows a required noticeof proposed rulemaking or promulgatesa final interpretative rule involving theinternal revenue laws that imposes a col-lection of information requirement onsmall entities as described in 5 U.S.C.

603(a), the Regulatory Flexibility Act(5 U.S.C. chapter 6) requires the agencyto “prepare a final regulatory flexibilityanalysis.” A final regulatory flexibil-ity analysis must, pursuant to 5 U.S.C.604(a), contain the five elements listedin this final regulatory flexibility analy-sis. For purposes of this final regulatoryflexibility analysis, a small entity is de-fined as a small business, small nonprofitorganization, or small governmental ju-risdiction. See 5 U.S.C. 601(3)-(6). TheTreasury and the IRS conclude that thefinal regulations (together with othercontemplated guidance provided for inthese regulations) will impact a substantialnumber of small entities and the economicimpact may be significant.

A statement of the need for, and the ob-jectives of, the final rule.

The Treasury and the IRS are imple-menting regulatory changes that increasethe oversight of the tax return preparerindustry based upon findings and recom-mendations in the Report. These regu-latory changes include establishing regis-tered tax return preparers as Circular 230practitioners. Individuals who wish to be-come a registered tax return preparer mustpass a competency examination. Individu-als who pass the competency examinationand become a registered tax return pre-parer will receive a special benefit that thegeneral public does not receive because aregistered tax return preparer is allowed toprepare and sign Form 1040 series returns(and accompanying schedules) for com-pensation. The regulations under section6109 (75 FR 60309) in conjunction withNotice 2011–6, 2011–3 I.R.B. 315 (Jan-uary 17, 2011), provide that only attor-neys, certified public accountants, enrolledagents, and registered tax return preparerscan prepare and sign all or substantiallyall of a Form 1040 series return (and ac-companying schedules) for compensation.This final rule recovers the full costs tothe IRS to oversee the registered tax returnpreparer competency examination.

Summaries of the significant issuesraised in the public comments respondingto the initial regulatory flexibility analysisand of the agency’s assessment of the is-sues, and a statement of any changes madeto the rule as a result of the comments.

Treasury and the IRS received no pub-lic comments responding to the initial reg-ulatory flexibility analysis related to com-

petency testing in the proposed regulationsthat preceded these final regulations. Trea-sury and the IRS did receive commentsfrom the public on the proposed regula-tions in general. A summary of these com-ments along with Treasury’s and the IRS’sassessment of the issues raised in the com-ments and descriptions of any revisionsresulting from the comments is set forthelsewhere in this preamble under the Sum-mary of Comments and Explanation of Re-visions heading.

A description and an estimate of thenumber of small entities to which the rulewill apply or an explanation of why anestimate is not available.

These final regulations affect all indi-viduals who want to become a registeredtax return preparer under the new over-sight rules in Circular 230. Only indi-viduals, not businesses, can practice be-fore the IRS or become a registered taxreturn preparer. Thus, the economic im-pact of these regulations on any small en-tity generally will be a result of applicantsowning a small business or a small en-tity employing applicants. The NAICScode that relates to tax preparation services(NAICS code 541213) is the appropriatecode for the registered tax return preparerprogram. Entities identified as tax prepa-ration services are considered small un-der the Small Business Administration sizestandards (13 CFR 121.201) if their annualrevenue is less than $7 million. The IRSestimates that approximately 350,000 in-dividuals will become registered tax returnpreparers. The IRS estimates that approx-imately 70 to 80 percent of the individualswho apply to become registered tax returnpreparers are operating as or employed bysmall entities.

A description of the projected report-ing, recordkeeping, and other compliancerequirements of the rule, including an esti-mate of the classes of small entities subjectto the requirements and the type of profes-sional skills necessary for preparation of areport or record.

The final regulations do not directly im-pose any reporting or recordkeeping re-quirements on any small entities. The fi-nal regulations, however, require certaintax return preparers to pay a user fee totake the registered tax return preparer com-petency examination. Small entities maybe affected by these costs if the entities

2012–2 I.R.B. 254 January 9, 2012

choose to pay some or all of these fees fortheir employees.

Under the amendments to Circular 230,tax return preparers may also incur costsfor exam preparation courses, plus inci-dental costs, such as for travel and accom-modations, in order to obtain the designa-tion of registered tax return preparer un-der Circular 230. Course prices can varygreatly, from free to hundreds of dollars.Many small tax return preparation firmsmay choose, as with the user fee, to bearthese costs for their employees. In somecases, small entities may lose sales andprofits while their employed tax return pre-parers attend exam preparation classes orare studying and sitting for the examina-tion. Some small entities that employ taxreturn preparers may even need to altertheir business operations if a significantnumber of their employees cannot satisfythe necessary registration and competencyrequirements. Treasury and the IRS con-clude, however, that only a small percent-age of small entities, if any, may need tocease doing business or radically changetheir business model due to these final reg-ulations.

A description of the steps the agencyhas taken to minimize the significant eco-nomic impact on small entities consistentwith the stated objectives of applicablestatutes, including a statement of the fac-tual, policy, and legal reasons for select-ing any alternative adopted in the final ruleand why other significant alternatives af-fecting the impact on small entities that theagency considered were rejected.

Treasury and the IRS are not aware ofany steps that could be taken to minimizethe economic impact on small entities thatwould also be consistent with the objec-tives of these final regulations and havedetermined that there is no viable alterna-tive to these final regulations. These reg-ulations do not impose any more require-ments on small entities than are necessaryto effectively administer the internal rev-enue laws. Further, the regulations do notsubject small entities to any requirementsthat are not also applicable to larger enti-ties covered by the regulations.

The IOAA authorizes the charging ofuser fees for agency services, subject topolicies designated by the President. TheOMB Circular implements presidentialpolicies regarding user fees and encour-ages user fees when a government agency

provides a special benefit to a member ofthe public. As Congress has not appro-priated funds to the registered tax returnpreparer program, there are no viable al-ternatives to the imposition of user fees,which fees recover the costs to the IRS forproviding the special benefits associatedwith the registered tax return preparer pro-gram.

Drafting Information

The principal author of these regula-tions is Emily M. Lesniak, Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 300 isamended as follows:

Part 300—USER FEES

Paragraph 1. The authority citation forpart 300 continues to read in part as fol-lows:

Authority: 31 U.S.C. 9701.Par. 2. Section 300.0 is amended by

redesignating paragraph (b)(12) as para-graph (b)(13) and adding new paragraph(b)(12) to read as follows:

§300.0 User fees; in general.

* * * * *(b) * * *(12) Taking the registered tax return

preparer competency examination.

* * * * *

§300.12 [Redesignated as §300.13]

Par. 3. Redesignate §300.12 as§300.13.

Par. 4. Adding new §300.12 to read asfollows:

§300.12 Registered tax return preparercompetency examination fee.

(a) Applicability. This section appliesto the competency examination to becomea registered tax return preparer pursuant to31 CFR 10.4(c).

(b) Fee. The fee for taking the regis-tered tax return preparer competency ex-amination is $27, which is the government

cost for overseeing the examination anddoes not include any fees charged by theadministrator of the examination.

(c) Person liable for the fee. The personliable for the competency examination feeis the applicant taking the examination.

(d) Effective/applicability date.This section is applicable beginningNovember 25, 2011.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved November 21, 2011.

Emily S. McMahon,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on November 22,2011, 11:15 a.m., and published in the issue of the FederalRegister for November 25, 2011, 76 F.R. 72619)

Section 461.—GeneralRule for Taxable Yearof Deduction26 CFR 1.461–4: Economic performance.

Recurring item exception to the allevents test. This ruling clarifies thetreatment of certain liabilities under therecurring item exception to the economicperformance requirement under section461(h)(3) of the Code. It also addressesthe application of the “not material” and“better matching” requirement of the re-curring item exception in the context of alease and a service contract each having aterm of one year. The ruling distinguishescontracts for the provision of servicesfrom insurance and warranty contractsand applies the recurring item exceptiondifferently. Rev. Proc. 2011–14 modifiedand amplified.

Rev. Rul. 2012–1

ISSUES

Under the situations described below:(1) Is the amount of X’s liability ma-

terial for purposes of the recurring itemexception in §461(h)(3) of the InternalRevenue Code if the liability accrues overmore than one taxable year for financialaccounting purposes?

(2) For purposes of the recurring itemexception, does the accrual of X’s liability

January 9, 2012 255 2012–2 I.R.B.

over more than one taxable year result inbetter matching of the liability with relatedincome if X generates the related incomein its trade or business over more than onetaxable year and the liability accrues overmore than one taxable year for financialaccounting purposes?

(3) Is X’s liability that arises under aservice contract properly characterized asa “liability arising out of the provisionof services” under § 1.461–4(d)(2), ratherthan a “liability arising out of the provi-sion of a warranty or service contract” un-der § 1.461–4(g)(5)?

(4) Does the recurring item excep-tion apply to X’s liability to provideservices pursuant to a service contractthat is characterized as a “liability arisingout of the provision of services” under§ 1.461–4(d)(2)?

FACTS

X is a corporation that uses an ac-crual method of accounting, includingthe recurring item exception provided in§ 461(h)(3) and § 1.461–5, for federalincome tax purposes. X files its federalincome tax returns on a calendar year basisand prepares annual financial statementsin accordance with generally accepted ac-counting principles.

On July 1, 2011, X enters into aone-year lease agreement for propertyit will use in its trade or business togenerate income over the period of thelease. The lease of the property beginson July 1, 2011, and continues throughJune 30, 2012. The terms of the leaseagreement require X to pay $50,000, theentire balance of the lease liability, onJuly 1, 2011, and X pays the $50,000 onthat date. X’s financial statements accountfor the lease agreement by recognizing the$50,000 expense ratably over the one-yearperiod of the lease.

In conjunction with entering into thelease agreement, X also enters into aone-year service contract with a mainte-nance company unrelated to the lessor ofthe property. The service contract beginson July 1, 2011, and continues throughJune 30, 2012. Under the terms of the ser-vice contract, the maintenance companywill inspect and clean the leased propertymonthly and provide any necessary repairand maintenance services relating to thenormal wear and tear or routine mainte-

nance of the property. The services to beprovided to X under the service contractare general services to be provided on anongoing and recurring basis. The termsof the service contract require X to pay$2,400, the entire balance of the liability,on July 1, 2011, and X pays the $2,400 onthat date. X’s financial statements accountfor the service contract by recognizingthe $2,400 expense as the services areprovided over the one-year period of thecontract.

X reasonably expects that it will enterinto similar leases and service contracts ona recurring basis in the future.

LAW

Section 461(a) provides that the amountof any deduction or credit must be takenfor the taxable year that is the proper tax-able year under the method of accountingused in computing taxable income.

Section 1.461–1(a)(2)(i) provides that,under an accrual method of accounting, aliability is incurred, and generally takeninto account for federal income tax pur-poses, in the taxable year in which (1) allthe events have occurred that establish thefact of the liability, (2) the amount of theliability can be determined with reason-able accuracy (requirements (1) and (2) arecollectively referred to as the “all eventstest”), and (3) economic performance hasoccurred with respect to the liability. Seealso § 1.446–1(c)(1)(ii)(A). All the eventshave occurred that establish the fact of theliability when (1) the event fixing the lia-bility, whether that be the required perfor-mance or other event, occurs, or (2) pay-ment is due, whichever happens earliest.Rev. Rul. 2007–3, 2007–1 C.B. 350; Rev.Rul. 80–230, 1980–2 C.B. 169; Rev. Rul.79–410, 1979–2 C.B. 213, amplified byRev Rul. 2003–90, 2003–2 C.B. 353.

Section 461(h)(1) and § 1.461–4(a)(1)provide that, for purposes of determiningwhether an accrual basis taxpayer can treatthe amount of any liability as incurred, theall events test is not treated as met anyearlier than the taxable year in which eco-nomic performance occurs with respect tothe liability.

Section 1.461–4(d)(2)(i) provides thatif the liability of a taxpayer arises out ofthe providing of services or property to thetaxpayer by another person, economic per-

formance occurs as the services or prop-erty is provided.

Section 1.461–4(d)(3)(i) provides thatif the liability of a taxpayer arises out of theuse of property by the taxpayer, economicperformance occurs ratably over the periodof time the taxpayer is entitled to the use ofthe property.

Section 1.461–4(g)(5) provides that ifthe liability of a taxpayer arises out of theprovision to the taxpayer of insurance, ora warranty or service contract, economicperformance occurs as payment is made tothe person to which the liability is owed.A warranty or service contract is a con-tract that a taxpayer enters into in connec-tion with property bought or leased by thetaxpayer, pursuant to which the other partyto the contract promises to replace or re-pair the property under specified circum-stances. Section 1.461–4(g)(5)(i).

Section 461(h)(3)(A) and § 1.461–5(b)provide a recurring item exception to thegeneral rule of economic performance.Under the recurring item exception, a li-ability is treated as incurred for a taxableyear if: (i) at the end of the taxable year,all events have occurred that establish thefact of the liability and the amount canbe determined with reasonable accuracy;(ii) economic performance occurs on orbefore the earlier of (a) the date that thetaxpayer files a timely return (includingextensions) for the taxable year, or (b) the15th day of the ninth calendar month afterthe close of the taxable year; (iii) the lia-bility is recurring in nature; and (iv) either(A) the amount of the liability is not mate-rial or (B) the accrual of the liability in thetaxable year results in a better matchingof the liability with the income to whichit relates than would result from accruingthe liability for the taxable year in whicheconomic performance occurs. Section461(h)(3)(B) provides that in making adetermination under the materiality andmatching requirements, the treatment ofthe liability on financial statements shallbe taken into account.

Section 1.461–5(b)(4)(i) provides thatin determining whether a liability is mate-rial, consideration is given to the amount ofthe liability in absolute terms and in rela-tion to the amount of other items of incomeand expense attributable to the same activ-ity. Section 1.461–5(b)(4)(ii) provides thata liability is material if it is material forfinancial statement purposes under gener-

2012–2 I.R.B. 256 January 9, 2012

ally accepted accounting principles. Sec-tion 1.461–5(b)(4)(iii) provides that a lia-bility that is immaterial for financial state-ment purposes under generally acceptedaccounting principles may be material forpurposes of the materiality requirement ofthe recurring item exception.

Section 1.461–5(b)(5)(i) provides thatin determining whether the matching re-quirement of the recurring item exceptionis satisfied, generally accepted accountingprinciples are an important factor, but arenot dispositive. Section 1.461–5(b)(5)(ii)provides that in the case of a liability de-scribed in § 1.461–4(g)(5) (insurance, war-ranty or service contract), the matching re-quirement of the recurring item exceptionis deemed satisfied.

ANALYSIS

Lease liability

On July 1, 2011, all the events have oc-curred that establish the fact of X’s lease li-ability (because X’s payment is due underthe lease agreement on that date) and theamount of the lease liability can be deter-mined with reasonable accuracy. Becausethe lease liability arises out of the use ofproperty provided to X, economic perfor-mance occurs ratably over the period oftime that X is entitled to use the property.Section 1.461–4(d)(3)(i). Therefore, un-less the recurring item exception applies,X’s lease liability is incurred ratably overthe one-year lease period beginning July 1,2011 and ending June 30, 2012.

To apply the recurring item exception toits lease liability, X must, in part, demon-strate either that the lease liability is im-material or that recognizing the liability ina year prior to the ratable use of the prop-erty results in a better matching of the ex-pense to the related income. In determin-ing whether a liability is immaterial, thelegislative history of the recurring item ex-ception provides:

If an item is considered material for fi-nancial statement purposes, it will alsobe considered material for tax purposes.For example, assume that a calen-dar-year taxpayer enters into a one-yearmaintenance contract on July 1, 1985.If the amount of the expense is proratedbetween 1985 and 1986 for financialstatement purposes, it should beprorated for tax purposes. If, however,

the full amount is deducted in 1985 forfinancial statement purposes because itis not material under generally acceptedaccounting principles, it may (or maynot) be considered an immaterial itemfor purposes of [the recurring item]exception.

H.R. Conf. Rep. 98–861, at 874 (1984)(original formatting omitted). The exam-ple in the legislative history makes clearthat a liability is material under the recur-ring item exception if it is deemed suf-ficiently material for financial statementpurposes so that it accrues over more thanone taxable year.

