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HIGHLIGHTS

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

INCOME TAX

Rev. Rul. 20141, page 263.Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and other sections of theCode, tables set forth the rates for December 2013.

Rev. Rul. 20142, page 255.National Mortgage Settlement payments. This revenue ruling ex-plains the tax treatment of payments to homeowners pursuant tothe National Mortgage Settlement, a group of settlement agree-ments entered into in 2012 with ve bank mortgage servicers toaddress mortgage loan servicing and foreclosure abuses.

REG13698412, page 378.These proposed regulations under section 752 of the Coderelate to recourse liabilities of a partnership and the specialrules for related persons. The proposed regulations affect

partnerships and their partners. Comments are requested byMarch 17, 2014.

REG15942004, page 374.Proposed regulations under section 41 of the Code provideguidance on the treatment of qualied research expendituresand gross receipts resulting from transactions between mem-bers of a controlled group of corporations or a group of tradesor businesses under common control for purposes of deter-mining the credit under section 41 for increasing researchactivities. Comments are requested by March 13, 2014. Apublic hearing is scheduled for April 23, 2014.

Notice 20141, page 270.This noticeprovides guidance on the application of the rules undersection 125 of the Code (relating to cafeteria plans, includinghealth and dependent care exible spending arrangements(FSAs)), and section 223 of the Code (relating to health savings

accounts (HSAs)), as those two provisions relate to the particby same-sex spouses in certain employee benet plans followinSupreme Court decision in United States v. Windsor , 570 U.S. _133 S. Ct. 2675 (2013), and the issuance of Rev. Rul. 2013Rev. Rul. 201317 is amplied.

Notice 2014 6, page 279.

This notice provides guidance on section 45R for certain employers that cannot offer a qualifying health plan through a Small Business Health Options Program (Exchange because the employers principal business addis in a county in which a QHP through a SHOP Exchangebe available for the 2014 calendar year.

Announcement 20141, page 393.This announcement noties nancial institutions creating accand entering registration information on the IRS FATCA rtion website about certain steps, as originally announced in N201343, those nancial institutions will need to take on orJanuary 1, 2014. This announcement also provides general mation concerning anticipated publication dates of nal quintermediary (QI), withholding foreign partnership (WP), aholding foreign trust agreements (WT).

EMPLOYEE PLANS

Rev. Rul. 20143, page 259.2014 covered compensation tables; permitted disparity. covered compensation tables under section 401 of the Cfor the year 2014 are provided for use in determining cbutions to dened benet plans and permitted disparity.

(Continued on the next page)

Finding Lists begin on page ii.

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REG14317213, page 383.This document proposes amendments to regulations regardingexcepted benets under the Code. Excepted benets are exemptfrom the health reform requirements that were added to the Codeby the Health Insurance Portability and Accountability Act and theAffordable Care Act. Comments requestedby February 24, 2014.

Notice 20145, page 276.This notice provides temporary nondiscrimination relief for certainclosed dened benet pension plans (i.e., dened benet plansthat provide ongoing accruals but that have been amended to limitthose accruals to some or all of the employees who participatedin the plan on a specied date). The notice permits certain em-ployers that sponsor a closed DB plan and a DC plan to demon-strate that the aggregated plans comply with the nondiscrimina-tion requirements of 401(a)(4) on the basis of equivalentbenets, even if the aggregated plans do not satisfy the currentconditions for testing on that basis. This notice also requests com-ments on possible permanentchanges to thenondiscrimination rulesunder 401(a)(4). Comments requested by February 28, 2014.

EXEMPT ORGANIZATIONS

Notice 2014 4, page 274.Under interim guidance, a Type III supporting organization will betreated as functionally integrated if it (i) supports a supportedorganization that is a governmental entity to which the supportingorganization is responsive; and (ii) engages in activities for or onbehalf of that governmental supported organization that performthe functions of, or carry out the purposes of, that governmentalsupported organization and that, but for the involvement of thesupporting organization, would normally be engaged in by the

governmental supported organization itself. Pending further guid-ance, private foundations and sponsoring organizations that main-tain donor-advised funds generally may continue to rely on thegrantor reliance standards of Notice 2006109, as modied by thisnotice, in determining whether a potential grantee is a Type I, Type II,or functionally integratedType IIISO for purposes of the excise taxesimposed under sections 4942, 4945, and 4966. Comments arerequested by March 7, 2014. Notice 2006109 modied.

Rev. Proc. 20149, page 281.This document sets forth procedures for issuing determinationletters and rulings on the exempt status of organizations undersections 501 and 521 of the Code. The procedures also applyto the revocation and modication of determination letters orrulings, and provide guidance on the exhaustion of administra-tive remedies for purposes of declaratory judgment undersection 7428 of the Code. Rev. Proc. 20139 is superseded.

Rev. Proc. 201410, page 293.This document sets forth procedures for issuing determinationletters and rulings on private foundation status under section

509(a) of the Code, operating foundation status under section4942(j)(3), and exempt operating foundation status under section4940(d)(2), of organizations exempt from Federal income taxunder section 501(c)(3). This revenue procedure also applies tothe issuance of determination letters on the foundation statusunder section 509(a)(3) of nonexempt charitable trusts describedin section 4947(a)(1). Rev. Proc. 201310 is superseded.

EMPLOYMENT TAX

T.D. 9649, page 265.Final regulations relating to agents authorized under section3504 of the Code to perform acts under the Federal Unem-ployment Tax Act (FUTA) required of employers who are homcare service recipients.

EXCISE TAX

REG14317213, page 383.This document proposes amendments to regulations regard-ing excepted benets under the Code. Excepted benets areexempt from the health reform requirements that were addedto the Code by the Health Insurance Portability and Accountability Act and the Affordable Care Act. Comments requestedby February 24, 2014.

Notice 2014 4, page 274.Under interim guidance, a Type III supporting organization will btreated as functionally integrated if it (i) supports a supportedorganization that is a governmental entity to which the supportingorganization is responsive; and (ii) engages in activities for or onbehalf of that governmental supported organization that perform

the functions of, or carry out the purposes of, that governmentalsupported organization and that, but for the involvement of thesupporting organization, would normally be engaged in by thegovernmental supported organization itself. Pending further guid-ance, private foundations and sponsoring organizations that main-tain donor-advised funds generally may continue to rely on thegrantor reliance standards of Notice 2006109, as modied by thisnotice, in determining whether a potential grantee is a Type I, Type II,or functionally integrated Type III SO forpurposes of theexcise taxesimposed under sections 4942, 4945, and 4966. Comments arerequested by March 7, 2014. Notice 2006109 modied.

ADMINISTRATIVERev. Proc. 201414, page 295.This revenue procedure provides issuers of qualied mortgagebonds, as dened in 143(a) of the Code, and issuers ofmortgage credit certicates, as dened in 25(c), with a list ofqualied census tracts for each state and the District of Co-lumbia. See 25(c)(2)(A)(iii)(V) and 143(j)(1)(A). Rev. Pr200349 is modied and superseded.

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

The adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof January 2014. See Rev. Rul. 20141, page 263.

Section 121.Exclusion ofgain from sale of principalresidence26 CFR 1.1211: Exclusion of gain from sale or exchange of a principal residence. (Also: 61, 165,691, 1001; 1.616, 1.1651, 1.691(a)1, 1.10011.)

Rev. Rul. 20142ISSUES

1. If a taxpayer receives a paymentpursuant to the National Mortgage Settle-ment due to the foreclosure of the taxpay-ers principal residence (NMS Pay-ment), what is the proper taxcharacterization of the payment?

2. If the NMS Payment is characterizedas part of the amount realized on the fore-closure and if that characterization createsor increases a gain on the foreclosure of

the principal residence, are there groundsfor the taxpayer to exclude from grossincome some or all of that gain?

3. If the property for which a taxpayerreceives an NMS Payment contained one ormore additional dwelling units that were notused as the taxpayers principal residence,how should the NMS Payment be allocatedbetween the portion of the property that thetaxpayer used as a principal residence andthe rest of the property?

4. If a borrower who was eligible for anNMS Payment died before receiving it,

what is the tax treatment of the personwho receives that payment?

BACKGROUND

In 2012, the United States governmentand the attorneys general of 49 states andthe District of Columbia entered into settle-

ment agreements with ve bank mortgageservicers to address mortgage loan servicingand foreclosure abuses (National MortgageSettlement). 1 One component of the Na-

tional Mortgage Settlement is the BorrowerPayment Fund (Fund), which the parties in-tend to be structured as a qualied settle-ment fund under 1.468B1 of the IncomeTax Regulations. The terms of the settle-ment agreements provide that:

(1) The ve mortgage servicers col-lectively will pay approximately$1.5 billion into the Fund.

(2) The Fund will make NMS Paymentsto certain borrowers who lost theirprincipal residences in foreclosure on

or after January 1, 2008, and on orbefore December 31, 2011.(3) Each borrowers transaction must

meet the following requirementsfor the borrower to receive anNMS Payment: 2

(i) The borrowers rst-lienmortgage loan was securedby a one-to-four-unit resi-dential property that the bor-rower had indicated at thetime of loan origination wasto be used as the borrowersprincipal residence;

(ii) The borrowers mortgage loanwas serviced by one of the vebank mortgage servicers;

(iii) The borrower made at leastthree payments on the rst-lien mortgage loan;

(iv) The loan went to foreclosuresale on or after January 1,2008, and on or before De-cember 31, 2011; and

(v) The unpaid principal balanceof the rst-lien mortgageloan did not exceed the gov-ernment sponsored enter-prise (GSE) loan limit for theproperty securing the loan(for example, $729,750 for aone-unit residence).

(4) For each NMS Payment, theremust be certication by (or for)the borrower under penalties of perjury that

(i) The borrower owned and oc-cupied (or intended to ownand occupy) the property (ora unit thereof) as his or herprincipal residence at thetime the borrower obtainedthe mortgage loan;

(ii) The borrower lost the princi-pal residence in foreclosureon or after January 1, 2008,and on or before December31, 2011; and

(iii) The borrower lost the princi-pal residence in foreclosurebecause(a) The borrower was un-

able to make paymentson the rst-lien mort-gage loan due to a nan-cial hardship; and/or

(b) The mortgage servicermishandled the borrow-ers application for aloan modication orother foreclosure alter-

native or pursued fore-closure while the appli-cation was pending orafter it was approved;and/or

(c) The mortgage servicer,foreclosure trustee, ortheir attorneys made er-rors in, or leading up to,the foreclosure process.

The NMS Payment for each loan is thesame amount (approximately $1,400). (If more than one of the co-borrowers on aloan led claims, they share a single NMSPayment from the Fund.) A borrowercould receive the NMS Payment withouthaving to prove nancial harm and with-out having to release any claims. How-ever, under the terms of the NationalMortgage Settlement, the NMS Payment

1 Oklahoma did not join in the National Mortgage Settlement, and borrowers in Oklahoma are not eligible for its direct relief measures to borrowers. Borrowers with property in Puerto Ricoand other American territories also are not eligible.2 The servicers provided lists of loans that met these ve criteria.

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offsets and reduces any other obligationthat a servicer has to the borrower to pro-vide compensation or other payments.

The National Mortgage Settlementagreements provide that an NMS Paymentis remedial and relates to the reduced pro-ceeds a borrower is deemed to have real-ized in a foreclosure because of the ser-vicers allegedly unlawful conduct. Theagreements do not consider the NMS Pay-ment to be forgiven debt.

The Fund began making the NMS Pay-ments to eligible borrowers in the summerof 2013. 3 In the case of a deceased eligibleborrower, the Fund generally issues pay-ment for the claim in the name of theborrower. 4

FACTS

Situation 1Loss on a single-unit

home. In 2006, Borrower A purchased aproperty for its fair market value of $230,000. A nanced $200,000 of the pur-chase price with a recourse rst-lien mort-gage loan that was secured by the prop-erty, and A used the property as Asprincipal residence. During 2011, Asprincipal residence was foreclosed onwhen its fair market value was $125,000.The lender subsequently sold the principalresidence and applied the proceeds in nalsatisfaction of the principal balance of therst-lien mortgage loan, which was$185,000. As adjusted basis in the prin-cipal residence at the time of the foreclo-sure was $230,000. In 2013, A received anNMS Payment of $1,400 from the Fund.Situation 2Loss on a multiple-unit home.The facts are the same as in Situation 1 ,except that the borrower was B, and theproperty has two identical dwelling units. Bused one unit as a principal residence andleased the other to a third party at fair rentalvalue. Bs entire property was foreclosed onand subsequently sold by the lender. Bs

adjusted basis in the entire property at thetime of the foreclosure was $200,000, of which $115,000 was allocable to the portionof the property B used as a principal resi-dence. Half of the propertys fair marketvalue at the time of the foreclosure

($62,500) was allocable to the portion of theproperty that B used as a principal residence.In 2013, B received an NMS Payment of $1,400 from the Fund.

Situation 3Gain on a multiple-unit home . The facts are the same as in Situa-tion 2 , except that the purchase price was$155,000; and, at the time of the foreclo-sure

The propertys fair market value was$160,000;

Half of the propertys fair marketvalue ($80,000) was allocable to theportion of the property that B used asa principal residence;

Bs adjusted basis in the entire prop-erty was $125,000; and

$77,500 of the total adjusted basis wasallocable to the portion of the propertythat B used as a principal residence.

Situation 4 Gain on a single-unit home. In 1980, Borrower C purchased aproperty for $155,000. C nanced$130,000 of the purchase price with arecourse rst-lien mortgage loan se-cured by the property. C continuouslyused the property as C s principal resi-dence. C renanced the mortgage loanfor an amount in excess of its outstand-ing principal balance with a new re-course rst-lien mortgage loan securedby the principal residence, and used the

proceeds to pay for educational ex-penses of Cs children and to purchase aboat for personal use.

In 2009, Cs principal residence wasforeclosed on when its fair market valuewas$160,000. The lender subsequently sold theprincipal residence and applied the proceedsin nal satisfaction of the principal balanceof the new loan, which was $215,000. C sadjusted basis in the principal residence atthe time of the foreclosure was $155,000. In2013, C received an NMS Payment of $1,400 from the Fund.

Situation 5Single-unit home withgain less than prior depreciation. In 2000,Borrower D purchased a property for$155,000. D nanced $130,000 of the pur-chase price with a recourse rst-lien mort-

gage loan secured by the property. D usa portion of the principal residence as aofce in Ds business and claimed deprciation deductions of $10,000.

In 2009, Ds principal residence waforeclosed on when its fair market valuwas $149,000. The lender subsequentlsold the principal residence and appliethe proceeds in nal satisfaction of thprincipal balance of the loan, which wa$175,000 due to subsequent renancingsDs adjusted basis in the principal resdence at the time of the foreclosure wa$145,000. D did not sell any other proerty during 2009. In 2013, D received NMS Payment of $1,400 from the Fund

Situation 6 Single-unit home withgain greater than prior depreciation. Tfacts are the same as in Situation 5, excepthat the fair market value of the propertat the time of the foreclosure w$154,500.

Situation 7Deceased borrower. Tfacts are the same as in Situation 5, excepthat D died before the NMS Payment wmade.

LAW AND ANALYSIS

Section 61(a)(3) of the Internal Revenue Code provides that, except as otherwise provided in subtitle A, gross incomincludes gains derived from dealings iproperty.

Section 121(a) generally provides, witcertain limitations and exceptions, thagross income does not include gain fromthe sale or exchange of property if, durinthe 5-year period ending on the date of thsale or exchange, the taxpayer has owneand used the property as the taxpayerprincipal residence for periods aggregating 2 years or more.

Section 121(d)(6) provides that the exclusion from income under 121(a) doenot apply to that part of the gain from th

sale of any property that does not exceethe depreciation adjustments (as denein 1250(b)(3)) attributable to the property for periods after May 6, 1997. Se 1.1211(d) for an example that illutrates this rule.

3 The National Mortgage Settlement also requires the servicers to make other payments to the federal and state governments. Each state has the option of using a portion of those other fundsto increase the amount paid to borrowers from that state who lost their homes in foreclosure. This revenue ruling does not address payments of these additional amounts.4 There are two exceptions

In the case of the death of one spouse, the NMS payment is made in the sole name of the surviving spouse. If an afdavit, an indemnity agreement, and a death certicate are submitted, the NMS payment is made in the name of the submitter.

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Section 1.1211(e)(1) provides that 121 does not apply to the gain allocable toany portion of the property (separate fromthe dwelling unit) sold or exchanged forwhich a taxpayer does not satisfy the userequirement. Thus, if a portion of the prop-erty was used for residential purposes and aportion of the property (separate from thedwelling unit) was used for nonresidentialpurposes, only the gain for the residentialportion is excludable under 121.

Section 1.1211(e)(3) provides that forpurposes of determining the amount of gain allocable to the residential and non-residential portions of the property, thetaxpayer must allocate the basis and theamount realized between the residentialand the non-residential portions of theproperty using the same method of allo-cation that the taxpayer used to determinedepreciation adjustments (as dened in 1250(b)(3)), if applicable.

Under 1.1211(e)(1), no allocation of the gain from the sale or exchange of property is required if both the residentialand non-residential portions of the prop-erty are within the same dwelling unit.However, 121 does not apply to the gainallocable to the residential portion of theproperty to the extent provided by 121(d)(6) and 1.1211(d). Thus, if thetaxpayers adjusted basis in the dwellingunit reects any prior depreciation deduc-

tions allowed or allowable on the dwellingunit, then the exclusion under 121 islimited to the gain in excess of the depre-ciation deductions allowed or allowable.See 1250(b)(3).

Section 165(a) allows as a deductionany loss sustained during the taxable yearand not compensated for by insurance orotherwise.

For an individual, 165(c) generallylimits the deduction for losses to

losses incurred in a trade or business;

losses incurred in any transaction en-tered into for prot, though not con-nected with a trade or business; and

losses of property not connectedwith a trade or business or a transac-tion entered into for prot that arisefrom re, storm, shipwreck, or othercasualty, or from theft.