Consistent with the legislative history,and with the directive in § 461(h)(3)(B)that the treatment of a liability on finan-cial statements be taken into account,§ 1.461–5(b)(4)(ii) provides that a liabilityis material if it is material for financialstatement purposes under generally ac-cepted accounting principles. Because X’slease liability accrues over more than onetaxable year for financial statement pur-poses under generally accepted accountingprinciples, the lease liability is material forpurposes of applying the recurring itemexception. Therefore, to apply the recur-ring item exception to its lease liability,X must demonstrate that recognizing theliability in a year prior to the ratable useof the property results in a better matchingof the liability to the income to which itrelates than would result from accrual ofthe liability in the taxable year in whicheconomic performance occurs.

In determining whether the matchingrequirement of the recurring item excep-tion is satisfied, the treatment of a liabilityon financial statements must be taken intoaccount. Section 461(h)(3)(B). Generallyaccepted accounting principles are an im-portant factor, but are not dispositive. Sec-tion 1.461–5(b)(5)(i). Accruing a liabil-ity over more than one taxable year resultsin better matching than accrual in a sin-gle, earlier year if: (1) the liability accruesover more than one taxable year for finan-cial accounting purposes under generallyaccepted accounting principles; (2) the lia-bility relates to income that a taxpayer gen-erates in its trade or business over morethan one taxable year; and (3) there are nooverriding facts or circumstances that indi-cate accrual of the full liability in the ear-lier year results in a better match with theincome.

X has determined that under generallyaccepted accounting principles, its lease li-ability should be recognized ratably overthe period of the lease, and thus accruesthe liability on its financial statements overthe period of the lease. Furthermore, Xuses the leased property in its trade or busi-ness to generate income over the periodof the lease. In addition, absent over-riding facts or circumstances that indicatethat accrual in the earlier year would re-sult in better matching, the accrual of thelease liability in a year prior to the satis-faction of economic performance will notresult in a better matching of the liabil-ity with the related income as compared toaccruing the liability for the taxable yearin which economic performance occurs.Because X’s lease liability is material un-der § 1.461–5(b)(1)(iv)(A), and because itdoes not satisfy the matching requirementof § 1.461–5(b)(1)(iv)(B), X cannot use therecurring item exception to treat its leaseliability as incurred in 2011.

Service Contract Liability

On July 1, 2011, all the events have oc-curred that establish the fact of X’s servicecontract liability (because X’s payment isdue under the service contract on that date)and the amount of the service contract li-ability can be determined with reasonableaccuracy. The applicable economic perfor-mance rule depends on whether the servicecontract liability arises out of the provisionof services to X under § 1.461–4(d)(2)(i)(a “service liability”), or whether the li-ability arises out of the provision to Xof a warranty or service contract under§ 1.461–4(g)(5) (a “payment liability”).Further, the matching requirement of therecurring item exception applies differ-ently depending on whether the servicecontract liability is a service liability under§ 1.461–4(d)(2)(i) or a payment liabilityunder § 1.461–4(g)(5).

Section 1.461–4(g)(5)(i) defines a war-ranty or service contract as a contract thata taxpayer enters into in connection withproperty bought or leased by the taxpayer,pursuant to which the other party to thecontract promises to replace or repair theproperty under specified circumstances.The term “specified circumstances” im-plies the occurrence of a unique or irreg-ular circumstance necessitating the repairor replacement of property. Thus, the war-

January 9, 2012 257 2012–2 I.R.B.

ranty and service contracts contemplatedin § 1.461–4(g)(5) are similar to insurancecontracts, which also are characterized bythe occurrence of a unique or irregularcircumstance necessitating the repair orreplacement of property. The regulationsrecognize this similarity by treating in-surance, warranty contracts, and servicecontracts collectively as a single categoryof payment liability under § 1.461–4(g)(5).

The service contracts addressed in§ 1.461–4(g)(5)(i) are distinguishablefrom contracts for general services thatare provided on an ongoing and re-curring basis. This distinction is rein-forced in the deemed matching rule of§ 1.461–5(b)(5)(ii), which provides thatthe matching requirement is deemed sat-isfied only for certain payment liabilities,including service contract liabilities ad-dressed in § 1.461–4(g)(5). Deemedmatching for these types of liabilities isappropriate because a liability is triggeredonly by the occurrence of a unique or irreg-ular circumstance. In contrast, a deemedmatching rule would be inappropriate forservices that are performed on an ongoingand recurring basis and contribute to thetaxpayer’s income-generating activitiesover a certain period.

The services to be provided to X un-der the terms of the service contract aregeneral services to be provided on anongoing and recurring basis rather thanservices to be provided only in “specifiedcircumstances.” Therefore, X’s servicecontract liability is a service liabilityunder §1.461–4(d)(2)(i), rather than apayment liability under §1.461–4(g)(5),for purposes of applying the economicperformance rules. Accordingly, under§ 1.461–4(d)(2), economic performanceof X’s service contract liability occurs asthe services are provided to X over theterm of the contract.

To apply the recurring item exceptionto its service contract liability, X must, inpart, demonstrate either that its liability isnot material or that recognizing the liabil-ity in a year prior to the performance ofthe services results in a better matchingof the expense to the related income. Indetermining whether a liability is not ma-terial, § 461(h)(3)(B) provides that finan-cial statement treatment is considered, andboth the legislative history of § 461(h)(3)and § 1.461–5(b)(4)(ii) provide that a li-

ability is material if it is material for fi-nancial statement purposes under gener-ally accepted accounting principles. Be-cause X’s service contract liability accruesover more than one taxable year for fi-nancial statement purposes under gener-ally accepted accounting principles, the li-ability is material for purposes of apply-ing the recurring item exception. There-fore, to apply the recurring item excep-tion to its service contract liability, X mustdemonstrate that recognizing the liabilityin a year prior to the performance of theservices results in a better matching of theliability to the income to which it relatesthan would result from accruing the lia-bility in the taxable year in which eco-nomic performance occurs. The deemedmatching rule for certain payment liabil-ities in §1.461–5(b)(5)(ii) does not applyto X’s service contract liability because X’sliability does not arise out of the provi-sion of a warranty or service contract under§1.461–4(g)(5).

In determining whether the matchingrequirement of the recurring item ex-ception is satisfied, generally acceptedaccounting principles are an impor-tant factor, but not dispositive. Section1.461–5(b)(5)(i). Under generally ac-cepted accounting principles, X has de-termined that its service contract liabilityshould be recognized as services are pro-vided over the period of the contract.Furthermore, the services provided to Xare used in the ongoing operation of X’strade or business to generate income overthe period of the contract. Absent anyother overriding facts or circumstancesthat would indicate better matching, theaccrual of the service contract liabilityin a year prior to the satisfaction of eco-nomic performance will not result in abetter matching of the liability with therelated income as compared to accruingthe liability for the taxable year in whicheconomic performance occurs. BecauseX’s service contract liability is materialunder § 1.461–5(b)(1)(iv)(A), and becauseit does not satisfy the matching require-ment of § 1.461–5(b)(1)(iv)(B), X cannotuse the recurring item exception to treatits service contract liability as incurred in2011.

Some contracts call for services to beperformed on a recurring basis and for ad-ditional performance to be provided only

in “specified circumstances.” This revenueruling does not address the tax treatmentfor a mixed service and warranty contract.

HOLDINGS

(1) For purposes of the recurring itemexception in § 461(h)(3), the amount of X’slease liability is material.

(2) For purposes of the recurring itemexception, the accrual of X’s lease liabilityover more than one taxable year results inbetter matching of the liability with relatedincome.

(3) X’s service contract liability is prop-erly characterized as a liability arising outof the provision of services to the taxpayerunder § 1.461–4(d)(2), rather than as a li-ability arising out of the provision to thetaxpayer of a warranty or service contractunder § 1.461–4(g)(5).

(4) The recurring item exception doesnot apply to X’s service contract liability.

APPLICATION

Any change in a taxpayer’s method ofaccounting to conform to any of the hold-ings in this revenue ruling is a change inmethod of accounting to which the provi-sions of §§ 446 and 481 and the regulationsthereunder apply. A taxpayer that wantsto change its method of accounting to con-form to any of the holdings in this rulingmust follow the automatic change in ac-counting method provisions of Rev. Proc.2011–14, 2011–4 C.B. 330, with the fol-lowing modifications:

(1) The scope limitations in section 4.02of Rev. Proc. 2011–14 do not apply toa taxpayer that wants to make the changefor its first taxable year ending on or afterDecember 13, 2011, provided an issue isnot under consideration, as defined in sec-tion 3.09 of Rev. Proc. 2011–14, regardingwhether all the events have occurred thatestablish the fact of the liability; and

(2) For purposes of section 6.02(4) ofRev. Proc. 2011–14, the taxpayer mustinclude on line 1a of the Form 3115 thedesignated automatic accounting methodchange number “161.”

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2011–14 is modified andamplified to include this automatic changein section 19 of the APPENDIX.

2012–2 I.R.B. 258 January 9, 2012

DRAFTING INFORMATION

The principal author of this revenueruling is Charles H. Kim of the Office of

the Associate Chief Counsel (Income Taxand Accounting). For further informationregarding this revenue ruling, contact

Charles H. Kim at (202) 622–5020 (not atoll-free call).

January 9, 2012 259 2012–2 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous2012 Standard Mileage Rates

Notice 2012–1

SECTION 1. PURPOSE

This notice provides the 2012 standardmileage rates for taxpayers to use in com-puting the deductible costs of operating anautomobile for business, charitable, med-ical, or moving expense purposes. Thisnotice also provides the amount taxpayersmust use in calculating reductions to basisfor depreciation taken under the businessstandard mileage rate, and the maximumstandard automobile cost that may be usedin computing the allowance under a fixedand variable rate (FAVR) plan.

SECTION 2. BACKGROUND

Rev. Proc. 2010–51, 2010–51 I.R.B.883, provides rules for computing the de-ductible costs of operating an automobilefor business, charitable, medical, or mov-ing expense purposes, and for substantiat-ing, under § 274(d) of the Internal Rev-enue Code and § 1.274–5 of the IncomeTax Regulations, the amount of ordinaryand necessary business expenses of localtransportation or travel away from home.Taxpayers using the standard mileage ratesmust comply with Rev. Proc. 2010–51.

An independent contractor conducts anannual study for the Internal Revenue Ser-vice of the fixed and variable costs of oper-ating an automobile to determine the stan-dard mileage rates for business, medical,and moving use reflected in this notice.The standard mileage rate for charitableuse is set by § 170(i).

Notice 2010–88, 2010–51 I.R.B. 882,requested comments on the limitation insection 4.05(1) of Rev. Proc. 2010–51 onusing the business standard mileage ratefor five or more automobiles (such as infleet operations). Only one responsivecomment was received, which suggestedextending the business standard mileagerate to larger fleets. After considering thiscomment, and in light of the limited num-ber of comments, the Service has decidedto make no changes to section 4.05(1) atthis time.

SECTION 2. STANDARD MILEAGERATES

The standard mileage rate for trans-portation or travel expenses is 55.5 centsper mile for all miles of business use (busi-ness standard mileage rate). See section 4of Rev. Proc. 2010–51.

The standard mileage rate is 14 centsper mile for use of an automobile in ren-dering gratuitous services to a charitableorganization under § 170. See section 5 ofRev. Proc. 2010–51.

The standard mileage rate is 23 centsper mile for use of an automobile (1) formedical care described in § 213, or (2) aspart of a move for which the expenses aredeductible under § 217. See section 5 ofRev. Proc. 2010–51.

SECTION 3. BASIS REDUCTIONAMOUNT

For automobiles a taxpayer uses forbusiness purposes, the portion of thebusiness standard mileage rate treated asdepreciation is 21 cents per mile for 2008and 2009, 23 cents per mile for 2010,

22 cents per mile for 2011, and 23 centsper mile for 2012. See section 4.04 of Rev.Proc. 2010–51.

SECTION 4. MAXIMUM STANDARDAUTOMOBILE COST

For purposes of computing the al-lowance under a FAVR plan, the standardautomobile cost may not exceed $28,000for automobiles (excluding trucks andvans) or $29,300 for trucks and vans. Seesection 6.02(6) of Rev. Proc. 2010–51.

SECTION 5. EFFECTIVE DATE

This notice is effective for (1) de-ductible transportation expenses paid orincurred on or after January 1, 2012, and(2) mileage allowances or reimbursementspaid to an employee or to a charitablevolunteer (a) on or after January 1, 2012,and (b) for transportation expenses theemployee or charitable volunteer pays orincurs on or after January 1, 2012.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Notice 2010–88, as modified by Ann.2011–40, 2011–29 I.R.B. 56, is super-seded.


The principal author of this noticeis Bernard P. Harvey of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further information onthis notice, contact Bernard P. Harvey at(202) 622–4930 (not a toll-free call).

2012–2 I.R.B. 260 January 9, 2012

26 CFR 601.201: Rulings and determination letters.

Rev. Proc. 2012–9

TABLE OF CONTENTS

SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262.01 Description of terms used in this revenue procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262.02 Updated annually . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263.01 Rev. Proc. 2011–9 is superseded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263.02 Related revenue procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263.03 What changes have been made to Rev. Proc. 2011–9?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPTSTATUS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

.01 In general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

.02 User fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

.03 Form 1023 application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264


.05 Letter application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264


.07 Form 8871 notice for political organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

.08 Requirements for a substantially completed application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

.09 Terrorist organizations not eligible to apply for recognition of exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULINGON EXEMPT STATUS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

.01 Exempt status must be established in application and supporting documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

.02 Determination letter or ruling based solely on administrative record. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

.03 Exempt status may be recognized in advance of actual operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

.04 No letter if exempt status issue in litigation or under consideration within the Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

.05 Incomplete application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

.06 Even if application is complete, additional information may be required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

.07 Expedited handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

.08 May decline to issue group exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER OR RULING? . . . . . . . . . . . . . . . . . . . . 267.01 EO Determinations issues a determination letter in most cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.02 Certain applications referred to EO Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.03 Technical advice may be requested in certain cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.04 Technical advice must be requested in certain cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

SECTION 6. WITHDRAWAL OF AN APPLICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.01 Application may be withdrawn prior to issuance of a determination letter or ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.02 § 7428 implications of withdrawal of application under § 501(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.01 Proposed adverse determination letter or ruling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.02 Appeal of a proposed adverse determination letter issued by EO Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.03 Protest of a proposed adverse ruling issued by EO Technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.04 Final adverse determination letter or ruling where no appeal or protest is submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.05 How EO Determinations handles an appeal of a proposed adverse determination letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.06 Consideration by the Appeals Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.07 If a protest of a proposed adverse ruling is submitted to EO Technical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.08 An appeal or protest may be withdrawn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268.09 Appeal or protest and conference rights not applicable in certain situations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND RULINGS . . . . . . . . . . . . . . . . . . . . . . . 268

January 9, 2012 261 2012–2 I.R.B.

.01 Disclosure of applications, supporting documents, and favorable determination letters or rulings . . . . . . . . . . . . . . . . . . . . . . 269

.02 Disclosure of adverse determination letters or rulings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

.03 Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3). . . . . . . . . . . . . . . . . . . . . . . 269

.04 Disclosure to State officials of information about § 501(c)(3) applicants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO TECHNICAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269.01 Determination letters may be reviewed by EO Technical to assure uniformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269.02 Procedures for cases where EO Technical takes exception to a determination letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.01 Actual controversy involving certain issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.02 Exhaustion of administrative remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.03 Not earlier than 270 days after seeking determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.04 Service must have reasonable time to act on an appeal or protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.05 Final determination to which § 7428 applies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

SECTION 11. EFFECT OF DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION . . . . . . . . . . . . . . . . . . . . . . . 270.01 Effective date of exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270.02 Reliance on determination letter or ruling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER OR RULINGRECOGNIZING EXEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

.01 Revocation or modification of a determination letter or ruling may be retroactive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

.02 Appeal and conference procedures in the case of revocation or modification of exempt status letter . . . . . . . . . . . . . . . . . . . . 271

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

SECTION 14. EFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

SECTION 15. PAPERWORK REDUCTION ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

DRAFTING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

SECTION 1. WHAT IS THEPURPOSE OF THIS REVENUEPROCEDURE?

This revenue procedure sets forth procedures for issuing determination letters and rulingson the exempt status of organizations under §§ 501 and 521 of the Internal Revenue Code otherthan those subject to Rev. Proc. 2012–6, last bulletin (relating to pension, profit-sharing, stockbonus, annuity, and employee stock ownership plans). Generally, the Service issues these de-termination letters and rulings in response to applications for recognition of exemption fromFederal income tax. These procedures also apply to revocation or modification of determi-nation letters or rulings. This revenue procedure also provides guidance on the exhaustion ofadministrative remedies for purposes of declaratory judgment under § 7428 of the Code.