Section 691(a)(1) provides that theamount of all items of gross income inrespect of a decedent that are not properlyincludible in respect of the taxable periodin which falls the date of the decedentsdeath or a prior period (including theamount of all items of gross income inrespect of a prior decedent, if the right toreceive such amount was acquired by rea-son of the death of the prior decedent orby bequest, devise, or inheritance from theprior decedent) shall be included in thegross income, for the taxable year inwhich received, of

the estate of the decedent, if the rightto receive the amount is acquired bythe decedents estate from the dece-dent;

the person who, by reason of the deathof the decedent, acquires the right toreceive the amount, if the right to re-ceive the amount is not acquired bythe decedents estate from the dece-dent; or

the person who acquires from thedecedent the right to receive theamount by bequest, devise, or inher-itance, if the amount is received aftera distribution by the decedents es-tate of such right.

Section 1.691(a)1(b) provides that theterm income in respect of a decedent re-fers to those amounts to which a decedentwas entitled as gross income, but whichwere not properly includible in computingthe decedents taxable income for the tax-able year ending with the date of the dece-dents death or for a previous taxable yearunder the method of accounting employedby the decedent.

Section 691(a)(3) provides that the rightto receive an amount of income in respect of a decedent shall be treated, in the hands of the estate of the decedent or any person who

acquired such right by reason of the death of the decedent, or by bequest, devise, or in-heritance from the decedent, as if it had beenacquired by the estate or such person in thetransaction in which the right to receive theincome was originally derived and theamount includible in gross income shall beconsidered, in the hands of the estate or such

person to have the character which it wouldhave had in the hands of the decedent if thedecedent had lived and received such income.

Section 1001(a) provides that the gainfrom the sale or other disposition of prop-erty is the excess of the amount realizedover the adjusted basis provided in 1011for determining gain, and the loss is theexcess of the adjusted basis provided in 1011 for determining loss over theamount realized.

Section 1.10011(a) states that theamount realized from a sale or other dispo-sition of property is the sum of any moneyreceived plus the fair market value of anyproperty (other than money) received.

Section 1.10012(a)(1) generally pro-vides that the amount realized on a sale ordisposition of property includes the amountof the liabilities from which the transferor is

discharged as a result of the sale or dispo-sition. Under 1.10012(a)(2), however,the amount realized on a sale or other dis-position of property that secures a recourseliability does not include amounts that are(or would be if realized and recognized)income from the discharge of indebtednessunder 61(a)(12).

In each situation in this revenue ruling,the borrower incurred recourse debt se-cured by property used (in whole or inpart) as the borrowers principal resi-dence, and the foreclosure of the propertyresulted in nal satisfaction of the out-standing balance of the recourse debt.Thus, under 1001 and its regulations, theamount realized by each borrower on thedisposition of the property in the foreclo-sure equals the fair market value of theproperty. 5

To determine the federal income taxtreatment of a settlement payment, thetest is not whether the action was one intort or contract, but rather the question tobe asked is In lieu of what were the

damages awarded? See Raytheon Pro-duction Corp. v. Commissioner , 144 F.2d110, 113 (1st Cir. 1944), affg 1 T.C. 952(1943). Here, as reected in the settlementdocuments, the NMS Payment from theFund is an additional amount realized onthe foreclosure of the borrowers principalresidence. That amount realized is used to

5 This revenue ruling addresses recourse mortgage loans. If the borrowers mortgage loan was a nonrecourse loan, the debt that was discharged in the foreclosure would be included in theborrowers amount realized from the disposition of the property. Regardless of whether the mortgage loan was recourse or nonrecourse, the NMS Payment is an additional amount realizedfrom the foreclosure.


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determine any gain or loss realized under 1001, including gain that may be ex-cluded under 121.

In addition, an NMS Payment is in-tended to compensate a borrower for lossof a principal residence rather than forloss on other property. This intention isindicated by the fact that only borrowerswho lost their principal residence may re-ceive the payment. Consequently, for pur-poses of 1001, 121, and 1.1211(e),if a taxpayer receives an NMS Paymentfor loss of a multiple-unit property a por-tion of which was used as the taxpayersprincipal residence, then the entire NMSPayment is allocable to the portion of theproperty used as a principal residence.

A taxpayer that receives a deceased eli-gible borrowers NMS Payment stands inthe shoes of the borrower for purposes of determining the tax consequences of thatpayment. Any gain not excluded from grossincome under 121 is income in respect of a decedent within the meaning of 691(a).

Situation 1Loss on a single-unit home. In 2011, As amount realized on theforeclosure of the principal residencewas $125,000, its fair market value. Asadjusted basis in the principal residence($230,000) exceeded As amount real-ized ($125,000). Thus, A realized a$105,000 ($230,000 $125,000) loss onthe foreclosure. Under 165(c), this

loss is not deductible because A, an in-dividual, did not incur the loss in a tradeor business, a transaction entered intofor prot, or as a result of a casualty.The NMS Payment of $1,400 that Areceived in 2013 reduces As nondeduct-ible loss to $103,600 and thus does notincrease As taxable income.

Situation 2Loss on a multiple-unit home. In 2011, Bs adjusted basis in theportion of the property that B used as aprincipal residence ($115,000) exceeded Bs amount realized from the foreclosureof that portion of the property ($62,500).Thus, B realized a loss of $52,500($115,000$62,500) on the portion of theproperty B used as a principal residence,which is not deductible under 165(c).The entire NMS Payment of $1,400 that Breceived in 2013 is allocable to the portionof the property B used as a principal res-idence. The allocated amount reduces Bsnondeductible loss to $51,100 and thusdoes not increase Bs taxable income.

Situation 3Gain on a multiple-unit home. In 2009, Bs amount realized on theforeclosure of the portion of the property B used as a principal residence ($80,000)exceeded Bs adjusted basis ($77,500) inthat portion of the property. Thus, B had a$2,500 ($80,000$77,500) gain on theforeclosure of the principal residence. Bexcludes this gain from gross income un-der 121 because B owned and used thatportion of the property as a principal res-idence for at least two of the ve yearspreceding the sale. The entire NMS Pay-ment of $1,400 that B received in 2013 isallocable to the portion of the property Bused as a principal residence, thus increas-ing Bs gain (and the amount excludedunder 121) on the foreclosure of theprincipal residence to $3,900.

Situation 4Gain on a single-unit home. In 2009, C s amount realized onthe foreclosure of the principal resi-dence was $160,000, its fair marketvalue. C s amount realized ($160,000)exceeded C s adjusted basis ($155,000).Thus, C had a $5,000 ($160,000$155,000) gain on the foreclosure of theprincipal residence. C excludes this gainfrom gross income under 121 becauseC owned and used the property as aprincipal residence for at least two of the ve years preceding the sale. TheNMS Payment of $1,400 that C received

from the Fund in 2013 increases Csgain (and the amount excluded under 121) on the foreclosure to $6,400.

Situation 5Single-unit home withgain less than prior depreciation. In 2009, Ds amount realized on the foreclosure of the principal residence ($149,000) ex-ceeded Ds adjusted basis in the principalresidence ($145,000). Thus, D realized again of $4,000 ($149,000$145,000) onthe foreclosure of the principal residence.Under 121(d)(6), however, because the$4,000 gain did not exceed D s deprecia-tion deductions of $10,000, D could notexclude that gain from income under 121, and D includes the $4,000 gain inincome under 61(a)(3) in 2009. Simi-larly, under 121(d)(6), D may not ex-clude from income the additional $1,400gain that D realizes as a result of the NMSPayment of $1,400 that D receives in2013. The NMS Payment increases thegain on the property to $5,400, whichdoes not exceed Ds depreciation deduc-

tions. Thus, none of the $5,400 gain excludable from gross income. Unde 61(a)(3), D must include the NMS Pament of $1,400 in income on Ds fedeincome tax return for 2013, the year iwhich D received the NMS Payment. Se 1.1211(d) for rules on determining thcharacter of this income.

Situation 6 Single-unit home with gaingreater than prior depreciation. Becauthe amount realized on the foreclosure wa$154,500, the NMS Payment of $1,400 increased the gain to $10,900 (($154,500$145,000) $1,400), which exceeds tdepreciation deductions by $900. Thus,includes $500 of the additional gain resulting from the NMS Payment in gross incomunder 121(d)(6) on Ds federal income tareturn for 2013, and excludes the remainin$900 from gross income under 121(a). See

1.1211(d) for rules on determining thcharacter of the amount that is included iincome.

Situation 7Deceased borrower. Bcause D died before payment was madthe person(s) with a right to Ds NMPayment must treat the entire amount received as income in respect of a decedenunder 691(a) because, if D had lived,could not have excluded any of the NMPayment from income pursuant t 121(d)(6). See 691(a)(3) and 1.1211(d) for rules on determining the characteof the amount that is included in income

HOLDINGS

1. A taxpayer who receives an NMPayment pursuant to the National Mortgage Settlement due to the foreclosure othe taxpayers principal residence includes the payment in the amount realizeon the foreclosure under 1001.

2. If a taxpayer includes an NMS Payment in the amount realized and, as a resulcreates or increases a gain on the foreclosureof the principal residence, the taxpayer maexclude the resulting gain from gross income to the extent permitted under 121including the limitation in 121(d)(6) thagain attributable to depreciation cannot bexcluded from gross income.

3. If the property for which a taxpayreceives an NMS Payment contained onor more additional dwelling units thwere not used as the taxpayers principaresidence, the entire NMS Payment is a


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locable to the portion of the property thatthe taxpayer used as a principal residence.

4. A taxpayer who receives any portionof a deceased borrowers NMS Paymentstands in the shoes of the borrower to deter-mine the taxable portion, if any, of the NMSPayment. Any taxable amount is income inrespect of a decedent under 691(a).

DRAFTING INFORMATION

The principal author of this revenueruling is Shareen S. Panz of the Ofce of Associate Chief Counsel (Income Tax &Accounting). For further information re-garding this revenue ruling, contact Sha-reen S. Panz at (202) 622-4920 (not atoll-free call).

Section 280G.GoldenParachute PaymentsFederal short-term, mid-term, and long-term

rates are set forth for the month of January 2014. SeeRev. Rul. 20141, page 263.

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

The adjusted applicable federal long-term rate isset forth for the month of January 2014. See Rev.Rul. 20141, page 263.

Section 401.QualiedPension, Prot-Sharing,and Stock Bonus Plans

26 CFR 1.401(l)1: Permitted disparity in employer- provided contributions or benets

Rev. Rul. 20143This revenue ruling provides tables of

covered compensation under 401(l)(5)(E)of the Internal Revenue Code (the Code)and the Income Tax Regulations thereun-der, for the 2014 plan year.

Section 401(l)(5)(E)(i) denes cov-ered compensation with respect to anemployee as the average of the contri-bution and benet bases in effect undersection 230 of the Social Security Act

(the Act) for each year in the 35-yearperiod ending with the year in which theemployee attains social security retire-ment age.

Section 401(l)(5)(E)(ii) states that thedetermination for any year preceding theyear in which the employee attains socialsecurity retirement age shall be made byassuming that there is no increase in thecontribution and benet base after the de-termination year and before the employeeattains social security retirement age.

Section 1.401(l)1(c)(34) of the In-come Tax Regulations (the Regula-tions) denes the taxable wage base asthe contribution and benet base undersection 230 of the Act.

Section 1.401(l)1(c)(7)(i) of the Reg-ulations denes covered compensation for

an employee as the average (without in-dexing) of the taxable wage bases in effectfor each calendar year during the 35-yearperiod ending with the last day of thecalendar year in which the employee at-tains (or will attain) social security retire-ment age. A 35-year period is used for allindividuals regardless of the year of birthof the individual. In determining an em-ployees covered compensation for a planyear, the taxable wage base for all calen-dar years beginning after the rst day of the plan year is assumed to be the same asthe taxable wage base in effect as of thebeginning of the plan year. An employeescovered compensation for a plan year be-ginning after the 35-year period applica-ble under 1.401(l)1(c)(7)(i) is the em-ployees covered compensation for a planyear during which the 35-year periodends. An employees covered compensa-tion for a plan year beginning before the35-year period applicable under 1.401(l)1(c)(7)(i) is the taxable wagebase in effect as of the beginning of theplan year.

Section 1.401(l)1(c)(7)(ii) providesthat, for purposes of determining theamount of an employees covered com-pensation under 1.401(l)1(c)(7)(i), aplan may use tables, provided by theCommissioner, that are developed by

rounding the actual amounts of coveredcompensation for different years of birth.

For purposes of determining coveredcompensation for the 2014 year, the tax-able wage base is $117,000.

The following tables provide coveredcompensation for 2014.

ATTACHMENT I

2014 COVERED COMPENSATION TABLE

CALENDARYEAR OFBIRTH

CALENDAR YEAR OFSOCIAL SECURITYRETIREMENT AGE

2014 COVEREDCOMPENSATIONTABLE II

1907 1972 $ 4,4881908 1973 4,7041909 1974 5,0041910 1975 5,3161911 1976 5,6641912 1977 6,060


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ATTACHMENT I


CALENDARYEAR OF

BIRTH


2014 COVEREDCOMPENSATION

TABLE II1913 1978 6,4801914 1979 7,0441915 1980 7,6921916 1981 8,4601917 1982 9,3001918 1983 10,2361919 1984 11,2321920 1985 12,2761921 1986 13,3681922 1987 14,5201923 1988 15,708

1924 1989 16,9681925 1990 18,3121926 1991 19,7281927 1992 21,1921928 1993 22,7161929 1994 24,3121930 1995 25,9201931 1996 27,5761932 1997 29,3041933 1998 31,1281934 1999 33,060

1935 2000 35,1001936 2001 37,2121937 2002 39,4441938 2004 43,9921939 2005 46,3441940 2006 48,8161941 2007 51,3481942 2008 53,9521943 2009 56,6281944 2010 59,2681945 2011 61,884

1946 2012 64,5601947 2013 67,3081948 2014 69,9961949 2015 72,6001950 2016 75,0841951 2017 77,5081952 2018 79,8241953 2019 82,0921954 2020 84,300


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ATTACHMENT I


CALENDARYEAR OF

BIRTH



TABLE II1955 2022 88,5361956 2023 90,6001957 2024 92,5681958 2025 94,4401959 2026 96,2641960 2027 98,0161961 2028 99,7201962 2029 101,3281963 2030 102,9241964 2031 104,4721965 2032 105,948

1966 2033 107,3401967 2034 108,6001968 2035 109,7641969 2036 110,8201970 2037 111,7321971 2038 112,5841972 2039 113,4241973 2040 114,1921974 2041 114,8401975 2042 115,4041976 2043 115,824

1977 2044 116,1241978 2045 116,4121979 2046 116,7001980 2047 116,904

1981 and Later 2048 and Later 117,000

ATTACHMENT II

2014 ROUNDED COVERED COMPENSATION TABLE

CALENDARYEAR OF

BIRTH


ROUNDED

1937 $ 39,00019381939 45,0001940 48,0001941 51,0001942 54,0001943 57,0001944 60,0001945 63,000


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ATTACHMENT II

2014 ROUNDED COVERED COMPENSATION TABLE

CALENDARYEAR OF

BIRTH


ROUNDED19461947 66,0001948 69,0001949 72,0001950 75,0001951 78,00019521953 81,0001954 84,00019551956 90,00019571958 93,0001959 96,00019601961 99,000

19621963 102,00019641965 105,00019661967 108,00019681970 111,00019711975 114,0001976 and Later 117,000

DRAFTING INFORMATION

The principal author of this revenueruling is Michael Spaid of the EmployeePlans, Tax Exempt and Government En-tities Division. For further informationregarding this revenue ruling, pleasecontact the Employee Plans taxpayer as-sistance telephone service at 1-877-829-5500, between the hours of 8:30 a.m.and 4:30 p.m. Eastern time, Mondaythrough Friday (a toll-free number). Mr.Spaid may be reached via e-mail at Reti [email protected].

Section 412.MinimumFunding Standards

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 2014. See Rev. Rul. 20141, page 263.

Section 467.CertainPayments for the Use ofProperty or Services


Section 468.SpecialRules for Mining and Solid Waste Reclamation andClosing Costs


Section 482.Allocation ofIncome and Deductions Among Taxpayers

Federal short-term, mid-term, and long-terrates are set forth for the month of January 2014. SRev. Rul. 20141, page 263.

Section 483.Interest onCertain Deferred Payments

The adjusted applicable federal short-term, miterm, and long-term rates are set forth for the monof January 2014. See Rev. Rul. 20141, page 263

Section 509.PrivateFoundation Dened

Guidance is provided for Type III supportinorganizations seeking to qualify as functionally integrated by supporting a governmental supporteorganization. See Notice 20144 on page 274.


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Section 642.SpecialRules for Credits andDeductions

Federal short-term, mid-term, and long-termrates are set forth for the month of January 2014. SeeRev. Rul. 20141, page 263.

Section 807.Rules forCertain Reserves


Section 846.DiscountedUnpaid Losses Dened


Section 1274.Determination of IssuePrice in the Case ofCertain Debt InstrumentsIssued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Rev. Rul. 20141

This revenue ruling providesvarious pre-scribed rates for federal income tax pur-poses for January 2014 (the current month).Table 1 contains the short-term, mid-term,and long-term applicable federal rates(AFR) for the current month for purposes of section 1274(d) of the Internal RevenueCode. Table 2 contains the short-term,mid-term, and long-term adjusted appli-cable federal rates (adjusted AFR) for thecurrent month for purposes of section1288(b). Table 3 sets forth the adjustedfederal long-term rate and the long-term

tax-exempt rate described in section382(f). Table 4 contains the appropriatepercentages for determining the low-income housing credit described in sec-tion 42(b)(1) for buildings placed in ser-vice during the current month. However,under section 42(b)(2), the applicablepercentage for non-federally subsidizednew buildings placed in service afterJuly 30, 2008, with respect to housingcredit dollar amount allocations madebefore January 1, 2014, shall not be lessthan 9%. Table 5 contains the federalrate for determining the present value of an annuity, an interest for life or for aterm of years, or a remainder or a rever-sionary interest for purposes of section7520. Finally, Table 6 contains thedeemed rate of return for transfers madeduring calendar year 2014 to pooled in-come funds described in section642(c)(5) that have been in existence forless than 3 taxable years immediatelypreceding the taxable year in which thetransfer was made.