Description of terms used in thisrevenue procedure

.01 For purposes of this revenue procedure —

(1) The term “Service” means the Internal Revenue Service.

(2) The term “application” means the appropriate form or letter that an organization mustfile or submit to the Service for recognition of exemption from Federal income tax under theapplicable section of the Internal Revenue Code. See section 3 for information on specificforms.

(3) The term “EO Determinations” means the office of the Service that is primarily respon-sible for processing initial applications for tax-exempt status. It includes the main EO Deter-minations office located in Cincinnati, Ohio, and other field offices that are under the directionand control of the Manager, EO Determinations. Applications are generally processed in thecentralized EO Determinations office in Cincinnati, Ohio. However, some applications maybe processed in other EO Determinations offices or referred to EO Technical.

(4) The term “EO Technical” means the office of the Service that is primarily responsible forissuing letter rulings to taxpayers on exempt organization matters, and for providing technical

2012–2 I.R.B. 262 January 9, 2012

advice or technical assistance to other offices of the Service on exempt organization matters.The EO Technical office is located in Washington, DC.

(5) The term “Appeals Office” means any office under the direction and control of the Chief,Appeals. The purpose of the Appeals Office is to resolve tax controversies, without litigation,on a fair and impartial basis. The Appeals Office is independent of EO Determinations and EOTechnical.

(6) The term “determination letter” means a written statement issued by EO Determinationsor an Appeals Office in response to an application for recognition of exemption from Federalincome tax under §§ 501 and 521. This includes a written statement issued by EO Determina-tions or an Appeals Office on the basis of advice secured from EO Technical pursuant to theprocedures prescribed herein and in Rev. Proc. 2012–5.

(7) The term “ruling” means a written statement issued by EO Technical in response to anapplication for recognition of exemption from Federal income tax under §§ 501 and 521.

(8) The term “Code” means the Internal Revenue Code.

Updated annually .02 This revenue procedure is updated annually, but may be modified or amplified duringthe year.

SECTION 2. NATURE OFCHANGES AND RELATEDREVENUE PROCEDURES

Rev. Proc. 2011–9 is superseded .01 This revenue procedure is a general update of Rev. Proc. 2011–9, 2011–2 I.R.B. 283,which is hereby superseded.

Related revenue procedures .02 This revenue procedure supplements Rev. Proc. 2012–10, this Bulletin, with respectto the effects of § 7428 of the Code on the classification of organizations under §§ 509(a) and4942(j)(3). Rev. Proc. 80–27, 1980–1 C.B. 677, sets forth procedures under which exemptionmay be recognized on a group basis for subordinate organizations affiliated with and under thegeneral supervision and control of a central organization. Rev. Proc. 72–5, 1972–1 C.B. 709,provides information for religious and apostolic organizations seeking recognition of exemp-tion under § 501(d). General procedures for requests for a determination letter or ruling areprovided in Rev. Proc. 2012–4. User fees for requests for a determination letter or ruling areset forth in Rev. Proc. 2012–8.

What changes have been made toRev. Proc. 2011–9?

.03 Notable changes to Rev. Proc. 2011–9 that appear in this year’s update include —

(1) Section 3.01 clarifies that Form 8718, User Fee for Exempt Organization DeterminationLetter Request, is not a determination letter application.

(2) A reference to § 501(r) is added to section 3.03 to cover hospitals seeking exemptionunder § 501(c)(3).

(3) Section 4.08 is added to describe existing practice that the Service may decline to issuea group exemption letter when appropriate in the interest of sound tax administration. See Rev.Proc. 2012–4, section 8.01.

(4) A new item (6) is added to section 12 to reflect revocation of exemption automaticallypursuant to § 6033(j) for failure to file a required annual return or notice for three consecutiveyears.

January 9, 2012 263 2012–2 I.R.B.

SECTION 3. WHAT ARETHE PROCEDURES FORREQUESTING RECOGNITIONOF EXEMPT STATUS?

In general .01 An organization seeking recognition of exempt status under § 501 or § 521 is requiredto submit the appropriate application. In the case of a numbered application form, the currentversion of the form must be submitted. A central organization that has previously receivedrecognition of its own exemption can request a group exemption letter by submitting a letterapplication along with Form 8718, User Fee for Exempt Organization Determination LetterRequest. See Rev. Proc. 80–27. Form 8718 is not a determination letter application. Attachthis form to the determination letter application.

User fee .02 An application must be submitted with the correct user fee, as set forth in Rev. Proc.2012–8.

Form 1023 application .03 An organization seeking recognition of exemption under § 501(c)(3) and § 501(e), (f),(k), (n), (q), or (r) must submit a completed Form 1023, Application for Recognition of Exemp-tion Under Section 501(c)(3) of the Internal Revenue Code. In the case of an organization thatprovides credit counseling services, see § 501(q) of the Code. In the case of an organizationthat is a hospital and is seeking exemption under § 501(c)(3), see § 501(r) of the Code.

Form 1024 application .04 An organization seeking recognition of exemption under § 501(c)(2), (4), (5), (6), (7),(8), (9), (10), (12), (13), (15), (17), (19), or (25) must submit a completed Form 1024, Appli-cation for Recognition of Exemption Under Section 501(a), along with Form 8718. In the caseof an organization that provides credit counseling services and seeks recognition of exemptionunder § 501(c)(4), see § 501(q) of the Code.

Letter application .05 An organization seeking recognition of exemption under § 501(c)(11), (14), (16), (18),(21), (22), (23), (26), (27), (28), or (29), or under § 501(d), must submit a letter applicationalong with Form 8718.

Form 1028 application .06 An organization seeking recognition of exemption under § 521 must submit a completedForm 1028, Application for Recognition of Exemption Under Section 521 of the Internal Rev-enue Code, along with Form 8718.

Form 8871 notice for politicalorganizations

.07 A political party, a campaign committee for a candidate for federal, state or local office,and a political action committee are all political organizations subject to tax under § 527. To betax-exempt, a political organization may be required to notify the Service that it is to be treatedas a § 527 organization by electronically filing Form 8871, Political Organization Notice ofSection 527 Status. For details, go to the IRS website at www.irs.gov/polorgs.

Requirements for a substantiallycompleted application

.08 A substantially completed application, including a letter application, is one that:

(1) is signed by an authorized individual;

(2) includes an Employer Identification Number (EIN);

(3) for organizations other than those described in § 501(c)(3), includes a statement of re-ceipts and expenditures and a balance sheet for the current year and the three preceding years(or the years the organization was in existence, if less than four years), and if the organizationhas not yet commenced operations or has not completed one accounting period, a proposedbudget for two full accounting periods and a current statement of assets and liabilities; for or-ganizations described in § 501(c)(3), see Form 1023 and Notice 1382;

(4) includes a detailed narrative statement of proposed activities, including each of thefundraising activities of a § 501(c)(3) organization, and a narrative description of anticipatedreceipts and contemplated expenditures;

2012–2 I.R.B. 264 January 9, 2012

(5) includes a copy of the organizing or enabling document that is signed by a principalofficer or is accompanied by a written declaration signed by an authorized individual certify-ing that the document is a complete and accurate copy of the original or otherwise meets therequirements of a “conformed copy” as outlined in Rev. Proc. 68–14, 1968–1 C.B. 768;

(6) if the organizing or enabling document is in the form of articles of incorporation, includesevidence that it was filed with and approved by an appropriate state official (e.g., stamped“Filed” and dated by the Secretary of State); alternatively, a copy of the articles of incorporationmay be submitted if accompanied by a written declaration signed by an authorized individualthat the copy is a complete and accurate copy of the original copy that was filed with andapproved by the state; if a copy is submitted, the written declaration must include the date thearticles were filed with the state;

(7) if the organization has adopted by-laws, includes a current copy; the by-laws need not besigned if submitted as an attachment to the application for recognition of exemption; otherwise,the by-laws must be verified as current by an authorized individual; and

(8) is accompanied by the correct user fee and Form 8718, when applicable.

Terrorist organizations noteligible to apply for recognition ofexemption

.09 An organization that is identified or designated as a terrorist organization within themeaning of § 501(p)(2) of the Code is not eligible to apply for recognition of exemption.

SECTION 4. WHAT ARE THESTANDARDS FOR ISSUING ADETERMINATION LETTER ORRULING ON EXEMPT STATUS?

Exempt status must be establishedin application and supportingdocuments

.01 A favorable determination letter or ruling will be issued to an organization only if itsapplication and supporting documents establish that it meets the particular requirements of thesection under which exemption from Federal income tax is claimed.

Determination letter or rulingbased solely on administrativerecord

.02 A determination letter or ruling on exempt status is issued based solely upon the factsand representations contained in the administrative record.

(1) The applicant is responsible for the accuracy of any factual representations contained inthe application.

(2) Any oral representation of additional facts or modification of facts as represented oralleged in the application must be reduced to writing over the signature of an officer or directorof the taxpayer under a penalties of perjury statement.

(3) The failure to disclose a material fact or misrepresentation of a material fact on the ap-plication may adversely affect the reliance that would otherwise be obtained through issuanceby the Service of a favorable determination letter or ruling.

Exempt status may be recognizedin advance of actual operations

.03 Exempt status may be recognized in advance of the organization’s operations if the pro-posed activities are described in sufficient detail to permit a conclusion that the organizationwill clearly meet the particular requirements for exemption pursuant to the section of the Codeunder which exemption is claimed.

(1) A mere restatement of exempt purposes or a statement that proposed activities will bein furtherance of such purposes will not satisfy this requirement.

(2) The organization must fully describe all of the activities in which it expects to engage,including the standards, criteria, procedures, or other means adopted or planned for carrying outthe activities, the anticipated sources of receipts, and the nature of contemplated expenditures.

(3) Where the organization cannot demonstrate to the satisfaction of the Service that it qual-ifies for exemption pursuant to the section of the Code under which exemption is claimed, the

January 9, 2012 265 2012–2 I.R.B.

Service will generally issue a proposed adverse determination letter or ruling. See also section7 of this revenue procedure.

No letter if exempt status issue inlitigation or under considerationwithin the Service

.04 A determination letter or ruling on exempt status ordinarily will not be issued if an issueinvolving the organization’s exempt status under § 501 or § 521 is pending in litigation, is underconsideration within the Service, or if issuance of a determination letter or ruling is not in theinterest of sound tax administration. If the Service declines to issue a determination or rulingto an organization seeking exempt status under § 501(c)(3), the organization may be able topursue a declaratory judgment under § 7428, provided that it has exhausted its administrativeremedies.

Incomplete application .05 If an application does not contain all of the items set out in section 3.08 of this revenueprocedure, the Service may return it to the applicant for completion.

(1) In lieu of returning an incomplete application, the Service may retain the application andrequest additional information needed for a substantially completed application.

(2) In the case of an application under § 501(c)(3) that is returned incomplete, the 270-dayperiod referred to in § 7428(b)(2) will not be considered as starting until the date a substantiallycompleted Form 1023 is refiled with or remailed to the Service. If the application is mailedto the Service and a postmark is not evident, the 270-day period will start to run on the datethe Service actually receives the substantially completed Form 1023. The same rules apply forpurposes of the notice requirement of § 508.

(3) Generally, the user fee will not be refunded if an incomplete application is filed. SeeRev. Proc. 2012–8, section 10.

Even if application is complete,additional information may berequired

.06 Even though an application is substantially complete, the Service may request additionalinformation before issuing a determination letter or ruling.

(1) If the application involves an issue where contrary authorities exist, an applicant’s failureto disclose and distinguish contrary authorities may result in requests for additional informa-tion, which could delay final action on the application.

(2) In the case of an application under § 501(c)(3), the period of time beginning on the datethe Service requests additional information until the date the information is submitted to theService will not be counted for purposes of the 270-day period referred to in § 7428(b)(2).

Expedited handling .07 Applications are normally processed in the order of receipt by the Service. However,expedited handling of an application may be approved where a request is made in writing andcontains a compelling reason for processing the application ahead of others. Upon approvalof a request for expedited handling, an application will be considered out of its normal order.This does not mean the application will be immediately approved or denied. Circumstancesgenerally warranting expedited processing include:

(1) a grant to the applicant is pending and the failure to secure the grant may have an adverseimpact on the organization’s ability to continue to operate;

(2) the purpose of the newly created organization is to provide disaster relief to victims ofemergencies such as flood and hurricane; and

(3) there have been undue delays in issuing a determination letter or ruling caused by aService error.

May decline to issue groupexemption

.08 The Service may decline to issue a group exemption letter when appropriate in the in-terest of sound tax administration.

2012–2 I.R.B. 266 January 9, 2012

SECTION 5. WHAT OFFICESISSUE AN EXEMPT STATUSDETERMINATION LETTEROR RULING?

EO Determinations issues adetermination letter in most cases

.01 Under the general procedures outlined in Rev. Proc. 2012–4, EO Determinations isauthorized to issue determination letters on applications for exempt status under §§ 501 and521.

Certain applications referred toEO Technical

.02 EO Determinations will refer to EO Technical those applications that present issueswhich are not specifically covered by statute or regulations, or by a ruling, opinion, or courtdecision published in the Internal Revenue Bulletin. In addition, EO Determinations will referthose applications that have been specifically reserved by revenue procedure or by other officialService instructions for handling by EO Technical for purposes of establishing uniformity orcentralized control of designated categories of cases. EO Technical will notify the applicantorganization upon receipt of a referred application, and will consider each such application andissue a ruling directly to the organization.

Technical advice may be requestedin certain cases

.03 If at any time during the course of consideration of an exemption application by EODeterminations the organization believes that its case involves an issue on which there is nopublished precedent, or there has been non-uniformity in the Service’s handling of similarcases, the organization may request that EO Determinations either refer the application to EOTechnical or seek technical advice from EO Technical. See Rev. Proc. 2012–5, sections 4.04and 4.05.

Technical advice must berequested in certain cases

.04 If EO Determinations proposes to recognize the exemption of an organization to whichEO Technical had issued a previous contrary ruling or technical advice, EO Determinationsmust seek technical advice from EO Technical before issuing a determination letter. This doesnot apply where EO Technical issued an adverse ruling and the organization subsequently madechanges to its purposes, activities, or operations to remove the basis for which exempt statuswas denied.

SECTION 6. WITHDRAWAL OFAN APPLICATION

Application may be withdrawnprior to issuance of adetermination letter or ruling

.01 An application may be withdrawn upon the written request of an authorized individualat any time prior to the issuance of a determination letter or ruling. Therefore, an applicationmay not be withdrawn after the issuance of a proposed adverse determination letter or ruling.

(1) When an application is withdrawn, the Service will retain the application and all sup-porting documents. The Service may consider the information submitted in connection withthe withdrawn request in a subsequent examination of the organization.

(2) Generally, the user fee will not be refunded if an application is withdrawn. See Rev.Proc. 2012–8, section 10.

§ 7428 implications of withdrawalof application under § 501(c)(3)

.02 The Service will not consider the withdrawal of an application under § 501(c)(3) aseither a failure to make a determination within the meaning of § 7428(a)(2) or as an exhaustionof administrative remedies within the meaning of § 7428(b)(2).

SECTION 7. WHAT ARETHE PROCEDURES WHENEXEMPT STATUS IS DENIED?

Proposed adverse determinationletter or ruling

.01 If EO Determinations or EO Technical reaches the conclusion that the organization doesnot satisfy the requirements for exempt status pursuant to the section of the Code under whichexemption is claimed, the Service generally will issue a proposed adverse determination letteror ruling, which will:

(1) include a detailed discussion of the Service’s rationale for the denial of tax-exempt sta-tus; and

January 9, 2012 267 2012–2 I.R.B.

(2) advise the organization of its opportunity to appeal or protest the decision and request aconference.

Appeal of a proposed adversedetermination letter issued by EODeterminations

.02 A proposed adverse determination letter issued by EO Determinations will advise theorganization of its opportunity to appeal the determination by requesting Appeals Office con-sideration. To do this, the organization must submit a statement of the facts, law and argumentsin support of its position within 30 days from the date of the adverse determination letter. Theorganization must also state whether it wishes an Appeals Office conference. Any determina-tion letter issued on the basis of technical advice from EO Technical may not be appealed tothe Appeals Office on issues that were the subject of the technical advice.

Protest of a proposed adverseruling issued by EO Technical

.03 A proposed adverse ruling issued by EO Technical will advise the organization of itsopportunity to file a protest statement within 30 days and to request a conference. If a confer-ence is requested, the conference procedures outlined in Rev. Proc. 2012–4, section 12, areapplicable.

Final adverse determination letteror ruling where no appeal orprotest is submitted

.04 If an organization does not submit a timely appeal of a proposed adverse determinationletter issued by EO Determinations, or a timely protest of a proposed adverse ruling issued byEO Technical, a final adverse determination letter or ruling will be issued to the organization.The final adverse letter or ruling will provide information about the filing of tax returns andthe disclosure of the proposed and final adverse letters or rulings.

How EO Determinations handlesan appeal of a proposed adversedetermination letter

.05 If an organization submits an appeal of the proposed adverse determination letter, EODeterminations will first review the appeal, and, if it determines that the organization qualifiesfor tax-exempt status, issue a favorable exempt status determination letter. If EO Determina-tions maintains its adverse position after reviewing the appeal, it will forward the appeal andthe exemption application case file to the Appeals Office.

Consideration by the AppealsOffice

.06 The Appeals Office will consider the organization’s appeal. If the Appeals Office agreeswith the proposed adverse determination, it will either issue a final adverse determination or,if a conference was requested, contact the organization to schedule a conference. At the endof the conference process, which may involve the submission of additional information, theAppeals Office will either issue a final adverse determination letter or a favorable determina-tion letter. If the Appeals Office believes that an exemption or private foundation status issueis not covered by published precedent or that there is non-uniformity, the Appeals Office mustrequest technical advice from EO Technical in accordance with Rev. Proc. 2012–5, sections4.04 and 4.05.

If a protest of a proposedadverse ruling is submitted to EOTechnical

.07 If an organization submits a protest of a proposed adverse exempt status ruling, EOTechnical will review the protest statement. If the protest convinces EO Technical that theorganization qualifies for tax-exempt status, a favorable ruling will be issued. If EO Technicalmaintains its adverse position after reviewing the protest, it will either issue a final adverseruling or, if a conference was requested, contact the organization to schedule a conference. Atthe end of the conference process, which may involve the submission of additional information,EO Technical will either issue a final adverse ruling or a favorable exempt status ruling.

An appeal or protest may bewithdrawn

.08 An organization may withdraw its appeal or protest before the Service issues a finaladverse determination letter or ruling. Upon receipt of the withdrawal request, the Service willcomplete the processing of the case in the same manner as if no appeal or protest was received.

Appeal or protest and conferencerights not applicable in certainsituations

.09 The opportunity to appeal or protest a proposed adverse determination letter or rulingand the conference rights described above are not applicable to matters where delay would beprejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the immi-nence of the expiration of the statute of limitations, or where immediate action is necessary toprotect the interests of the Government).

SECTION 8. DISCLOSUREOF APPLICATIONS ANDDETERMINATION LETTERSAND RULINGS

Sections 6104 and 6110 of the Code provide rules for the disclosure of applications, includ-ing supporting documents, and determination letters and rulings.

2012–2 I.R.B. 268 January 9, 2012

Disclosure of applications,supporting documents, andfavorable determination letters orrulings

.01 The applications, any supporting documents, and the favorable determination letter orruling issued, are available for public inspection under § 6104(a)(1) of the Code. However,there are certain limited disclosure exceptions for a trade secret, patent, process, style of work,or apparatus, if the Service determines that the disclosure of the information would adverselyaffect the organization.

(1) The Service is required to make the applications, supporting documents, and favorabledetermination letters or rulings available upon request. The public can request this informationby submitting Form 4506–A, Request for Public Inspection or Copy of Exempt or Political Or-ganization IRS Form. Organizations should ensure that applications and supporting documentsdo not include unnecessary personal identifying information (such as bank account numbersor social security numbers) that could result in identity theft or other adverse consequences ifpublicly disclosed.

(2) The exempt organization is required to make its exemption application, supporting doc-uments, and determination letter or ruling available for public inspection without charge. Formore information about the exempt organization’s disclosure obligations, see Publication 557,Tax-Exempt Status for Your Organization.

Disclosure of adversedetermination letters or rulings

.02 The Service is required to make adverse determination letters and rulings available forpublic inspection under § 6110 of the Code. Upon issuance of the final adverse determinationletter or ruling to an organization, both the proposed adverse determination letter or ruling andthe final adverse determination letter or ruling will be released pursuant to § 6110.

(1) These documents are made available to the public after the deletion of names, addresses,and any other information that might identify the taxpayer. See § 6110(c) for other specificdisclosure exemptions.

(2) The final adverse determination letter or ruling will enclose Notice 437, Notice of Inten-tion to Disclose, and redacted copies of the final and proposed adverse determination lettersor rulings. Notice 437 provides instructions if the organization disagrees with the deletionsproposed by the Service.

Disclosure to State officials whenthe Service refuses to recognizeexemption under § 501(c)(3)

.03 The Service may notify the appropriate State officials of a refusal to recognize an or-ganization as tax-exempt under § 501(c)(3). See § 6104(c) of the Code. The notice to the Stateofficials may include a copy of a proposed or final adverse determination letter or ruling theService issued to the organization. In addition, upon request by the appropriate State official,the Service may make available for inspection and copying the exemption application and otherinformation relating to the Service’s determination on exempt status.

Disclosure to State officials ofinformation about § 501(c)(3)applicants

.04 The Service may disclose to State officials the name, address, and identification numberof any organization that has applied for recognition of exemption under § 501(c)(3).

SECTION 9. REVIEW OFDETERMINATION LETTERSBY EO TECHNICAL

Determination letters may bereviewed by EO Technical toassure uniformity

.01 Determination letters issued by EO Determinations may be reviewed by EO Technical,or the Office of the Associate Chief Counsel (Passthroughs and Special Industries) (for casesunder § 521), to assure uniform application of the statutes or regulations, or rulings, courtopinions, or decisions published in the Internal Revenue Bulletin.

Procedures for cases where EOTechnical takes exception to adetermination letter

.02 If EO Technical takes exception to a determination letter issued by EO Determinations,the manager of EO Determinations will be advised. If EO Determinations notifies the organ-ization of the exception taken, and the organization disagrees with the exception, the file willbe returned to EO Technical. The referral to EO Technical will be treated as a request for tech-nical advice, and the procedures in Rev. Proc. 2012–5 will be followed.

January 9, 2012 269 2012–2 I.R.B.

SECTION 10. DECLARATORYJUDGMENT PROVISIONS OF§ 7428

Actual controversy involvingcertain issues

.01 Generally, a declaratory judgment proceeding under § 7428 of the Code can be filed inthe United States Tax Court, the United States Court of Federal Claims, or the district court ofthe United States for the District of Columbia with respect to an actual controversy involvinga determination by the Service or a failure of the Service to make a determination with respectto the initial or continuing qualification or classification of an organization under § 501(c)(3)(charitable, educational, etc.); § 170(c)(2) (deductibility of contributions); § 509(a) (privatefoundation status); § 4942(j)(3) (operating foundation status); or § 521 (farmers cooperatives).

Exhaustion of administrativeremedies

.02 Before filing a declaratory judgment action, an organization must exhaust its adminis-trative remedies by taking, in a timely manner, all reasonable steps to secure a determinationfrom the Service. These include:

(1) the filing of a substantially completed application Form 1023 under § 501(c)(3) pursuantto section 3.08 of this revenue procedure, or the request for a determination of foundation statuspursuant to Rev. Proc. 2012–10, this Bulletin, or its successor;

(2) in appropriate cases, requesting relief pursuant to Treas. Reg. § 301.9100–1 of the Pro-cedure and Administration Regulations regarding the extension of time for making an electionor application for relief from tax;

(3) the timely submission of all additional information requested by the Service to perfectan exemption application or request for determination of private foundation status; and

(4) exhaustion of all administrative appeals available within the Service pursuant to section7 of this revenue procedure.

Not earlier than 270 days afterseeking determination

.03 An organization will in no event be deemed to have exhausted its administrative reme-dies prior to the earlier of:

(1) the completion of the steps in section 10.02, and the sending by the Service by certifiedor registered mail of a final determination letter or ruling; or

(2) the expiration of the 270-day period described in § 7428(b)(2) in a case where the Servicehas not issued a final determination letter or ruling, and the organization has taken, in a timelymanner, all reasonable steps to secure a determination letter or ruling.

Service must have reasonable timeto act on an appeal or protest

.04 The steps described in section 10.02 will not be considered completed until the Servicehas had a reasonable time to act upon an appeal or protest, as the case may be.

Final determination to which§ 7428 applies

.05 A final determination to which § 7428 of the Code applies is a determination letter orruling, sent by certified or registered mail, which holds that the organization is not described in§ 501(c)(3) or § 170(c)(2), is a public charity described in a part of § 509 or § 170(b)(1)(A) otherthan the part under which the organization requested classification, is not a private foundationas defined in § 4942(j)(3), or is a private foundation and not a public charity described in a partof § 509 or § 170(b)(1)(A).

SECTION 11. EFFECT OFDETERMINATION LETTEROR RULING RECOGNIZINGEXEMPTION

Effective date of exemption .01 A determination letter or ruling recognizing exemption is usually effective as of the dateof formation of an organization if its purposes and activities prior to the date of the determi-nation letter or ruling were consistent with the requirements for exemption. However, specialrules under § 508(a) of the Code may apply to an organization applying for exemption under§ 501(c)(3), and special rules under § 505(c) may apply to an organization applying for ex-emption under § 501(c)(9), (17), or (20).

2012–2 I.R.B. 270 January 9, 2012

(1) If the Service requires the organization to alter its activities or make substantive amend-ments to its enabling instrument, the exemption will be effective as of the date specified in adetermination letter or ruling.

(2) If the Service requires the organization to make a nonsubstantive amendment, exemp-tion will ordinarily be recognized as of the date of formation. Examples of nonsubstantiveamendments include correction of a clerical error in the enabling instrument or the addition ofa dissolution clause where the activities of the organization prior to the determination letter orruling are consistent with the requirements for exemption.

Reliance on determination letteror ruling

.02 A determination letter or ruling recognizing exemption may not be relied upon if there isa material change, inconsistent with exemption, in the character, the purpose, or the method ofoperation of the organization, or a change in the applicable law. Also, a determination letter orruling may not be relied upon if it was based on any inaccurate material factual representations.See section 12.01.

SECTION 12. REVOCATIONOR MODIFICATION OFDETERMINATION LETTEROR RULING RECOGNIZINGEXEMPTION

A determination letter or ruling recognizing exemption may be revoked or modified: (1) bya notice to the taxpayer to whom the determination letter or ruling was issued; (2) by enactmentof legislation or ratification of a tax treaty; (3) by a decision of the Supreme Court of the UnitedStates; (4) by the issuance of temporary or final regulations; (5) by the issuance of a revenueruling, revenue procedure, or other statement published in the Internal Revenue Bulletin; or(6) automatically, pursuant to § 6033(j), for failure to file a required annual return or notice forthree consecutive years.

Revocation or modification of adetermination letter or ruling maybe retroactive

.01 The revocation or modification of a determination letter or ruling recognizing exemptionmay be retroactive if there has been a change in the applicable law, the organization omittedor misstated a material fact, operated in a manner materially different from that originally rep-resented, or, in the case of organizations to which § 503 of the Code applies, engaged in aprohibited transaction with the purpose of diverting corpus or income of the organization fromits exempt purpose and such transaction involved a substantial part of the corpus or income ofsuch organization. In certain cases an organization may seek relief from retroactive revocationor modification of a determination letter or ruling under § 7805(b). Requests for § 7805(b)relief are subject to the procedures set forth in Rev. Proc. 2012–4.

(1) Where there is a material change, inconsistent with exemption, in the character, the pur-pose, or the method of operation of an organization, revocation or modification will ordinarilytake effect as of the date of such material change.

(2) In the case where a determination letter or ruling is issued in error or is no longer inaccord with the Service’s position and § 7805(b) relief is granted (see sections 13 and 14 ofRev. Proc. 2012–4), ordinarily, the revocation or modification will be effective not earlier thanthe date when the Service modifies or revokes the original determination letter or ruling.

Appeal and conference proceduresin the case of revocation ormodification of exempt statusletter

.02 In the case of a revocation or modification of a determination letter or ruling, the appealand conference procedures are generally the same as set out in section 7 of this revenue proce-dure, including the right of the organization to request that EO Determinations or the AppealsOffice seek technical advice from EO Technical. However, appeal and conference rights arenot applicable to matters where delay would be prejudicial to the interests of the Service (suchas in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limita-tions, or where immediate action is necessary to protect the interests of the Government).

(1) If the case involves an exempt status issue on which EO Technical had issued a previouscontrary ruling or technical advice, EO Determinations generally must seek technical advicefrom EO Technical.

(2) EO Determinations does not have to seek technical advice if the prior ruling or technicaladvice has been revoked by subsequent contrary published precedent or if the proposed revo-cation involves a subordinate unit of an organization that holds a group exemption letter issuedby EO Technical, the EO Technical ruling or technical advice was issued under the Internal

January 9, 2012 271 2012–2 I.R.B.

Revenue Code of 1939 or prior revenue acts, or if the ruling was issued in response to Form4653, Notification Concerning Foundation Status.

SECTION 13. EFFECTON OTHER REVENUEPROCEDURES

Rev. Proc. 2011–9 is superseded.

SECTION 14. EFECTIVE DATE This revenue procedure is effective January 9, 2012.

SECTION 15. PAPERWORKREDUCTION ACT

The collection of information for a letter application under section 3.05 of this revenue pro-cedure has been reviewed and approved by the Office of Management and Budget (OMB)in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number1545–2080. All other collections of information under this revenue procedure have been ap-proved under separate OMB control numbers.

An agency may not conduct or sponsor, and a person is not required to respond to, a collec-tion of information unless the collection of information displays a valid OMB control number.

The collection of this information is required if an organization wants to be recognized astax-exempt by the Service. We need the information to determine whether the organizationmeets the legal requirements for tax-exempt status. In addition, this information will be usedto help the Service delete certain information from the text of an adverse determination letteror ruling before it is made available for public inspection, as required by § 6110.

The time needed to complete and file a letter application will vary depending on individualcircumstances. The estimated average time is 10 hours.

Books and records relating to the collection of information must be retained as long as theircontents may become material in the administration of any internal revenue law. The rulesgoverning the confidentiality of letter applications are covered in § 6104.

DRAFTING INFORMATION The principal authors of this revenue procedure are Mr. Dave Rifkin and Mr. Matt Perdoniof the Exempt Organizations, Tax Exempt and Government Entities Division. For furtherinformation regarding this revenue procedure, please contact the TE/GE Customer Serviceoffice at (877) 829–5500 (a toll-free call), or send an e-mail to [email protected] and include“Question about Rev. Proc. 2012–9” in the subject line.

2012–2 I.R.B. 272 January 9, 2012

Rev. Proc. 2012–10

SECTION 1. PURPOSE AND SCOPE

The purpose of this revenue proce-dure is to set forth updated procedures ofthe Internal Revenue Service (the “Ser-vice”) with respect to issuing rulings anddetermination letters on private founda-tion status under § 509(a) of the InternalRevenue Code (the “Code”), operatingfoundation status under § 4942(j)(3),and exempt operating foundation sta-tus under § 4940(d)(2), of organizationsexempt from Federal income tax under§ 501(c)(3). This revenue procedure alsoapplies to the issuance of determinationletters on the foundation status under§ 509(a)(3) of nonexempt charitable trustsdescribed in § 4947(a)(1).

SECTION 2. WHAT CHANGESHAVE BEEN MADE TO REV. PROC.2011–10?

.01 This revenue procedure is a generalupdate of Rev. Proc. 2011–10, 2011–2I.R.B. 294.

.02 Section 6.02 is rewritten to reflectchanges since the introduction of Form8940, Request for Miscellaneous Determi-nation Under Section 507, 509(a), 4940,4942, 4945, and 6033 of the Internal Rev-enue Code, and the Instructions for Form8940. Refer to Form 8940 and the Instruc-tions for Form 8940 for information aboutthe types of requests that require the filingof a Form 8940.


.01 All § 501(c)(3) organizations areclassified as private foundations under§ 509(a) unless they qualify as a publiccharity under § 509(a)(1) (which cross-ref-erences § 170(b)(1)(A)(i)-(vi)), (2), (3),or (4). See Treas. Reg. §§ 1.170A–9,1.509(a)–1 through 1.509(a)–7. The Ser-vice determines an organization’s privatefoundation or public charity status whenthe organization files its Form 1023. Thisstatus will be included in the organiza-tion’s determination letter.