REV. RUL. 20141 TABLE 1

Applicable Federal Rates (AFR) for January 2014

Period for Compounding Annual Semiannual Quarterly Monthly

Short-termAFR .25% .25% .25% .25%110% AFR .28% .28% .28% .28%120% AFR .30% .30% .30% .30%130% AFR .33% .33% .33% .33%

Mid-termAFR 1.75% 1.74% 1.74% 1.73%110% AFR 1.92% 1.91% 1.91% 1.90%120% AFR 2.10% 2.09% 2.08% 2.08%130% AFR 2.27% 2.26% 2.25% 2.25%150% AFR 2.63% 2.61% 2.60% 2.60%175% AFR 3.07% 3.05% 3.04% 3.03%

Long-termAFR 3.49% 3.46% 3.45% 3.44%110% AFR 3.85% 3.81% 3.79% 3.78%120% AFR 4.19% 4.15% 4.13% 4.11%130% AFR 4.55% 4.50% 4.47% 4.46%


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Section 1288.Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 3504.Acts to bePerformed by Agents

T.D. 9649

DEPARTMENT OF THETREASURY Internal Revenue Service26 CFR Part 31

Section 3504 AgentEmployment Tax Liability

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains -nal regulations relating to agents autho-rized by the Secretary under section 3504of the Internal Revenue Code to performacts required of employers who are homecare service recipients. The nal regula-tions affect employers and their desig-nated agents who pay wages for homecare services, which are subject to taxesunder the Federal Unemployment TaxAct. The nal regulations also modify theexisting regulations under section 3504 tobe consistent with the organizationalstructure of the Internal Revenue Service(IRS), and to update the citation to the

Internal Revenue Code of 1986.

DATES: Effective Date : These regula-tions are effective on December 12, 2013.

Applicability Date : For dates of appli-cability, see 31.35041(c) of these reg-ulations.

FOR FURTHER INFORMATIONCONTACT: Michelle R. Weigelt at (202)317-6798 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 31 under section 3504 of the Internal Revenue Code (Code). OnJanuary 13, 2010, the Treasury Depart-

ment and the IRS published a notice of proposed rulemaking (REG137036 08,75 FR 1735, 20106 I.R.B. 398) (the pro-posed regulations) in the Federal Registerunder section 3504 of the Code. The Trea-sury Department and the IRS did not hold apublic hearing because there were no re-quests to speak at a hearing. The TreasuryDepartment and the IRS received writtenand electronic comments responding to theproposed regulations. After consideration of all the comments, the proposed regulationsare adopted as amended by this Treasury

decision. The comments and revisions arediscussed in the preamble.

Explanation of Provisions

In case a duciary, agent, or other per-son has the control, receipt, custody, ordisposal of, or pays the wages of an em-ployee or group of employees, employedby one or more employers, section 3504of the Code authorizes the Secretary of theTreasury to promulgate regulations to au-thorize the person (agent) to performcertain specied acts required of employ-ers. Under section 3504, all provisions of law (including penalties) applicable withrespect to employers are applicable to theagent and remain applicable to the em-ployer. Accordingly, both the agent andemployer are liable for the employmenttaxes and penalties associated with theemployers employment tax obligationswhich the agent is authorized to perform.Prior to the amendments made by thesenal regulations, 31.35041 of the Em-ployment Tax Regulations provided thatthe IRS may authorize an agent to under-take the employment tax obligations of anemployer with respect to income tax with-holding and Federal Insurance Contribu-tions Act (FICA) taxes. However, the em-ployer was required to continue to meet itsemployment tax obligations with respectto Federal Unemployment Tax Act(FUTA) tax. Like the proposed regula-tions, these nal regulations provide thatthe IRS may authorize an agent to under-

take the employment tax obligations of anemployer with respect to FUTA tax incertain circumstances.

Summary of Comments andExplanation of Revisions

A. Amendments to 31.35041(a)

Under 31.35041(a), an employermay request that the IRS authorize anagent under section 3504 to report, le,and pay income tax withholding, tax un-der the FICA, or tax under the RailroadRetirement Tax Act (RRTA), with respectto wages or compensation. The proposedregulations under 31.3504 1(a) pro-posed amendments to the existing regula-tory language designed to update citationsand be consistent with the current organi-zational structure of the IRS.

One commenter expressed concern thatdeletion of the limiting language in re-spect of such acts from these regulationsimplied an agent could be held liable forall of an employers employment tax lia-bilities, regardless of which acts the agentwas authorized to perform. Under section3504, the agent is only liable for acts theIRS has authorized the agent to performon behalf of the employer. Thus, languagethat limits the scope of the agents liabilityhas been reincorporated into the nal reg-ulations.

Another commenter suggested that thenal regulations include a rule that theagent is only liable for employment taxeswith respect to wages or compensationpaid by the agent on behalf of the em-ployer. Because section 3504 provides anagent may also be authorized under sec-tion 3504 if the person has the control,receipt, custody, or disposal of the wagesof an employers employees, a rule thatthe agent can only be held liable for em-ployment taxes with respect to thosewages paid by the agent would be morenarrow than the statute. Therefore, thisrule was not adopted in the nal regula-tions. In addition to the change to pro-posed 31.35041(a) made in response tocomments, these nal regulations adoptminor changes for clarity and consistency.

B. Amendments under 31.3504 1(b)

The proposed regulations under 31.35041(b) provide a special rule that


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allows an employer who is a home careservice recipient to request that the IRSauthorize an agent to act with respect toFUTA taxes imposed on wages paid forhome care services, provided that theagent is authorized to act for the homecare service recipient for income tax with-holding and FICA tax purposes. The pro-posed regulations under 31.35041(b) do not apply to an agent that isauthorized to report, le, and pay incometax withholding or FICA tax for an em-ployer who is not a home care servicerecipient, or for wages paid for servicesother than home care services.

Several commenters sought legal orprocedural explanations which were be-yond the scope of the proposed regula-tions. Thus, those comments are not ad-dressed in these nal regulations. Forexample, these regulations do not addresscomments seeking clarication on theidentity of the common law employer if the home care service recipient has a rep-resentative acting on his or her behalf, theability of an agent to delegate its respon-sibility to a third-party, the application of certain exceptions to FICA and FUTAtaxes, the proper use of employer identi-cation numbers (EIN) in ling employ-ment tax returns, and the deposit require-ments of agents. However, RevenueProcedure 201339, which is being re-

leased simultaneously with these nal reg-ulations updates the procedures for re-questing that the IRS authorize a person toact as agent under section 3504, and ad-dresses ling, reporting, and deposit rulesfor agents.

1. Certication of State Unemployment Contributions

Section 3504 provides that all provi-sions of law applicable to an employerapply to the agent. Thus, an agent autho-rized under the proposed regulations forFUTA tax purposes reports the state un-employment contributions paid into astate unemployment fund on behalf of ahome care service recipient as a creditunder section 3302 against the FUTA taxreported on the agents aggregate FUTAtax return. The IRS has designated Form940, Employers Annual Federal Unem- ployment Tax (FUTA) Return , as the re-turn to le to report FUTA tax. The credit

can be reported by the agent regardless of whether the state unemployment contribu-tions are made under the name and stateidentifying number of the home care ser-vice recipient or of the agent.

Several commenters expressed concernthat the IRS will be unable to verify thestate unemployment contributions madeon behalf of a home care service recipientif such contributions are reported on anaggregate Form 940 FUTA tax return us-ing the agents name and EIN. The com-menters suggested that each home careservice recipients name and EIN be in-cluded on the aggregate return for pur-poses of the annual certication process.

Following the publication of the pro-posed regulations, the IRS issued Sched-ule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers , for use be-ginning in tax year 2010. Agents of homecare service recipients are required to useSchedule R (Form 940) to allocate theinformation reported on the aggregateFUTA tax return, and must separately listeach home care service recipients nameand EIN on Schedule R (Form 940). Be-cause the issuance of Schedule R (Form940) resolves the concerns raised by thesecommenters, no changes were made to thenal regulations.

2. Domestic Service Employment Tax Rules and Home Care Services

The proposed regulations dene homecare services to include health care andpersonal attendant care services renderedin the home care service recipients homeor local community. Several commentersrequested clarication of whether homecare services constitute domestic servicesfor employment tax purposes, particularlywhen the services involve travel outsidethe home.

The Code has special rules for domes-tic services. These special rules includeprovisions in section 3401(a)(3) regardingthe requirement to withhold income tax;sections 3121(a)(7)(B), 3306(a)(3), and3306(c)(2) regarding minimum dollarthresholds for imposition of FICA andFUTA taxes; section 3121(b)(3)(B) re-garding exemption from FICA tax for cer-tain family employment relationships; andsection 3121(b)(21) regarding exemptionfrom FICA tax depending on the age of

the service provider. Whether any of thesrules apply in a given situation depends owhether the services are domestic servicesand whether the services are provided in thprivate home of the employer. Thesterms are explained in 31.3121(a)(7)1(a)(2), 31.3306(c)(2)1, and 31.3401(a)3of the regulations.