.02 In its Form 990, Return of Or-ganization Exempt From Income TaxUnder section 501(c), 527, or 4947(a)(1)of the Internal Revenue Code (exceptblack lung benefit trust or private founda-

tion), a public charity indicates the para-graph of § 509(a), and subparagraph of§ 170(b)(1)(A), if applicable, under whichit qualifies as a public charity. Because ofchanges in its activities or operations, thismay differ from the public charity statuslisted in its original determination letter.Although an organization is not required toobtain a determination letter to qualify forthe new public charity status, in order forService records to recognize any change inpublic charity status, an organization mustobtain a new determination of foundationstatus pursuant to this revenue procedure.

.03 If a public charity no longerqualifies as a public charity under§ 509(a)(1)-(4), then it becomes a privatefoundation, and as such, it must file Form990–PF, Return of Private Foundation orSection 4947(a)(1) Nonexempt CharitableTrust Treated as a Private Foundation. Itis not necessary for the organization toobtain a determination letter on its newprivate foundation status (although it ispermitted to do so pursuant to this revenueprocedure). The organization indicatesthis change in foundation status by filingits Form 990–PF return and followingany procedures specified in the form, in-structions, or other published guidance.Thereafter, the organization may termi-nate its private foundation status, suchas by giving notice and qualifying as apublic charity again under § 509(a)(1)-(3)during a 60-month termination periodin accordance with the procedures un-der § 507(b)(1)(B) and Treas. Reg.§ 1.507–2(b).

.04 This revenue procedure applies toorganizations that may have erroneouslydetermined that the organization was aprivate foundation and wish to correct theerror. For example, an organization mayhave erroneously classified an item oritems in its calculation of public support,causing the organization to classify itselfas a private foundation and to file Forms990–PF. Pursuant to this revenue proce-dure, the organization can request to beclassified as a public charity by showingthat it continuously met the public supporttests during the relevant periods. See sec-tion 7 below

.05 A private foundation may qualify asan operating foundation under § 4942(j)(3)without a determination letter from theService, but the Service will not recog-nize such status in its records without a

determination letter from the Service. Anorganization claiming to be an exemptoperating foundation under § 4940(d)(2)must obtain a determination letter fromthe Service recognizing such status to beexempt from the § 4940 tax on net invest-ment income.

SECTION 4. DETERMINATIONS OFFOUNDATION STATUS

.01 EO Determinations will issue deter-mination letters on foundation status, in-cluding whether an organization is:

(1) a private foundation;(2) a public charity described in

§§ 509(a)(1) and 170(b)(1)(A) (other thanclauses (v), (vii), and (viii));

(3) a public charity described in§ 509(a)(2) or (4);

(4) a public charity described in§ 509(a)(3), whether such organizationis described in § 509(a)(3)(B)(i), (ii), or(iii) (“supporting organization type”), andwhether or not a Type III supporting or-ganization is functionally integrated;

(5) a private operating foundation de-scribed in § 4942(j)(3); or

(6) an exempt operating foundation de-scribed in § 4940(d)(2).

.02 EO Determinations will also is-sue determination letters on whether anonexempt charitable trust described in§ 4947(a)(1) is described in § 509(a)(3).

.03 EO Determinations will issue suchdeterminations in response to applicationsfor recognition of exempt status under§ 501(c)(3), submitted by organizationspursuant to § 508(b). EO Determinationswill also issue such determinations inresponse to separate requests for deter-mination of foundation status submittedon Form 8940, Request for MiscellaneousDetermination, pursuant to Rev. Proc.2012–10 or its successor revenue proce-dures.

SECTION 5. APPLICABILITY OFANNUAL REVENUE PROCEDURES

.01 Rev. Proc. 2012–9 (updated annu-ally) provides procedures of the Service inprocessing applications for recognition ofexemption from Federal income tax under§ 501(c)(3). Rev. Proc. 2012–4 (updatedannually) governs requests for rulings anddetermination letters. Rev. Proc. 2012–8(updated annually) prescribes user fees for

January 9, 2012 273 2012–2 I.R.B.

applications, rulings, and other determina-tions. Except as specifically noted herein,those revenue procedures and their annualsuccessors also apply to requests for deter-minations of foundation status.

.02 The provisions of Rev. Proc.2012–9 and any successor revenue proce-dure regarding § 7428, protest, conference,and appeal rights also apply to all deter-minations of foundation status describedin section 4.01 (except section 4.01(6)relating to exempt operating foundationstatus) and section 4.02, whether or notthe request for determination is made inconnection with an application for recog-nition of tax-exempt status.

.03 Where the issue of exemption un-der § 501(c)(3) is referred to EO Technicalfor decision under the procedures of Rev.Proc. 2012–9, the foundation status issuewill be referred along with it.

SECTION 6. GENERALLY NO NEWDETERMINATION LETTER IFSAME STATUS IS SOUGHT

The Service generally will not issue anew determination letter to a taxpayer thatseeks a determination of private founda-tion status that is identical to its currentfoundation status as determined by theService. For example, an organizationthat is already recognized as describedin §§509(a)(1) and 170(b)(1)(A)(ii) as aschool generally will not receive a newdetermination letter that it is still describedin §§ 509(a)(1) and 170(b)(1)(A)(ii) un-der the currently extant facts. However,the organization in such case could re-quest a letter ruling, pursuant to Rev.Proc. 2012–4, that a given change offacts and circumstances will not adverselyaffect its status under §§ 509(a)(1) and170(b)(1)(A)(ii).

SECTION 7. FORMAT OF REQUEST

.01 Organizations that are seeking tochange their foundation status, includingrequests from public charities for privatefoundation status and requests from publiccharities to change from one public char-ity classification to another public char-ity classification, or seeking a determi-nation or a change as to supporting or-ganization type or functionally integratedstatus, or seeking operating foundation orexempt operating foundation status, must

submit Form 8940, Request MiscellaneousDetermination Under Section 507, 509(a),4940, 4942, 4945, and 6033 of the Inter-nal Revenue Code, along with all informa-tion, documentation, and other materialsrequired by Form 8940 and the instructionsthereto, as well as the appropriate user feepursuant to Rev. Proc. 2012–8 or its suc-cessor revenue procedures.

.02 For complete information aboutfiling requirements and the submissionprocess, refer to Form 8940 and the In-structions for Form 8940.

SECTION 8. REQUESTS BYNONEXEMPT CHARITABLETRUSTS

.01 A nonexempt charitable trust de-scribed in § 4947(a)(1) seeking a determi-nation that it is described in § 509(a)(3)should submit a written request for a deter-mination pursuant to Rev. Proc. 2012–4 orits successor revenue procedure.

.02 The request for determination mustinclude the following information items,from the date that the organization becamedescribed in § 4947(a)(1) (but not beforeOctober 9, 1969) to the present:

(1) A subject line or other indica-tor on the first page of the request inbold, underlined, or all capitals font in-dicating “NONEXEMPT CHARITABLETRUST REQUEST FOR DETERMI-NATION THAT IT IS DESCRIBED IN§ 509(a)(3)”;

(2) The name, address, and EmployerIdentification Number of the beneficiaryorganizations, together with a statementwhether each such beneficiary organiza-tion is described in § 509(a)(1) or (2);

(3) A list of all of the trustees that haveserved, together with a statement statingwhether such trustees were disqualifiedpersons within the meaning of § 4946(a)(other than as foundation managers);

(4) A copy of the original trust instru-ment and all subsequently adopted amend-ments to that instrument;

(5) Sufficient information to other-wise establish that the trust has met therequirements of § 509(a)(3) as providedfor in Treas. Reg. § 1.509(a)–4 (otherthan § 1.509(a)–4(i)(4)); If the trust didnot qualify under § 509(a)(3) in one ormore prior years (after October 9, 1969)in which it was described in § 4947(a)(1),then it cannot be issued a § 509(a)(3) deter-

mination letter except in accordance withthe procedures for termination of privatefoundation status under § 507(b)(1)(B);and

(6) Such other information as is re-quired for a determination under Rev.Proc. 2012–4 or any successor revenueprocedure.

SECTION 9. DETERMINATIONSOPEN TO PUBLIC INSPECTION

Determinations and rulings as to foun-dation status are open to public inspectionpursuant to § 6104(a).

SECTION 10. NOT APPLICABLETO PRIVATE FOUNDATIONTERMINATIONS UNDER § 507 ORCHANGES OF STATUS PURSUANTTO EXAMINATION

These procedures do not apply to a pri-vate foundation seeking to terminate itsstatus under § 507. These procedures alsodo not apply to the examination of an or-ganization which results in changes to itsfoundation status.

SECTION 11. EFFECT ON OTHERREVENUE PROCEDURES

Rev. Proc. 2011–10 is superseded.


This revenue procedure is effective Jan-uary 9, 2012.


The collections of information con-tained in this revenue procedure havebeen reviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. § 3507) under control number1545–1520.

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 sections 7.02 and8.02. This information is required to eval-uate and process the request for a letter

2012–2 I.R.B. 274 January 9, 2012

ruling or determination letter. The collec-tions of information are required to obtaina letter ruling or determination letter. Thelikely respondents are tax-exempt organi-zations.


The principal authors of this rev-enue procedure are Mr. Dave Rifkinand Mr. Matt Perdoni of the ExemptOrganizations, Tax Exempt andGovernment Entities Division. Forfurther information about this revenueprocedure, contact Customer AccountServices at 877–829–5500. Dave Rifkinor Matt Perdoni can be reached bye-mail at [email protected]. Please include“Question about Rev. Proc. 2012–10” inthe subject line.

26 CFR 601.601: Rules and regulations.(Also: 31 USC 330, 31 CFR 10.6, 31 CFR 10.9.)

Rev. Proc. 2012–12

SECTION 1. PURPOSE

The purpose of this revenue procedureis to describe the procedures and standardsthat organizations must follow to be iden-tified by the Internal Revenue Service as aqualifying organization that may accreditcontinuing education providers under sec-tion 10.9(a)(1)(iii) of Circular 230. Thisrevenue procedure also describes the stan-dards for a continuing education providerunder section 10.9(a)(1) and the proce-dures that individuals and entities must fol-low to be approved by the Internal Rev-enue Service as a continuing educationprovider under section 10.9(a)(1)(iv).


.01 On June 3, 2011, the Treasury De-partment and the Internal Revenue Ser-vice published final regulations in the Fed-eral Register (T.D. 9527, 2011–28 I.R.B.38 [76 FR 32286]) under 31 CFR Part 10(reprinted as Treasury Department Circu-lar 230) that require registered tax returnpreparers to complete continuing educa-tion offered by qualified continuing edu-cation providers. Enrolled agents and en-rolled retirement plan agents also are re-quired to complete continuing education

under Circular 230. Section 10.9(a)(1) ofCircular 230 provides that continuing edu-cation providers must be:

(i) An accredited educational institu-tion;

(ii) Recognized for continuing educa-tion purposes by the licensing body of anyState, territory, or possession of the UnitedStates, including a Commonwealth, or theDistrict of Columbia;

(iii) Recognized and approved by aqualifying organization as a provider ofcontinuing education on subject matterswithin section 10.6(f) of Circular 230; or

(iv) Recognized by the IRS as a pro-fessional organization, society, or businesswhose programs include offering continu-ing professional education opportunities insubject matters within section 10.6(f).

For purposes of this revenue procedure,an entity referred to as a “qualifying organ-ization” in section 10.9(a)(1)(iii) will bereferred to as an “accrediting organization”and an individual or entity approved by theIRS as a continuing education provider un-der section 10.9(a)(1)(iv) will be referredto as a “section iv CE provider.”

.02 Section 10.9(a)(1)(iii) provides thatthe IRS, at its discretion, may identify theaccrediting organizations that maintainminimum education standards compara-ble to those set forth in Circular 230 inappropriate forms, instructions, and otherappropriate guidance.

.03 Section 10.9(a)(1)(iv) provides thatthe IRS, at its discretion, may require sec-tion iv CE providers to file an agreementand/or obtain IRS approval of each pro-gram as a qualified continuing educationprogram in appropriate forms, instruc-tions, or other appropriate guidance.

.04 Under section 10.9(a)(2), a con-tinuing education provider must obtain acontinuing education provider number andpay any applicable user fee. A continuingeducation provider also must maintain itsstatus as a continuing education providerduring each continuing education providercycle by renewing its continuing educationprovider number as prescribed by forms,instructions, or other appropriate guidanceand paying any applicable user fee.

.05 Sections 10.6(f) and 10.9(a)(3)provide initial criteria that continuing ed-ucation programs must meet to qualifyfor continuing education credit for en-rolled agents, enrolled retirement planagents, and registered tax return preparers.

A qualifying continuing education pro-gram generally must enhance professionalknowledge in Federal taxation or Federaltax related matters, including ethics, mustbe consistent with the Internal RevenueCode and effective tax administration, andmust be conducted by a qualified instruc-tor.

.06 On July 18, 2011, Treasury and theIRS published Notice 2011–61 solicitingthe feedback of education providers, taxreturn preparers, the associated industryand consumer groups, and taxpayers onthe procedures and standards that will gov-ern the process for identifying accreditingorganizations or for those individuals andentities seeking approval as section iv CEproviders. Numerous comments were re-ceived and were taken into account in thedevelopment of the standards and proce-dures prescribed in this revenue procedure.

SECTION 3. SCOPE

This revenue procedure applies to anyorganization seeking to be identified as anaccrediting organization or any individualor entity seeking approval as a section ivCE provider; and applies to any continuingeducation provider seeking to obtain con-tinuing education provider and programnumbers under section 10.9. This rev-enue procedure supplements sections 10.6and 10.9 by describing the specific stan-dards and procedures that those organiza-tions, individuals, and entities must followto be identified as an accrediting organiza-tion or accepted as a continuing educationprovider.

SECTION 4. ACCREDITINGORGANIZATIONS

.01 Standards. Any organization seek-ing to be identified as an accrediting organ-ization that may approve individuals andentities as continuing education providersunder section 10.9(a)(1)(iii) must:

(1) Have an established framework andeffective means of review and approval forcontinuing education providers.

(2) Publish requirements for continuingeducation provider approval.

(3) Have written procedures sufficientto ensure that the continuing educationproviders it accredits comply with anystandards set forth in Circular 230, therequirements described in section 5.02

January 9, 2012 275 2012–2 I.R.B.

below, and any other standards prescribedby the IRS in other appropriate guidance.

(4) Have experience evaluating contin-uing education providers in Federal taxa-tion or Federal tax related matters, includ-ing ethics. The minimum level of experi-ence required typically will be two years.

(5) Have an established process for an-nually auditing or reviewing selected pro-grams of selected approved continuing ed-ucation providers. Reviews of selectedprograms must be performed periodically,at least annually.

(6) Maintain records for each approvedcontinuing education provider for fouryears and submit reports to the IRS peri-odically on the individuals and entities ap-plying for continuing education providerstatus.

(7) Maintain an internet listing of allcontinuing education providers approvedby the accrediting organization.

(8) Employ at least one full-time staffmember with subject-matter expertise inFederal taxation or Federal tax related mat-ters, including ethics. That staff membermust be qualified to evaluate continuingeducation provider programs as outlined inCircular 230.

.02 Requirements. Any organizationidentified as an accrediting organizationmust:

(1) Comply with all IRS guidance andrequirements, including Circular 230. TheIRS may require an accrediting organiza-tion to provide additional information re-garding such compliance. The IRS mayrevoke an organization’s status as an ac-crediting organization if the organizationfails to adequately and timely respond tothe IRS’s request for information.

(2) Have an established process forin-depth reviews of selected approvedcontinuing education providers on an an-nual basis.

(3) Act only as an approver of continu-ing education providers, and not offer Fed-eral tax related continuing education com-mercially.

(4) Respond to IRS requests for infor-mation regarding the individuals or enti-ties approved or not approved as continu-ing education providers.

.03 How to Apply. An organizationseeking to be identified as an accreditingorganization authorized to approve indi-viduals and entities as continuing educa-tion providers may apply by providing the

information set forth in section 4.04 be-low. The applicant must include all rele-vant information required by this revenueprocedure, including how the organizationmeets the standards described in section4.01 above, in the application. Completedapplications must be sent to:

Internal Revenue ServiceAttention: RPO ContinuingEducation Program

Rm. 7238 IR1111 Constitution Ave., NWWashington, DC 20224

Applicants will be notified, in writ-ing, whether the application has beenapproved. Only after an applicant hasreceived written notification of approvalfrom the IRS may the accrediting or-ganization begin accepting applicationsfrom individuals or entities seeking tobecome a continuing education providerunder section 10.9(a)(1)(iii). Individualsor entities approved by the accreditingorganization as a continuing educationprovider under section 10.9(a)(1)(iii) mustobtain a provider number and programnumber(s) from the IRS by filing a com-pleted Form 8498, Continuing EducationProvider Application and Request forProvider Number, (and pay any applica-ble fee) online at www.irs.gov/taxpros/ceor they may request a paper applica-tion by calling the IRS Continuing Ed-ucation Provider Processing Center at1–855–296–3150 (toll-free) in the UnitedStates or 202–499–5606 (not a toll-freecall) outside the United States. The pro-cessing time for a paper application willbe six to eight weeks. Continuing educa-tion providers who have been approvedby an accrediting organization may of-fer continuing education for purposes ofsection 10.6 only after they have receiveda continuing education provider numberand program number(s) from the IRS, andfollowed all applicable procedures pre-scribed by the IRS.

An accrediting organization must re-new its status as an accrediting organi-zation every three calendar years as pre-scribed in forms, instructions, or other ap-propriate guidance. The renewal periodwill be from July through September of theapplicable renewal year.

.04 Required Information. Any or-ganization seeking to be identified as

an accrediting organization that may ap-prove individuals and entities as contin-uing education providers under section10.9(a)(1)(iii) must provide the follow-ing information, including any supportingdocumentation, in its application to beidentified as an accrediting organization:

(1) Full name, mailing address, tele-phone number, and web address (URL) ofthe organization.

(2) Tax identification number of the or-ganization.

(3) Name and contact information of theorganization’s point of contact, includingmailing address, telephone number, ande-mail address.

(4) Description of the requirements anindividual or entity must meet to obtain theorganization’s approval as a continuing ed-ucation provider. Supporting documenta-tion must be attached.

(5) Description of the organization’sexperience and qualifications evaluatingcontinuing education providers.

(6) Description of the process the or-ganization uses to review applicationsit receives from continuing educationproviders and to ensure that continuingeducation providers will comply with thestandards set forth in Circular 230, require-ments described in section 5.02 below, andany other standards prescribed by the IRSin other appropriate guidance. Supportingdocumentation must be attached.

(7) Statement that the organization willnot directly or indirectly offer continuingeducation in Federal tax matters or ethicscommercially during any period that theorganization is operating as an accreditingorganization.

(8) Statement that the organizationagrees to comply with all IRS guidanceand requirements, including Circular 230.

(9) Statement that the organization ac-knowledges that its status as an IRS ac-crediting organization is subject to reviewat any time by the IRS, including but notlimited to, IRS requests for informationabout the organization’s review and ap-proval process, interviews, and site vis-itations (including site visitations of theorganization’s approved continuing edu-cation providers). Statement also mustacknowledge that the organization’s fail-ure to provide any data or information re-quested by the IRS or its denial of an IRSsite visitation may result in suspension or

2012–2 I.R.B. 276 January 9, 2012

revocation of its accrediting organizationstatus.

(10) Signed and dated statement by theorganization’s point of contact (see section4.04(3)) or an officer, partner, member, orowner of the organization providing thatthe individual has examined and read theapplication and all accompanying infor-mation and to the best of the individual’sknowledge and belief, the information pro-vided is true, correct, and complete. Thestatement must be made under penalties ofperjury and acknowledge that any false ormisleading information may result in crim-inal penalties and/or the denial or termina-tion of the organization’s status as an ac-crediting organization.

SECTION 5. CONTINUINGEDUCATION PROVIDERS

.01 General. Individuals or entities ap-proved as a continuing education providerunder section 10.9(a)(1)(i), (ii), or (iii)are required to obtain and renew an-nually a continuing education providernumber. These continuing educationproviders also are required to obtain con-tinuing education program numbers foreach qualifying program they intend tooffer. Continuing education providersmay obtain and renew their continuingeducation provider numbers and programnumbers by submitting a completed Form8498, Continuing Education ProviderApplication and Request for ProviderNumber, online at www.irs.gov/taxpros/ceor they may request a paper applica-tion by calling the IRS Continuing Ed-ucation Provider Processing Center at1–855–296–3150 (toll-free) in the UnitedStates or 202–499–5606 (not a toll-freecall) outside the United States. The pro-cessing time for a paper application willbe six to eight weeks. Continuing edu-cation providers may be required to paya reasonable annual fee to the third-partyvendor who administers this program forthe IRS. The third-party vendor will notcharge an additional fee if a continuingeducation provider adds programs duringa calendar year.

Individuals or entities approved as acontinuing education provider may be re-quired, as prescribed by the IRS and thethird-party vendor, to provide identifyinginformation of preparer tax identifica-tion number holders who successfully

complete programs with IRS programnumbers.

Continuing education providers musthave a current or otherwise valid con-tinuing education provider number priorto advertising that programs offered bythe provider may be used to meet anyIRS continuing education requirements.Additionally, any program offered by acontinuing education provider must have acurrent or otherwise valid program numberbefore the continuing education provideradvertises that the program meets IRSrequirements for continuing education.

.02 Requirements. Any individual ororganization approved as a continuing ed-ucation provider must:

(1) Offer continuing education pro-grams designed to enhance professionalknowledge in Federal taxation or Federaltax related matters, including ethics, con-sistent with the Internal Revenue Code andprinciples of effective tax administration.

a) If the continuing education programwill be offered for the purpose of qualify-ing for continuing education credit for reg-istered tax return preparers, the programmust directly relate to the preparation ofFederal tax returns or Federal tax ethics.

b) If the continuing education pro-gram will be offered for the purpose ofqualifying for continuing education creditfor enrolled retirement plan agents, theprogram must enhance the participant’sprofessional knowledge in qualified retire-ment plan matters, including ethics.

Continuing education programs fo-cused primarily on state tax related mat-ters generally will not be eligible forcontinuing education credit unless the in-structional material demonstrates that theprogram is designed to illustrate the differ-ence between state law and Federal law inthe same tax related matter. Providers of-fering continuing education programs withonly limited professional benefit not de-signed to improve skills related to Federaltax related matters will not be approved.

(2) Provide continuing education pro-gram content that is accurate, current, andeffectively designed to communicate con-tent through program materials, activities,and delivery systems, whether classroom-based, computer-based, or for self-study.

(3) Use continuing education programpresenters, instructors, discussion leaders,and speakers who have subject-matter ex-pertise in Federal taxation or Federal tax

related matters, including ethics, as wellas demonstrable teaching and communica-tion skills.

(4) Comply with any standards set forthin Circular 230 and any other standardsprescribed by the IRS in other appropriateguidance.

(5) Ensure that all continuing educationprograms are developed and written by in-dividual(s) with expertise in Federal tax re-lated matters, or ethics in the case of anethics program.

(6) Provide continuing education pro-grams that utilize materials specifically de-veloped for instructional use. General pro-fessional literature or IRS publications andreference manuals may be used only tosupplement specific program materials.

(7) Review and update programs peri-odically, at least annually, to ensure ac-curacy and consistency with currently ac-cepted standards relating to the program’ssubject matter. This review must be con-ducted by a qualified individual to ensurethat the program is current, technically ac-curate, and addresses the stated learningobjectives.

(8) Provide a means for evaluationof attendees’ successful completion ofthe program. Providers must ensure thatself-study programs include verificationof completion of required material anddemonstrated mastery of program content.

(9) Develop programs that meet thestandards of Circular 230 for continuingeducation credit earned upon completion,based upon the standard of 50 minutesof contact time required for 1 continuingeducation credit earned. Credit is grantedonly for a full contact hour of 50 min-utes, or multiples thereof; no credit willbe awarded for partial continuing educa-tion consisting of less than 50 minutes ofcontact time.

(10) Collect and maintain reliablerecords to document participation and at-tendance, and issue certificates with IRSprogram numbers to students upon suc-cessful completion.

(11) Provide for voluntary programevaluations by individuals who have com-pleted the program. The provider mustensure that participants have an opportu-nity to provide feedback concerning thequality and knowledge of the speaker/in-structor, the quality of program materials,and whether the program met stated ob-jectives. Any participant evaluations

January 9, 2012 277 2012–2 I.R.B.

received by the provider must be madeavailable to the IRS on request.

.03 How to Apply to Become a SectionIV CE Provider. Individuals or entitiesthat do not meet the requirements of sec-tion 10.9(a)(1)(i), (ii), or (iii) may applyto the IRS for approval as a section ivCE provider. An applicant under sec-tion 10.9(a)(1)(iv) must apply for statusas a section iv CE provider by submit-ting a completed Form 8498, ContinuingEducation Provider Application and Re-quest for Provider Number, online atwww.irs.gov/taxpros/ce or these individ-uals or entities may request a paper ap-plication by calling the IRS ContinuingEducation Provider Processing Center at1–855–296–3150 (toll-free) in the UnitedStates or 202–499–5606 (not a toll-freecall) outside the United States. The pro-cessing time for a paper application willbe six to eight weeks. The applicant alsomust pay any applicable third-party ven-dor fee with the application and includeall relevant information required in the ap-plication, including how the section iv CEprovider meets the requirements describedin section 5.02 above. Approved appli-cants will receive a continuing educationprovider number and program numbersand must renew their status annually inaccordance with section 5.01 above.


The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)) under control number1545–1726.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number.

The collection of information in thisrevenue procedure is in sections 4 and 5.This information is required in order forthe IRS to ensure that individuals and or-ganizations permitted to provide continu-ing education or accredit others to providecontinuing education meet all of the ap-propriate procedures and standards for ed-ucation in Federal tax practice. The likelyrespondents are individuals and organiza-tions that want to provide continuing edu-cation or accredit others to provide contin-uing education.

The estimated total annual reporting orrecordkeeping burden is 2,750 hours.

The estimated annual burden per re-spondent/recordkeeper varies from .6hours to 1 hour, depending on individual

circumstances, with an estimated averageof .75 hours. The estimated number ofrespondents or recordkeepers is 3,000.

The estimated frequency of responses(used for reporting requirements only) un-der section 4 is once every three years;the estimated frequency of responses un-der section 5 is twice annually.

Books or records relating to a collectionof information must be retained as longas their contents might become material inthe administration of any internal revenuelaw.


This revenue procedure is effective De-cember 6, 2011.

SECTION 8. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Janet Engel Kidd of the Officeof Associate Chief Counsel (Procedure &Administration). For further informationregarding this revenue procedure, contactJanet Engel Kidd at (202) 622–4940 (nota toll-free call).

2012–2 I.R.B. 278 January 9, 2012

Part IV. Items of General InterestNotice of ProposedRulemaking

Application of the SegregationRules to Small Shareholders

REG–149625–10

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations under section 382 ofthe Internal Revenue Code (Code). Theseproposed regulations provide guidanceregarding the application of the segrega-tion rules to public groups under section382 of the Code. These regulations affectcorporations.

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

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–149625–10), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–149625–10),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC, or sent electroni-cally via the Federal eRulemaking Por-tal at http://www.regulations.gov/ (IRSREG–149625–10).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Stephen R. Cleary, (202)622–7750; concerning submission ofcomments or to request a public hearing,Oluwafunmilayo (Funmi) P. Taylor, (202)622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

1. Segregation and Aggregation —Statute, Legislative History, and CurrentRegulations

Section 382 imposes a limitation on acorporation’s use of net operating loss car-ryovers following a change in ownership.The legislative history explains that a lim-itation is necessary following a change inownership because new shareholders oth-erwise would have an opportunity to con-tribute income-producing assets (or divertincome opportunities) to the corporation,thus inappropriately accelerating the useof net operating loss carryovers. The sec-tion 382 limitation is intended to preventa corporation from obtaining greater lossutilization than it could have achieved ab-sent a change in ownership. S. Rep. No.99–313 at 232 (1986).

A loss corporation has an ownershipchange if the percentage of stock of a losscorporation that is owned by one or more5-percent shareholders has increased bymore than 50 percentage points over thelowest percentage of stock of the loss cor-poration owned by such shareholders atany time during the testing period (gen-erally, a three-year period). For purposesof section 382, the attribution rules ofsection 318(a)(2) apply, without limita-tion, to treat individuals as the owners ofloss corporation stock. Pursuant to sec-tion 382(g)(4)(A), individual shareholderswho own less than five percent of a losscorporation are aggregated and treated asa single 5-percent shareholder (a publicgroup).

The regulations extend the public groupconcept to situations in which a loss cor-poration is owned by one or more entities,as defined in §1.382–3(a) (generally, part-nerships, corporations, estates, and trusts).If an entity directly or indirectly owns fivepercent or more of the loss corporation,that entity has its own public group if itsowners who are not 5-percent sharehold-ers own, in the aggregate, five percent ormore of the loss corporation. (Such an en-tity is referred to as a 5-Percent Entity inthis preamble.)

The segregation rules, which are gen-erally contained in §1.382–2T(j), and theexceptions thereto, which are generallycontained in §1.382–3(j), apply to certaintransactions affecting ownership by theloss corporation’s direct public group andby the public groups of a 5-Percent Entity.The application of the segregation rulesresults in the creation of a new publicgroup in addition to the one (or more)that existed previously. That new groupis treated as a new 5-percent shareholderthat increases its ownership interest in theloss corporation.

Section 382(g)(4)(B) mandates applica-tion of the segregation rules to transactionsconstituting equity structure shifts of theloss corporation. Generally, equity struc-ture shifts are acquisitive asset reorgani-zations and recapitalizations under section368. Section 382(g)(3)(B) provides reg-ulatory authority to treat public offeringsand similar transactions as equity struc-ture shifts. Pursuant to that authority, thecurrent segregation rules, subject to thecash issuance and small issuance excep-tions (described in this preamble), treat is-suances of stock under section 1032, re-demptions, and redemption-like transac-tions as segregation events. The segrega-tion rules also apply to transfers of loss cor-poration stock by an individual 5-percentshareholder to public shareholders and a5-Percent Entity’s transfer of loss corpora-tion stock to public shareholders.

The small issuance and cash issuanceexceptions exempt certain amounts ofstock issuances from the segregation rules.Generally, the small issuance exceptionexempts the total amount of stock issuedduring a taxable year to the extent it doesnot exceed 10 percent of the total value ofthe corporation’s outstanding stock at thebeginning of the taxable year or 10 percentof the class of stock issued and outstandingat the beginning of the taxable year (thesmall issuance limitation). However, thesmall issuance exception does not applyto any issuance of stock that, by itself,exceeds the small issuance limitation. Ifstock is issued solely for cash, the cash is-suance exception exempts a percentage ofthe total stock issued equal to 50 percentof the aggregate percentage ownershipinterest of the public groups of the cor-

January 9, 2012 279 2012–2 I.R.B.

poration immediately before the issuance.In determining the size of the issuancefor this purpose, stock issued to 5-percentshareholders is taken into account. If thesmall issuance exception excludes only aportion of a stock issuance, the cash is-suance exception may apply to the portionnot excluded under the small issuance ex-ception. Pursuant to a grant of regulatoryauthority in section 382(m)(4), the smallissuance exception can apply to recapital-izations, but otherwise, neither exceptionapplies to equity structure shifts.

2. Notice 2010–49

Notice 2010–49, 2010–27 I.R.B. 10,invited public comment relating to pos-sible modifications to the regulationsunder section 382 regarding the treatmentof shareholders who are not 5-percentshareholders (Small Shareholders). See§601.601(d)(2)(ii)(b).

Notice 2010–49 describes two generalapproaches — the Ownership TrackingApproach and the Purposive Approach— and sets forth some of the policy con-siderations underlying each approach.Both approaches recognize that a primaryabuse section 382 seeks to prevent in-volves an acquisition of loss corporationstock followed by the contribution of in-come-producing assets or the diversionof income-producing opportunities to thecorporation. The two approaches differ,however, in the extent they seek to identifyand limit their effect to circumstances inwhich that abuse is most likely to occur.

Under the Ownership Tracking Ap-proach, generally it is of no significancewhether the shareholders who increasetheir ownership are Small Shareholdersor 5-percent shareholders. This approachensures that abusive transactions are ad-dressed by tracking all changes in own-ership without regard to their particularcircumstances. Thus, any transactionthat allows the corporation to track theincrease in ownership interests held bySmall Shareholders results in the segre-gation of Small Shareholders into a newpublic group, which is treated as a 5-per-cent shareholder. However, the OwnershipTracking Approach makes a concession toadministrative convenience and acknowl-edges that “public trading,” which is thepurchase by one Small Shareholder ofstock from another Small Shareholder,

should not be taken into account becauseit is unduly burdensome for a corporationto take into account all such transactions.See §1.382–2T(e)(1)(ii).