Generally, 31.3121(a)(7)1(a)(2) provides that domestic services areservices of ahousehold nature performed by an employee in or about a private home of thperson by whom the employee is employedA private home is a xed place of abode an individual or family. Section31.3306(c)(2)1 and 31.3401(a)3 contaisimilar descriptions for FUTA tax and income tax withholding purposes, respectively.

The preamble to the proposed regula

tions stated that services provided outsidthe home care service recipients privathome may qualify as home care servicefor purposes of these regulations even the services do not qualify as domestservice in a private home of the employefor purposes of sections 3121(a)(73306(c)(2), and 3401(a)(3).

One commenter requested a rule deeming the special statutory rules for domestiservices as applying to all home care services. The determination of whether thstatutory rules for domestic services applydepends on whether the services are domestic services provided in the privathome of the employer as explained in thregulations. Thus, a bright line rule thahome care services are domestic servicein all cases is beyond the scope of thesregulations, and the proposal was not adopted.

However, we anticipate that there wionly be limited circumstances when homcare services would not be subject to thdomestic service rules and note that thregulations on domestic service describein this section, and other public guidanccurrently available address these comments. For example, Revenue Ruling 56109, 19561 C.B. 467, provides that sevices performed by an employee as companion to a convalescent employeincluding accompanying the convalescenon trips, constitute domestic service in private home of the employer for purposeof employment taxes.


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Several commenters interpreted the useof the phrase home or local communityin the denition of home care services toimpose geographical restrictions. Thephrase was intended to indicate that de-spite the home-based nature of health careand personal attendant care services,home care services may be provided out-side of a home, and was not intended toexclude services qualifying for funds un-der the government program based on thelocation at which the services were pro-vided. Thus, home care services under theregulations include any services for whichan individual enrolled in a governmentprogram described in the regulationswould be eligible to receive funds. Similarto how Rev. Rul. 56109 describes a sit-uation where services that are providedoutside the employers house neverthelessconstitute domestic services in the pri-vate home of the employer, services pro-vided outside the home or local commu-nity may constitute home care services.Nevertheless, to avoid the implication of ageographical limitation on what servicesmay qualify as home care services, thephrase was removed from the denition of home care services in the nal regulations.

Finally, one commenter interpreted thedenition of home care services to includeonly services provided to elderly individ-uals and individuals with physical disabil-

ities, and not to include services providedto individuals with intellectual and devel-opmental disabilities. The denition of home care services in the proposed regu-lations are not limited by the type of dis-ability. Rather, the denition of home careservices includes any services for whichan individual enrolled in a governmentprogram described in the regulationswould be eligible to receive funds. There-fore, no changes were made to the nalregulations with regard to the denition of home care services to address this com-

ment.

3. Clarication Regarding Home CareService Recipients

The proposed regulations dene homecare service recipient as any individualwho receives home care services whileenrolled, and for the remainder of the cal-endar year after ceasing to be enrolled, ina program administered by a Federal,

state, or local government agency thatprovides Federal, state, or local govern-ment funds, to pay, in whole or in part, forthe home care services for that individual.Several commenters submitted questionsregarding this denition that did not re-quire changes to the regulations, but withrespect to which clarication is providedin this preamble.

With regard to the Federal, state, orlocal government programs which providefunds for home care services, the pream-ble to the proposed regulations provides,In all such programs, intermediaries whoare engaged to assist beneciaries to re-ceive and distribute funds on the bene-ciaries behalf are reviewed and approvedby a state or local government agency.Several commenters interpreted this state-ment as inferring coordination betweenthe IRS and the Centers for Medicare andMedicaid Services (CMS) regarding qual-ications and contracting requirements foragents. The statement was intended tohighlight the currently existing oversightof the intermediaries that serve as agentsin these programs by CMS or other Fed-eral, state, and local government agencies.There is no anticipated IRS involvementin the way these agencies administer theseprograms, including selection and moni-toring of the intermediaries.

Application of the proposed regula-

tions requires that a home care servicerecipient be enrolled in a program thatprovides Federal, state, or local govern-ment funds to pay for home care services,in whole or in part . One commenter askedwhether an individual who pays for homecare services from his or her personalbank account or with other non-government funds can be a home careservice recipient within the meaning of the regulations. An individual is not ahome care service recipient within themeaning of these regulations if no govern-ment funds are used to pay for any part of the home care services performed for theindividual. However, an individual maybe a home care service recipient if the costof the home care services are initially paidfor with non-government funds and suchcost is reimbursed in whole or in part withgovernment funds provided under thegovernment program.

Other commenters asked about proce-dures an agent should follow when an

individual ceases to be a home care ser-vice recipient. Under 31.35041(b)(3), a participant qualies as a homecare service recipient until the end of thecalendar year in which the participantceases to be enrolled in the governmentprogram; accordingly, the agent may actas an agent with respect to the home careservice recipients FUTA tax obligationsfor the entire calendar year in which theparticipant ceases to qualify as a homecare service recipient. Furthermore, theagent may continue to act as an agent withrespect to the home care service recipi-ents FICA tax and income tax withhold-ing obligations pursuant to 31.35041(a) after a participant ceases to qualify asa home care service recipient. Treasuryand the IRS do not believe a description of any specic procedures is needed in theseregulations with regard to the cessation of home care service recipient status forFUTA tax purposes. However, RevenueProcedure 201339, which is being re-leased simultaneously with these nal reg-ulations updates the procedures to requestthe IRS authorize a person to act as agentunder section 3504 and claries the rulesfor revoking authorization.

Special Analyses

It has been determined that this Trea-sury decision is not a signicant regula-tory action as dened in EO 12866. There-fore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to this regulation. Pursuant to theRegulatory Flexibility Act (5 U.S.C.chapter 6), it is hereby certied that theseregulations will not have a signicant eco-nomic impact on a substantial number of small entities. The collection of informa-tion contained in these regulations is avoluntary written application from an em-ployer, signed by the employer and theagent, requesting the IRS approve the ap-pointment of an agent to perform the actsrequired of the employer. The applicationcontains information generally availableto taxpayers, such as the name, address,and EIN of the employer, and ultimatelyserves to lessen taxpayer burden by allow-ing the employer to have an agent fulllcertain employment tax obligations. Ac-cordingly, a regulatory exibility analysis


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is not required. Pursuant to section7805(f) of the Internal Revenue Code, theproposed regulations preceding these reg-ulations were submitted to the Chief Counsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business, and no com-ments were received.

Drafting Information

The principal author of these nal reg-ulations is Michelle R. Weigelt, Ofce of Division Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). However, personnel from other of-ces of the IRS and the TreasuryDepartment participated in their develop-ment.* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 31 isamended as follows:

PART 31EMPLOYMENT TAXESAND COLLECTION OF INCOMETAX AT SOURCE

Paragraph 1. The authority citation forpart 31 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par.2. Section 31.35041 is revised to

read as follows:

31.35041 Designation of Agent by Application.

(a) In general . In the event wages asdened in chapter 21 or 24 of the InternalRevenue Code (Code), or compensationas dened in chapter 22 of the Code, of anemployee or group of employees, em-ployed by one or more employers, is paidby a duciary, agent, or other person(agent), or if that agent has the control,receipt, custody, or disposal of (collec-tively pays) wages or compensation, theInternal Revenue Service may, subject tothe terms and conditions as it deemsproper, authorize that agent to perform theacts required of the employer or employ-ers under those provisions of the Code andthe regulations that apply, for purposes of the taxes imposed by the chapter or chap-ters, with respect to wages or compensa-

tion paid by the agent. If the agent isauthorized by the Internal Revenue Ser-vice to perform such acts, all provisions of law (including penalties) and of the regu-lations applicable to an employer with re-spect to such acts shall be applicable tothe agent. However, each employer forwhom the agent acts shall remain subjectto all provisions of law (including penal-ties) and of the regulations applicable toan employer with respect to such acts.Any application to authorize an agent toperform such acts, signed by the agent andthe employer, shall be made on the formprescribed by the Internal Revenue Ser-vice and shall be led with the InternalRevenue Service as prescribed in the in-structions to the form and other applicableguidance.

(b) Special rule for home care servicerecipients . (1) In general . In the event anagent is authorized pursuant to paragraph(a) of this section to perform the actsrequired of an employer under chapters 21or 24 on behalf of one or more home careservice recipients, as dened in paragraph(b) (3) of this section, the Internal Reve-nue Service may authorize that agent toperform the acts as are required of em-ployers for purposes of the tax imposed bychapter 23 of the Code with respect towages paid by the agent for home careservices, as dened in paragraph (b) (2) of

this section, rendered to the home careservice recipient. If the agent is authorizedby the Internal Revenue Service to per-form such acts, all provisions of law (in-cluding penalties) and of the regulationsapplicable to an employer in respect of such acts shall be applicable to the agent.However, each employer for whom theagent acts shall remain subject to all pro-visions of law (including penalties) and of the regulations applicable to an employerwith respect to such acts.