Consistent with the purpose of sec-tion 382, the Purposive Approach seeksto identify more specifically the circum-stances in which abuses are likely to arise.This approach reflects the view that it isunnecessary to take into account all read-ily identifiable acquisitions of stock bySmall Shareholders, because Small Share-holders generally are not in a position toacquire loss corporation stock in orderto contribute income-producing assets ordivert income-producing opportunities.

The current regulations primarily re-flect the Ownership Tracking Approach.Although certain provisions may seemto follow the Purposive Approach, theirjustification is nevertheless based uponthe Ownership Tracking Approach. Forexample, the cash issuance exception of§1.382–3(j)(3) reduces the segregation ef-fect of an issuance of stock to Small Share-holders but is justified on the grounds thatthere is likely to be substantial overlapbetween Small Shareholders who acquirestock in such an issuance and the SmallShareholders who already own stock.

Explanation of Provisions

1. Overview

The IRS and the Treasury Departmentreceived a range of comments in responseto Notice 2010–49. Some commentsendorsed substantial changes to the ex-isting regulations, while others supportedchanges within the existing regulatoryframework. One commenter supportingmore modest changes to the existing reg-ulations suggested that an overhaul ofthe current regulations likely would pro-duce new uncertainties and complexities.Additionally, the comment observed thatrevisions allowing substantial infusionsof capital into a loss corporation withoutsection 382 implications would be counterto section 382 policies.

After consideration of the commentsreceived, these regulations propose revi-sions following the Purposive Approachwithin the existing regulatory framework.Consistent with the Purposive Approach,these proposed regulations are intendedto lessen the administrative burden and

section 382 implications associated withtransactions that are unlikely to implicatesection 382 policy concerns. In general,these proposed regulations employ objec-tive criteria to implement the PurposiveApproach. The IRS and the Treasury De-partment believe that, where practicable,objective rules best serve the interests ofloss corporations that desire certainty withrespect to their section 382 positions, andbest serve the interests of the governmentin fairly and consistently administering acomplex statutory scheme.

Comments that embraced a more funda-mental reform of the existing regulationswere not incorporated into this proposalprimarily because the approaches intro-duced significant subjectivity. For exam-ple, one commenter suggested that, subjectto an anti-abuse rule, the segregation rulesshould not apply to redemption transac-tions. Another commenter suggested thatif certain stock issuances and redemptionsof Small Shareholders are sufficiently re-lated, those transactions should be treatedas public trading. These suggestions werenot incorporated in favor of proposals thatwill provide greater certainty of result tothe government and to loss corporations.

2. Proposed Revisions

A. Inapplicability of the Segregation Rulesto Certain Secondary Transfers

Several of the comments supportedrendering the segregation rules inoperativeto transfers of loss corporation stock toSmall Shareholders by 5-Percent Entitiesor individuals who are 5-percent share-holders. These comments also supportedrelief from the segregation rules for trans-actions in which an ownership interest in a5-Percent Entity is transferred to a publicowner or a 5-percent owner who is not a5-percent shareholder.

The IRS and the Treasury Departmentagree that adoption of these exceptionsis appropriate because these transactionsdo not introduce new capital into the losscorporation and because direct or indirectownership of the loss corporation becomesless concentrated, thus diminishing theopportunity for loss trafficking. Further-more, limiting the creation of additionalpublic groups where loss trafficking isnot implicated simplifies tax complianceand administration. Accordingly, these

2012–2 I.R.B. 280 January 9, 2012

proposed regulations generally render thesegregation rules inoperative to trans-fers of loss corporation stock to SmallShareholders by 5-Percent Entities or in-dividuals who are 5-percent shareholders.In these cases, the stock transferred willbe treated as being acquired proportion-ately by the public groups existing at thetime of the transfer. This rule also ap-plies to transfers of ownership interests in5-Percent Entities to public owners and to5-percent owners who are not 5-percentshareholders.

B. Inapplicability of the Segregation Rulesto Certain Redemptions

Two of the comments supported lim-iting application of the segregation rulesin the case of redemptions. These com-menters observed that, generally, a losscorporation’s redemption of its stock fromSmall Shareholders does not raise loss traf-ficking concerns because (i) the capital ofthe loss corporation is contracting, and (ii)Small Shareholders generally cannot traf-fic in losses. One comment supported arule that would, subject to an anti-abuserule, render the segregation rules inappli-cable to all redemptions. In addition tosupporting the inapplicability of the segre-gation rules to all redemptions, the com-ment supported an objective rule for ex-empting redemptions based upon the me-chanics of the small issuance exception.

In general, these proposed regulationsadopt a rule based upon the mechanics ofthe small issuance exception to obviate theneed for a subjective anti-abuse rule. Likethe small issuance exception, this excep-tion for redemptions exempts from segre-gation, at the loss corporation’s option, ei-ther 10 percent of the total value of the losscorporation’s stock at the beginning of thetaxable year, or 10 percent of the numberof shares of the redeemed class outstand-ing at the beginning of the taxable year.Where this exception applies, each publicgroup existing immediately before the re-demption will be treated as redeeming itsproportionate share of exempted stock.

Like the small issuance exception, thesmall redemption exception will allow aloss corporation to plan its affairs as of thebeginning of each taxable year. Further-more, consistent with the Purposive Ap-proach, the exception reduces administra-

tive burden and the section 382 impact oftransactions in which the abuses that sec-tion 382 is intended to prevent are unlikelyto arise.

C. Inapplicability of the SegregationRules to 5-Percent Entities in CertainCircumstances

One commenter expressed the need forrelief from tracking shifts of ownership bySmall Shareholders of 5-Percent Entities.The comment expressed that, in manycases, a loss corporation cannot obtaininformation relating to this ownership —either because the entity chooses not torespond or because the entity is prohib-ited from sharing information regardingits owners with the loss corporation. Theinability to obtain this information mayrestrict capital-raising activities beyondwhat section 382 requires, because theloss corporation may choose to makeworst-case assumptions about shifts inownership when the relevant informationcannot be obtained. The IRS and the Trea-sury Department agree that it is appropri-ate to provide relief in situations in whichtracking shifts in ownership by SmallShareholders does not further the policyobjectives of section 382. Furthermore,the IRS and the Treasury Departmentrecognize that application of the segre-gation rules and the exceptions theretopresent compliance issues for taxpayersand issues of tax administration for thegovernment. Accordingly, these proposedregulations limit the situations in whichthe segregation rules apply to situationsthat potentially implicate the policies un-derlying section 382.

Under these proposed regulations, thesegregation rules will not apply to a trans-action if, on a testing date on which therules would otherwise apply (i) the 5-Per-cent Entity owns ten percent or less (byvalue) of all the outstanding stock of theloss corporation (the ownership limita-tion), and (ii) the 5-Percent Entity’s director indirect investment in the loss corpo-ration does not exceed 25 percent of theentity’s gross assets (the asset threshold).For purposes of the asset threshold, theentity’s cash and cash items within themeaning of section 382(h)(3)(B)(ii) arenot taken into account. Generally, the losscorporation may establish the ownership

limitation through either actual knowledgeor, absent actual knowledge to the con-trary, the presumptions regarding stockownership in §1.382–2T(k)(1).

The IRS and the Treasury Departmentbelieve that the proposal strikes an appro-priate balance between reducing complex-ity and safeguarding section 382 policies.The proposal will enable loss corporationsto disregard indirect changes in its own-ership that may, under the current regu-lations, require burdensome informationgathering and may unnecessarily impedethe loss corporation’s ability to reorganizeits affairs. At the same time, however, theproposal imposes criteria that protect thegovernment’s interests. The asset thresh-old makes it unlikely that the loss corpo-ration’s attributes motivate transactions inthe equity of 5-Percent Entities. Addi-tionally, like the small issuance exceptionand the relief for redemptions that appearselsewhere in this proposal, the ownershiplimitation makes it unlikely that transac-tions among Small Shareholders one ormore tiers removed from the loss corpo-ration implicate loss trafficking concerns.(Note that the asset threshold and the own-ership limitation do not apply to the excep-tion for secondary transfers described else-where in this preamble because secondarytransfers do not implicate the same policyconcerns as transactions in which loss cor-porations can obtain additional capital.)

D. Clarification of §1.382–2T(j)(3)

Section 1.382–2T(j)(3) provides that,in general, the segregation rules apply tosales of loss corporation stock by individ-ual 5-percent shareholders and by first tierentities. This section further provides thatthe “principles” of the foregoing apply to“transactions in which an ownership inter-est in a higher tier entity that owns five per-cent or more of the loss corporation (with-out regard to §1.382–2T(h)(2)(i)(A)) or afirst tier entity is transferred to a publicowner or a 5-percent owner who is not a5-percent shareholder.” This proposed reg-ulation clarifies that the segregation rulesapply to such a transfer only if the sellerindirectly owns five percent or more of theloss corporation. In the case of a sale byan entity, ownership is determined withoutregard to §1.382–2T(h)(2)(i)(A).

January 9, 2012 281 2012–2 I.R.B.

E. Small Issuance and Cash IssuanceExceptions

Several of the comments requested ex-pansion of the small issuance and cashissuance exceptions as a percentage ofstock that is exempted from the segrega-tion rules. Some of these comments alsosuggested that the cash issuance excep-tion should apply to issuances of stock fornon-cash property, including debt.

As previously discussed, transactionsthat infuse new capital into a loss corpo-ration are of particular concern to section382 policies because the capital infusioncan accelerate the use of tax attributes.This is the case even if the new investorsare Small Shareholders. Moreover, in itscurrent form, the cash issuance exceptiondilutes the owner shifts that are attributableto capital-raising transactions.

The IRS and the Treasury Departmentrequest comments as to whether further re-finement of either or both of these excep-tions might be warranted in the context ofany potential expansion of the exceptionsproposed in this document.

F. Coordinated Acquisitions

Questions have arisen concerning theapplication of §1.382–3(a), which pro-vides, in part, that a group of personsmaking a coordinated acquisition of stockcan constitute an entity for purposes of sec-tion 382. Adding additional distinctionsbetween larger and smaller shareholders,as proposed here, will increase the sig-nificance of this provision. The IRS andthe Treasury Department are interestedin comments as to circumstances underwhich a group of investors should be ag-gregated into a single entity based on theirunderstandings or communications witheach other or with third persons, such asthe loss corporation or an underwriter.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866, as supplemented by Execu-tive Order 13563. Therefore, a regulatoryassessment is not required. It is hereby cer-tified that these regulations will not have asignificant economic impact on a substan-tial number of small entities. The certifica-tion is based on the fact that this rule would

not impose new burdens on small entitiesand in fact, may reduce the recordkeepingburden on small entities. Therefore, a Reg-ulatory Flexibility Analysis under the Reg-ulatory Flexibility Act (5 U.S.C. chapter 6)is not required. Pursuant to section 7805(f)of the Code, this notice of proposed rule-making has been submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Request for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submit-ted timely to the IRS. In addition to thespecific requests for comments madeelsewhere in this preamble, the IRS andthe Treasury Department specifically re-quest comments on the clarity of theproposed regulations and how they may bemade easier to understand. All commentswill be available for public inspectionat www.regulations.gov or upon request.A public hearing may be scheduled ifrequested in writing by any person whotimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place of the hearing will bepublished in the Federal Register.

Drafting Information

The principal author of these proposedregulations is Stephen R. Cleary of the Of-fice of Associate Chief Counsel (Corpo-rate). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

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

PART 1—INCOME TAXES

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

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

Section 1.382–3 also issued under26 U.S.C. 382(g)(4)(C) and 26 U.S.C.382(m). * * *

Par. 2. Section 1.382–3 is amended asfollows:

1. Adding paragraph (i).2. Revising the heading of paragraph

(j) and the introductory text of paragraph(j)(1).

3. Redesignating paragraphs (j)(13)and (j)(14) as (j)(16) and (j)(17).

4. Adding new paragraphs (j)(13)through (j)(14).

5. Adding new Examples 5, 6, 7, 8,9, 10, 11, and 12 to newly redesignatedparagraph (j)(16).

6. Revising newly redesignated para-graph (j)(17).

The revisions and additions read as fol-lows:

§1.382–3 Definitions and rules relating toa 5-percent shareholder.

* * * * *(i) Segregation rules applicable to

transactions involving first tier or highertier entities—(1) In general. The lastsentence of §1.382–2T(j)(3)(i) appliesonly if the transferor of the ownershipinterest indirectly owns five percent ormore of the loss corporation. If thetransferor is an entity, ownership is deter-mined without regard to the application of§1.382–2T(h)(2)(i)(A).

(2) Effective/Applicability date. Thisparagraph (i) applies to testing dates oc-curring on or after the date these regula-tions are published as final regulations inthe Federal Register.

(j) Modification of the segregation rulesof §1.382–2T(j)(2)(iii) and (3)—(1) In-troduction. This paragraph (j) exempts,in whole or in part, certain transfersof stock from the segregation rules of§1.382–2T(j)(2)(iii) and (3). Terms andnomenclature used in this paragraph (j),and not otherwise defined herein, have thesame meanings as in section 382 and theregulations issued under section 382.

* * * * *(13) Secondary transfer exception. The

segregation rules of §1.382–2T(j)(3)(i)will not apply to the transfer of a directownership interest in the loss corporationby a first tier entity or an individual thatowns five percent or more of the loss

2012–2 I.R.B. 282 January 9, 2012

corporation to public shareholders. In-stead, each public group existing at thetime of the transfer will be treated under§1.382–2T(j)(3)(i) as acquiring its propor-tionate share of the stock exempted fromthe application of §1.382–2T(j)(3)(i). Thesegregation rules also will not apply if anownership interest in an entity that ownsfive percent or more of the loss corporation(determined without regard to the appli-cation of §1.382–2T(h)(2)(i)(A)) is trans-ferred by either a 5-percent owner that is a5-percent shareholder or a higher tier en-tity owning five percent or more of the losscorporation (determined without regard tothe application of §1.382–2T(h)(2)(i)(A)),provided that the transferee is either apublic owner or a 5-percent owner whois not a 5-percent shareholder. Instead,each public group of the entity existingat the time of the transfer is treated under§1.382–2T(j)(3)(i) as acquiring its propor-tionate share of the transferred ownershipinterest.

(14) Small redemption exception—(i)In general. Section 1.382–2T(j)(2)(iii)(C)does not apply to a small redemption (asdefined in paragraph (j)(14)(ii) of thissection), except to the extent that thetotal amount of stock redeemed in that re-demption and all other small redemptionspreviously made in the same taxable year(determined in each case on redemption)exceeds the small redemption limitation.This paragraph (j)(14) does not apply to aredemption of stock that, by itself, exceedsthe small redemption limitation.

(ii) Small redemption defined. Smallredemption means a redemption of publicshareholders by the loss corporation of anamount of stock not exceeding the smallredemption limitation.

(iii) Small redemption limitation—(A)In general. For each taxable year, the losscorporation may, at its option, apply thisparagraph (j)(14)—

(1) On a corporation-wide basis, inwhich case the small redemption limita-tion is 10 percent of the total value of theloss corporation’s stock outstanding at thebeginning of the taxable year (excludingthe value of stock described in section1504(a)(4)); or

(2) On a class-by-class basis, in whichcase the small redemption limitation is 10percent of the number of shares of the classredeemed that are outstanding at the begin-ning of the taxable year.

(B) Class of stock defined. For pur-poses of this paragraph (j)(14)(iii), a classof stock includes all stock with the samematerial terms.

(C) Adjustments for stock splits andsimilar transactions. Appropriate adjust-ments to the number of shares of a classoutstanding at the beginning of a taxableyear must be made to take into accountany stock split, reverse stock split, stockdividend to which section 305(a) applies,recapitalization, or similar transaction oc-curring during the taxable year.

(D) Exception. The loss corporationmay not apply this paragraph (j)(14)(iii)on a class-by-class basis if, during the tax-able year, more than one class of stockis redeemed in a single redemption (or intwo or more redemptions that are treatedas a single redemption under paragraph(j)(14)(v) of this section).

(E) Short taxable years. In the case of ataxable year that is less than 365 days, thesmall redemption limitation is reduced bymultiplying it by a fraction, the numeratorof which is the number of days in the tax-able year, and the denominator of which is365.

(iv) Proportionate redemption of ex-empted stock—(A) In general. Each directpublic group that exists immediately be-fore a redemption to which this paragraph(j)(14) applies is treated as having beenredeemed of its proportionate share of theamount of stock exempted from the ap-plication of §1.382–2T(j)(2)(iii)(C) underthis paragraph (j)(14).

(B) Actual knowledge of greater re-demption. Under the last sentence of§1.382–2T(k)(2), the loss corporation maytreat direct public groups existing im-mediately before a redemption to whichthis paragraph (j)(14) applies as hav-ing been redeemed of more stock thanthe amount determined under paragraph(j)(14)(iv)(A) of this section, but only ifthe loss corporation actually knows thatthe amount redeemed from those groupsin the redemption exceeds the amount sodetermined.

(v) Certain related redemptions. Forpurposes of this paragraph (j)(14), two ormore redemptions (including redemptionsof stock by first tier or higher tier entities)are treated as a single redemption if—

(A) The redemptions occur at approxi-mately the same time pursuant to the sameplan or arrangement; or

(B) A principal purpose of redeemingthe stock in separate redemptions ratherthan in a single redemption is to minimizeor avoid an owner shift under the rules ofthis paragraph (j)(14).

(vi) Certain non-stock ownership inter-ests. As the context may require, a non-stock ownership interest in an entity otherthan a corporation is treated as stock forpurposes of this paragraph (j)(14).

(15) Exception for first tier and highertier entities—(i) In general. The segrega-tion rules of §1.382–2T(j)(3)(iii) will notapply if, after taking into account the re-sults of such transaction and all other trans-actions occurring on that date—

(A) The first tier or higher tier entityowns 10 percent or less (by value) of allthe outstanding stock (without regard to§1.382–2(a)(3)) of the loss corporation;and

(B) The entity’s direct or indirect in-vestment in the loss corporation does notexceed 25 percent of the entity’s gross as-sets. For this purpose, the entity’s cash andcash items within the meaning of section382(h)(3)(B)(ii) are not taken into account.

(ii) Special Rules. If paragraph(j)(15)(i) applies to combine one or morepublic groups, then—

(A) the amount of increase in the per-centage of stock ownership of the continu-ing public group will be the sum of its in-crease and a proportionate amount of anyincrease by any public group that is com-bined with the continuing public group(the former public group); and

(B) the continuing public group’s low-est percentage ownership will be the sumof its lowest percentage ownership and aproportionate amount of the former publicgroup’s lowest percentage ownership.

(iii) Ownership of the loss corporation.In making the determination under para-graph (j)(15)(i)(A) of this section—

(A) The rules of §1.382–2T(h)(2) willnot apply;

(B) The entity will be treated as own-ing the loss corporation stock that it actu-ally owns, and any loss corporation stockif that stock would be attributed to the en-tity under section 318(a) (without regardto paragraph (4) thereof unless an optionis treated as exercised under §1.382–4(d));and

(C) The operating rules of paragraph(j)(15)(iv) of this section will apply.

January 9, 2012 283 2012–2 I.R.B.

(iv) Operating Rules. Subject to theprinciples of §1.382–2T(k)(4), a loss cor-poration may establish the ownership lim-itation of paragraph (j)(15)(i)(A) of thissection through either—

(A) Actual knowledge; or(B) Absent actual knowledge to the

contrary, the presumptions regarding stockownership in §1.382–2T(k)(1).

(16) Examples. * * *

* * * * *Example 5. Secondary transfer exception to seg-

regation rules — no new public group. (i) Facts. L isowned 60 percent by one public group (Public L

1) and

40 percent by another public group (Public L2). On

July 1, 2010, A acquires 10 percent of L’s stock overa public stock exchange. On December 31, 2010, Asells all of his L stock over a public stock exchange.No individual or entity acquires as much as five per-cent of L’s stock as a result of A’s disposition of his Lstock. On January 3, 2011, B acquires 10 percent ofL’s stock over a public stock exchange. On June 30,2011, B sells all of her L stock over a public stock ex-change. No individual or entity acquires as much asfive percent of L’s stock as a result of B’s dispositionof her L stock.

(ii) Analysis. The dispositions of the L stock by Aand B are not transactions that cause the segregationof L’s direct public groups that exist immediately be-fore the transaction (Public L

1and Public L

2). When

A and B sell their shares to public shareholders overthe public stock exchange, the shares are treated asbeing reacquired by Public L

1and Public L

2. As

a result, Public L1’s ownership interest is treated as

increasing from 54 percent to 60 percent during thetesting period, and Public L

2’s ownership interest is

treated as increasing from 36 percent to 40 percentduring the testing period.

Example 6. Secondary transfer exception — firsttier entity. (i) Facts. L has a single class of commonstock outstanding that is owned 60 percent by a di-rect public group (Public L) and 40 percent by P. P isowned 20 percent by Individual A and 80 percent bya direct public group (Public P). On October 6, 2013,A sells 50 percent of his interest in P to B, an individ-ual who is a member of Public P.

(ii) Analysis. P is an entity that owns five percentor more of L. A is a 5-percent owner of P that is a5-percent shareholder of L. Because A’s sale of the Pstock is to a member of Public P, the disposition ofthe P stock by A is not a transaction that causes thesegregation of P’s direct public group that exists im-mediately before the transaction (Public P). See para-graph (j)(13) of this section. When A sells his sharesto B, the shares are treated as being acquired by Pub-lic P. As a result, Public P’s ownership interest in Lis treated as increasing from 32 percent to 36 percentduring the testing period.

Example 7. Small redemption exception. (i)Facts. L is a calendar year taxpayer. On January 1,2010, L has 1,060 shares of a single class of commonstock outstanding, all of which are owned by a singledirect public group (Public L). On July 1, 2010, Lacquires 60 shares of its stock for cash. On Decem-ber 31, 2010, in an unrelated redemption, L acquires90 more shares of its stock for cash. Following eachredemption, L’s stock is owned entirely by public

shareholders. No other changes in the ownership ofL’s stock occur prior to December 31, 2010.

(ii) Analysis. The July redemption is a smallredemption because the number of shares redeemed(60) does not exceed 106, the small redemptionlimitation (10 percent of the number of commonshares outstanding on January 1, 2010). Underparagraph (j)(14) of this section, the segregationrules of §1.382–2T(j)(2)(iii)(C) do not apply to theJuly redemption. Under paragraph (j)(14)(iv) of thissection, Public L is treated as having all 60 sharesredeemed.

(iii) The December redemption is a small redemp-tion because the number of shares redeemed (90) doesnot exceed 106, the small redemption limitation (10percent of the number of common shares outstand-ing on January 1, 2010). However, under paragraph(j)(14)(i) of this section, only 46 of the 90 shares re-deemed are exempted from the segregation rules of§1.382–2T(j)(2)(iii)(C) because the total number ofshares of common stock redeemed in the July and De-cember redemptions exceeds 106, the small redemp-tion limitation, by 44. Accordingly, under paragraph(j)(14)(iv) of this section, Public L is treated as hav-ing 46 shares redeemed in the December redemption.Section 1.382–2T(j)(2)(iii)(C) applies to the remain-ing 44 shares redeemed. Accordingly, Public L is seg-regated into two different public groups immediatelybefore the transaction (and thereafter) so that the re-deemed interests (Public RL) are treated as part of apublic group that is separate from the ownership in-terests that are not redeemed (Public CL). Therefore,as a result of the December redemption, Public CL’sinterest in L increases by 4.4 percentage points (from95.6 percent (956/1,000) to 100 percent (910/910))on the December 31, 2010 testing date. For purposesof determining whether an ownership change occurson any subsequent testing date having a testing periodthat includes such redemption, Public CL is treated asa 5-percent shareholder whose percentage ownershipinterests in L increased by 4.4 percentage points as aresult of the redemption.

Example 8. Segregation rules inapplicable —proportionate amount. (i) Facts. P

1is a corporation

that owns 8 percent of the stock of L. The remainingL stock (92 percent) is owned by Public L. P

1is en-

tirely owned by Public P1. Excluding cash and cash

items within the meaning of section 382(h)(3)(B)(ii),P

1’s investment in L represents 11 percent of P

1’s

gross assets. P2

is a corporation owned 90 percent byindividual A and 10 percent by a public group (PublicP

2). On May 22, 2013, P

1merges into P

2with the

shareholders of P1

receiving an amount of P2

stockequal to 25 percent of the value of P

2immediately

after the reorganization. Following the merger, P2’s

investment in L represents 6 percent of the combinedgross assets of P

1and P

2(excluding cash and cash

items). L was owned 92 percent by Public L and 8percent by P

1throughout the testing period ending

on the date of the merger.(ii) Analysis. Assuming L can establish that P

2owns 10 percent or less (by value) of L on May 22,2013 pursuant to the operating rules of paragraph(j)(15)(iv) of this section, the segregation rules of§1.382–2T(j)(3)(iii) will not apply to segregate P

1’s

direct public group (Public P1) immediately before

the merger from P2’s direct public group (Public P

2).

Thus, following the merger, P2

is owned 67.5 per-cent (90% x 75%) by A and 32.5 percent (25% +

(10% x 75%)) by Public P2. Pursuant to paragraph

(j)(15)(ii)(B) of this section, Public P2’s lowest per-

centage of ownership is the sum of its lowest percent-age of ownership (zero) and a proportionate amountof former Public P

1’s lowest ownership percentage of

L of 2.6 percent (32.5% x 8%). P2

will be treatedas having one public group whose ownership interestin L was 2.6 percent before the merger and remains2.6 percent after the merger. Because Public P

2owns

less than 5 percent of L, Public P2

is treated as partof Public L. See §1.382–2T(j)(1)(iv). Thus, pursuantto paragraph (j)(15)(ii)(B) of this section, Public L’slowest ownership percentage of L during the testingperiod is 94.6 percent.

Example 9. Segregation rules inapplicable —prior increase in ownership by former public groupduring testing period. (i) Facts. The facts are thesame as Example 8, except that P

1acquired its 8

percent interest in L during the testing period thatincludes the merger.

(ii) Analysis. Pursuant to the rules of paragraph(j)(15)(ii)(A) of this section, the amount of increasein the percentage of stock ownership by Public P

2is the sum of its increase and any increase by a for-mer public group (Public P

1). Accordingly, Public

P2, the continuing public group, is treated as having

increased its ownership interest by 2.6 percent, andPublic L is treated as increasing its ownership inter-est by 2.6 percent.

Example 10. Ownership limitation based uponfair market value. (i) Facts. L has two classesof stock outstanding, common stock and preferredstock. The preferred stock is stock within the mean-ing of §1.382–2(a)(3). A direct public group (PublicL) owns all of the common stock of L. P purchased100 percent of the preferred stock of L at a time whenthe preferred stock represented 9 percent of the valueof all the outstanding stock of L. The common stockowned by Public L represents the remaining 91 per-cent of the value of the stock of L. P has one class ofcommon stock outstanding, all of which is owned bya direct public group (Public P). On October 7, 2013,P redeems 30 percent of its single outstanding classof common stock. Due to a decline in the relativevalue of the common stock of L, the preferred stockof L represents 40 percent of the value of all theoutstanding stock of L on the date of the redemption.

(ii) Analysis. The rules of paragraph (j)(15) ofthis section do not apply to the redemption becauseP owns more than 10 percent of L (by value) on thatdate.

Example 11. Ownership limitation — fair marketvalue includes preferred stock. The facts are the sameas in Example 10, except that the preferred stock isnot stock within the meaning of §1.382–2(a)(3). Theresults are the same as in Example 10.

Example 12. Ownership limitation — applica-tion of attribution rules. (i) Facts. Individual Aowns all the outstanding stock of X. A also owns pre-ferred stock in Y that is not stock within the mean-ing §1.382–2(a)(3), which represents 50 percent ofthe value of Y. All the Y common stock is owned bypublic owners. Each of X and Y own 6 percent of thesingle class of L stock outstanding. On October 6,2013, Y redeems 15 percent of its common stock.

(ii) Analysis. In determining the ownership lim-itation of this paragraph, the attribution rules of sec-tion 318(a) apply. Pursuant to section 318(a)(2), Ais treated as owning the L stock owned by X. Pur-

2012–2 I.R.B. 284 January 9, 2012

suant to section 318(a)(3), Y is treated as owning theL stock that A indirectly owns. Because Y’s owner-ship of L exceeds the ownership limitation, the rulesof paragraph (j)(15) of this section do not apply.

(17) Effective/applicability date. Thisparagraph (j) generally applies to is-suances or deemed issuances of stockin taxable years beginning on or afterNovember 4, 1992. However, paragraphs(j)(13) through (j)(15) and Examples 5through 12 of paragraph (j)(16) apply totesting dates occurring on or after thedate these regulations are published asfinal regulations in the Federal Regis-ter. See §1.382–3(j)(14)(ii) and (iii), ascontained in 26 CFR part 1 revised asof April 1, 1994, for the application ofparagraph (j)(10) to stock issued on theexercise of certain options exercised onor after November 4, 1992 and for anelection to apply paragraphs (j)(1) through(12) retroactively to certain issuances and

deemed issuances of stock occurring intaxable years prior to November 4, 1992.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on November 22,2011, 8:45 a.m., and published in the issue of the FederalRegister for November 23, 2011, 76 F.R. 72362)

Change to Publication 1220,Specifications for Filing Forms1097, 1098, 1099, 3921,3922, 5498, and W–2G,Electronically (Rev. 9–2011)

Announcement 2012–2

This announcement contains an updateto Publication 1220, Specifications for Fil-

ing Forms 1097, 1098, 1099, 3921, 3922,5498, 8935 and W–2G, Electronically, re-vised (9–2011), concerning the filing ofForm 1099–K.

Part C. Section 6(14), Payee “B”Record Layout for Form 1099–K, fieldpositions 605–608 (page 73), the referenceto Rev. Proc. 2004–43 related to MerchantCategory Codes has been deleted.

January 9, 2012 285 2012–2 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.

2012–2 I.R.B. i January 9, 2012

Numerical Finding List1

Bulletins 2012–1 through 2012–2

Announcements:

2012-1, 2012-1 I.R.B. 249

2012-2, 2012-2 I.R.B. 285

Notices:

2012-1, 2012-2 I.R.B. 260

Proposed Regulations:

REG-149625-10, 2012-2 I.R.B. 279

Revenue Procedures:

2012-1, 2012-1 I.R.B. 1

2012-2, 2012-1 I.R.B. 92

2012-3, 2012-1 I.R.B. 113

2012-4, 2012-1 I.R.B. 125

2012-5, 2012-1 I.R.B. 169

2012-6, 2012-1 I.R.B. 197

2012-7, 2012-1 I.R.B. 232

2012-8, 2012-1 I.R.B. 235

2012-9, 2012-2 I.R.B. 261

2012-10, 2012-2 I.R.B. 273

2012-12, 2012-2 I.R.B. 275

Revenue Rulings:

2012-1, 2012-2 I.R.B. 255

Treasury Decisions:

9559, 2012-2 I.R.B. 252

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin2011–52, dated December 27, 2011.

January 9, 2012 ii 2012–2 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2012–1 through 2012–2

Notices:

2010-88

as modified by Ann. 2011-40, is superseded by

Notice 2012-1, 2012-2 I.R.B. 260

Revenue Procedures:

2011-1

Superseded by

Rev. Proc. 2012-1, 2012-1 I.R.B. 1

2011-2

Superseded by

Rev. Proc. 2012-2, 2012-1 I.R.B. 92

2011-3

Superseded by

Rev. Proc. 2012-3, 2012-1 I.R.B. 113

2011-4

Superseded by

Rev. Proc. 2012-4, 2012-1 I.R.B. 125

2011-5

Superseded by

Rev. Proc. 2012-5, 2012-1 I.R.B. 169

2011-6

Superseded by

Rev. Proc. 2012-6, 2012-1 I.R.B. 197

2011-7

Superseded by

Rev. Proc. 2012-7, 2012-1 I.R.B. 232

2011-8

Superseded by

Rev. Proc. 2012-8, 2012-1 I.R.B. 235

2011-9

Superseded by

Rev. Proc. 2012-9, 2012-2 I.R.B. 261

2011-10

Superseded by

Rev. Proc. 2012-10, 2012-2 I.R.B. 273

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27,2011.

2012–2 I.R.B. iii January 9, 2012

January 9, 2012 2012–2 I.R.B.

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EXEMPT ORGANIZATIONS INCOME TAXBulletin No. 2012-2 January 9, 2012 HIGHLIGHTS OF THIS ISSUE These...

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Transcript of EXEMPT ORGANIZATIONS INCOME TAXBulletin No. 2012-2 January 9, 2012 HIGHLIGHTS OF THIS ISSUE These...