(2) Home care services . For purposesof this section, the term home care ser-vices includes health care and personalattendant care services rendered to thehome care service recipient.

(3) Home care service recipient . Forpurposes of this section, the term homecare service recipient means any individ-ual who receives home care services, asdened in paragraph (b) (2) of this sec-tion, while enrolled, and for the remainderof the calendar year after ceasing to be

enrolled, in a program administered by Federal, state, or local government agencthat provides Federal, state, or local government funds, to pay, in whole or in parfor home care services for that individua

(c) Effective/applicability dates . An athorization under paragraph (a) in effecprior to December 12, 2013 continues tbe in effect after that date. Paragraph (bof this section applies to wages paid on oafter January 1, 2014. However, pursuanto section 7805(b), taxpayers may rely oparagraph (b) of this section for all taxablyears for which a valid designation is ieffect under paragraph (a) of this section

Beth Tuck Deputy Commissioner for Services and

Enforcemen

Approved September 27, 2013

Mark J. Mazu Assistant Secretary of the Treasury

(Tax Policy

(Filed by the Ofce of the Federal Register on December 12013, 8:45 a.m., and published in the issue of the FederRegister on December 12, 2013, 78 F.R. 75471)

Section 4942.Taxes onFailure to DistributeIncome

Guidance is provided to private foundations ansponsoring organizations that maintain donoadvised funds relating to grants to functionally intgrated Type III supporting organizations. See Notic20144 on page 274.

Section 4945.Taxes onTaxable Expenditures

Guidance is provided to private foundations ansponsoring organizations that maintain dono

advised funds relating to grants to functionally intgrated Type III supporting organizations. See Notic20144 on page 274.


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Section 4966.Taxes onTaxable Distributions

Guidance is provided to private foundations andsponsoring organizations that maintain donor-advised funds relating to grants to functionally inte-grated Type III supporting organizations. See Notice20144 on page 274.

Section 7520.ValuationTables


Section 7872.Treatmentof Loans With Below-Market Interest Rates



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Part III. Administrative, Procedural, and MiscellaneousSections 125 and 223Cafeteria Plans, FlexibleSpending Arrangements,and Health Savings AccountsElections andReimbursements for Same-Sex Spouses Following theWindsor Supreme CourtDecisionNotice 20141

I. PURPOSE

This notice provides guidance on theapplication of the rules under section 125of the Internal Revenue Code (Code) (re-

lating to cafeteria plans, including healthand dependent care exible spending ar-rangements (FSAs)), and section 223 of the Code (relating to health savings ac-counts (HSAs)), as those two provisionsrelate to the participation by same-sexspouses in certain employee benet plansfollowing the Supreme Court decision inUnited States v. Windsor , 570 U.S. ___,133 S. Ct. 2675 (2013), and the issuanceof Rev. Rul. 201317, 201338 I.R.B.201. This notice amplies the previousguidance provided in Rev. Rul. 201317.

II. BACKGROUND

A. Cafeteria Plans, Health andDependent Care FSAs, and HSAs

Section 125(d)(1) denes a cafeteriaplan as a written plan under which allparticipants are employees and the partic-ipants may choose among two or morebenets consisting of cash and qualiedbenets. Section 125(f) denes a qualiedbenet as any benet which, with the ap-plication of section 125(a), is not includ-able in the gross income of the employeeby reason of an express provision of Chapter I of the Code (with certain excep-tions). Qualied benets include contribu-tions to an employer-provided accidentand health plan that are excludable fromgross income under section 106.

Under Treas. Reg. 1.1061, the grossincome of an employee does not includecontributions that his employer makes toan accident or health plan for compensa-

tion (through insurance or otherwise) tothe employee for personal injuries or sick-ness incurred by the employee, the em-ployees spouse and dependents, and cer-tain other individuals.

Treas. Reg. 1.1254 provides that acafeteria plan may permit an employee torevoke an election during a period of cov-erage and make a new election under cer-tain circumstances. One circumstance un-der which a cafeteria plan may permit anemployee to make a new election is achange in status event under Treas. Reg. 1.1254(c), including a change in legalmarital status. Another circumstance un-der which a cafeteria plan may permit anemployee to make a new election is asignicant change in the cost of coverage

under Treas. Reg. 1.1254(f).Prop. Treas. Reg. 1.1255 denes aFSA as a benet program that providesemployees with coverage that reimbursesspecied incurred expenses (subject to re-imbursement maximums and any otherreasonable conditions). Prop. Treas. Reg. 1.1255(h) provides that the benetsthat may be offered through FSAs includedependent care assistance programs undersection 129 and medical reimbursementarrangements under section 105.

Section 129 provides that the maxi-

mum exclusion from gross income undera dependent care assistance program is$5,000 for an individual or a married cou-ple ling jointly or $2,500 for a marriedindividual ling separately.

Section 223(d) denes a HSA as a trustcreated or organized in the United Statesas a health savings account exclusively forthe purpose of paying the qualied medi-cal expenses of the account beneciaryand that satises other delineated require-ments. The term qualied medical ex-penses is dened in section 223(d)(2) toinclude amounts paid by a beneciary formedical care for that individual and thespouse of that individual. Section 223(a)allows a deduction for an eligible individ-ual in an amount equal to the aggregateamount paid in cash during a taxable yearby or on behalf of the individual to a HSA.The maximum deduction for the 2013 tax-able year is limited to $6,450 (as adjustedfor cost-of-living increases) in the case of an eligible individual who has family cov-

erage under a high-deductible health pla(HDHP); see Rev. Proc. 201226201220 I.R.B. 933. In the case of maried individuals either one of whom hafamily coverage under a HDHP, the HSAdeduction limitation is divided equallamong the spouses unless they agree on different division.

B. Defense of Marriage Act

Until the recent decision of the Supreme Court in Windsor found it uncostitutional, section 3 of the Defense oMarriage Act (DOMA) prohibited the recognition of same-sex marriages for purposes of federal tax law. Specically, section 3 of DOMA (1 U.S.C. 7) providethat:

In determining the meaning of anyAct of Congress, or of any ruling,regulation or interpretation of thevarious administrative bureaus andagencies of the United States, theword marriage means only a legalunion between one man and onewoman as husband and wife, andthe word spouse refers only to aperson of the opposite sex who is ahusband or a wife.

As a result, employers could not permemployees to elect coverage of same-se

spouses on a pre-tax basis under a cafeteria plan unless the spouse otherwise qualied as a tax dependent of the employe

C. Effect of the Windsor decision andRev. Rul. 201317

In Windsor , the Supreme Court held oJune 26, 2013 that section 3 of DOMA unconstitutional because it violates FifthAmendment principles. Rev. Rul. 201317, interpreting the Windsor decisioheld the following:

1. For Federal tax purposes, thterms spouse, husband and wife,husband, and wife include an individual married to a person of thsame sex if the individuals are lawfully married under state law, and thterm marriage includes such a marriage between individuals of the samsex;

2. For Federal tax purposes, the IRadopts a general rule recognizing marriage of same-sex individuals tha


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was validly entered into in a statewhose laws authorize the marriage of two individuals of the same sex evenif the married couple is domiciled in astate that does not recognize the valid-ity of same-sex marriages; and

3. For Federal tax purposes, theterms spouse, husband and wife,husband, and wife do not includeindividuals (whether of the oppositesex or the same sex) who have enteredinto a registered domestic partnership,civil union, or other similar formalrelationship recognized under statelaw that is not denominated as a mar-riage under the laws of that state, andthe term marriage does not includesuch formal relationships.

Rev. Rul. 201317 provides that tax-payers may rely on its holdings retroac-

tively with respect to any employee ben-et plan or arrangement or any benetprovided thereunder only for purposes of ling original returns, amended returns,adjusted returns, or claims for credit orrefund of an overpayment of tax concern-ing employment tax and income tax withrespect to employer-provided health cov-erage benets or fringe benets that wereprovided by the employer and are exclud-able from income under sections 106,117(d), 119, 129, or 132 based on anindividuals marital status. The ruling fur-

ther provides that, for purposes of thepreceding sentence, if an employee madea pre-tax salary-reduction election forhealth coverage under a section 125 cafe-teria plan sponsored by an employer andalso elected to provide health coverage fora same-sex spouse on an after-tax basisunder a group health plan sponsored bythat employer, an affected taxpayer maytreat the amounts that were paid by theemployee for the coverage of the same-sex spouse on an after-tax basis as pre-taxsalary reduction amounts.

Notice 201361, 44 I.R.B. 432, con-tains special administrative procedures foremployers who want to make adjustmentsor claims for refund or credit of employ-ment taxes paid with respect to the valueof same-sex spousal benets that are ex-cludable from the income and wages of anemployee under the Windsor decision, asinterpreted by Rev. Rul. 201317.

The following questions and answersprovide further guidance on the applica-

tion of the Windsor decision with respectto certain rules governing the federal taxtreatment of certain types of employeebenet arrangements.

III. QUESTIONS AND ANSWERS

With respect to the following guidance,

references to marriage or spouse referto individuals who at the relevant date orfor the relevant period of time would betreated as married or as spouses under theholdings in Rev. Rul. 201317.

Mid-Year Election Changes

Q1: If a cafeteria plan participant waslawfully married to a same-sex spouse asof the date of the Windsor decision, maythe plan permit the participant to make amid-year election change on the basis that

the participant has experienced a changein legal marital status?

A1: Yes. A cafeteria plan may treat aparticipant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) as if the partici-pant experienced a change in legal maritalstatus for purposes of Treas. Reg. 1.1254(c). Accordingly, a cafeteriaplan may permit such a participant to re-voke an existing election and make a newelection in a manner consistent with the

change in legal marital status. For pur-poses of election changes due to the Wind-sor decision, an election may be acceptedby the cafeteria plan if led at any timeduring the cafeteria plan year that includesJune 26, 2013, or the cafeteria plan yearthat includes December 16, 2013.

A cafeteria plan may also permit a par-ticipant who marries a same-sex spouseafter June 26, 2013, to make a mid-yearelection change due to a change in legalmarital status.

Any election made with respect to asame-sex spouse (and/or the spouses de-pendents) must satisfy the requirements of the regulations concerning electionchanges generally, including the consis-tency rule under Treas. Reg. 1.1254(c)(3).

Q2: May a cafeteria plan permit aparticipant with a same-sex spouse tomake a mid-year election change underTreas. Reg. 1.1254(f) on the basis thatthe change in tax treatment of health cov-

erage for a same-sex spouse resulted in asignicant change in the cost of coverage?

A2: A change in the tax treatment of a benet offered under a cafeteria plangenerally does not constitute a signicantchange in the cost of coverage for pur-poses of Treas. Reg. 1.1254(f). Giventhe legal uncertainty created by the Wind-sor decision, however, cafeteria plansmay have permitted mid-year electionchanges under Treas. Reg. 1.1254(f)prior to the publication of this notice.

As noted in Q&A1 above, such anelection change would have been permit-ted on the basis that the participant expe-rienced a change in legal marital status.Accordingly, for periods between June 26and December 31, 2013, a cafeteria planwill not be treated as having failed to meetthe requirements of section 125 or Treas.Reg. 1.1254 solely because the planpermitted a participant with a same-sexspouse to make a mid-year electionchange under Treas. Reg. 1.1254(f) asa result of the plan administrators inter-pretation that the change in tax treatmentof spousal health coverage arising fromthe Windsor decision resulted in a signif-icant change in the cost of health cover-age.

Q3: When does an election made by aparticipant in connection with the Wind-

sor decision take effect?A3: An election made under a cafete-

ria plan with respect to a same-sex spouseas a result of the Windsor decision gener-ally takes effect as of the date that anyother change in coverage becomes effec-tive for a qualifying benet that is offeredthrough the cafeteria plan.

With respect to a change in status elec-tion that was made by a participant inconnection with the Windsor decision be-tween June 26, 2013 and December 16,

2013, the cafeteria plan will not be treatedas having failed to meet the requirementsof section 125 or Treas. Reg. 1.1254 tothe extent that coverage under the cafete-ria plan becomes effective no later thanthe later of (a) the date that coverage un-der the cafeteria plan would be added un-der the cafeteria plans usual proceduresfor change in status elections, or (b) areasonable period of time after December16, 2013.


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The rules set forth in Q&A-1 throughQ&A3 are illustrated by the followingexamples:

Example 1 . Employer sponsors a cafeteria planwith a calendar year plan year. Employee A marriedsame-sex Spouse B in October 2012 in a state thatrecognized same-sex marriages. During open enroll-ment for the 2013 plan year, Employee A elected topay for the employee portion of the cost of self-only

health coverage through salary reduction under thecafeteria plan.

Employer permits same-sex spouses to partici-pate in its health plan. On October 5, 2013, Em-ployee A elected to add health coverage for SpouseB under Employers health plan, and made a newsalary reduction election under the cafeteria plan topay for the employee portion of the cost of SpouseBs health coverage. Employer was not certainwhether such an election change was permissible,and accordingly declined to implement the electionchange until the publication of this notice.

After publication of this notice, Employer deter-mines that Employee As revised election is permis-sible as a change in status election in accordance

with this notice. Employer enrolls Spouse B in thehealth plan as of December 20, 2013, and beginsmaking appropriate salary reductions from the com-pensation of Employee A for Spouse Bs coveragebeginning with the pay period starting December 20,2013. The cafeteria plan is administered in accor-dance with this notice.

Example 2 . Same facts as Example 1 , except thatEmployee A submitted the election to add healthcoverage for Spouse B under Employers cafeteriaplan on September 1, 2013. Prior to publication of this notice, Employer implemented the electionchange and enrolled Spouse B in the health plan asof October 1, 2013, and began making appropriatesalary reductions from the compensation of Em-

ployee A for Spouse Bs coverage beginning withthe pay period starting October 1, 2013. The cafete-ria plan was administered in accordance with thisnotice.

Q4: If a cafeteria plan participant haselected to pay for the employee cost of health coverage for the employee on apre-tax basis through salary reduction un-der a cafeteria plan, and is also paying theemployee cost of health coverage for asame-sex spouse under a health plan of the employer on an after-tax basis, when,and under what circumstances, must anemployer begin to treat the amount thatthe employee pays for spousal coverage asa pre-tax salary reduction?

A4: An employer that, before the endof the cafeteria plan year including De-cember 16, 2013, receives notice that sucha participant is married to the individualreceiving health coverage must begintreating the amount that the employeepays for the spousal coverage as a pre-taxsalary reduction under the plan no laterthan the later of (a) the date that a change

in legal marital status would be requiredto be reected for income tax withholdingpurposes under section 3402, or (b) a rea-sonable period of time after December 16,2013.

For this purpose, a participant may pro-vide notice of the participants marriage tothe individual receiving health coverageby making an election under the employ-ers cafeteria plan to pay for the employeecost of spousal coverage through salaryreduction (as permitted under Q&A1) orby ling a revised Form W4 represent-ing that the participant is married.

Q5: How does the Windsor decisionaffect the tax treatment of health coveragefor a same-sex spouse in the case of acafeteria plan participant who had beenpaying for the cost of same-sex spousecoverage on an after-tax basis?

A5: In the case of a cafeteria planparticipant who elected to pay for the em-ployee cost of health coverage for theemployee on a pre-tax basis through sal-ary reduction under a cafeteria plan andalso paid for the employee cost of healthcoverage for a same-sex spouse under theemployers health plan on an after-tax ba-sis, the participants salary reduction elec-tion under the cafeteria plan is deemed toinclude the employee cost of spousal cov-erage, even if the employer reports theamounts as taxable income and wages to

the participant. Accordingly, the amountthat the participant pays for spousal cov-erage is excluded from the gross incomeof the participant and is not subject tofederal income or federal employmenttaxes. This rule applies to the cafeteriaplan year including December 16, 2013and any prior years for which the applica-ble limitations period under section 6511has not expired.

In general, Q&A4 and Q&A5 pro-vide that a cafeteria plan participant maychoose to pay for the employee cost of same-sex spouse coverage on a pre-taxbasis through the remaining pay periods inthe current cafeteria plan year by provid-ing notice of the participants marital sta-tus to the employer or the cafeteria plan,or to continue paying for these benets onan after-tax basis. In either case, the par-ticipant may seek a refund of federal in-come or federal employment taxes paid onany amounts representing the employeecost of spousal health coverage that were

treated as after-tax and may exclude thesamounts from gross income when linan income tax return for the year.

The rules set forth in Q&A4 anQ&A5 are illustrated by the followinexample:

Example 3 . Same facts as Example 1 , except tstarting January 1, 2013, Employee A paid for th

employee portion of health coverage for Spouse under Employers group health plan on an after-tabasis. The value of Spouse Bs health coverage w$500 per month, and this amount was included taxable income and wages to Employee A for payropurposes with respect to all pay periods startiJanuary 1, 2013.

On October 5, 2013, Employee A made a changin status election under the cafeteria plan electing pay for the employee cost of Spouse Bs healcoverage on a pre-tax basis through salary reductioEmployer implemented the change in status electioon November 1, 2013, and excluded the cost Spouse Bs coverage from Employee As gross income and wages with respect to all remaining pa

periods in 2013 starting November 1, 2013.Employee A and Spouse B le a joint federincome tax return for 2013. The value of Spouse Bhealth coverage for the full 2013 taxable year (icluding the $5,000 of coverage ($500 per month f10 months) that was initially reported by Employas includable in gross income with respect to all pperiods from January through October) may be excluded from gross income on the couples joint rturn for 2013. Employee A may also request a refunof any federal employment taxes paid on account such coverage.

FSA Reimbursements

Q6: May a cafeteria plan permit participants FSA to reimburse covereexpenses incurred by the participantsame-sex spouse during a period beginning on a date that is no earlier than (a) thbeginning of the cafeteria plan year including the date of the Windsor decisior (b) the date of marriage, if later?

A6: Yes. A cafeteria plan may perma participants FSA, including a healthdependent care, or adoption assistancFSA, to reimburse covered expenses othe participants same-sex spouse or thsame-sex spouses dependent that werincurred during a period begi

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