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

INCOME TAX

REG–131239–13, page 1064.Proposed regulations under section 381 of the Internal Reve-nue Code modify the definition of an acquiring corporation forpurposes of section 381 with regard to certain acquisitions ofassets. Written or electronic comments and requests for apublic hearing must be received by August 5, 2014.

Announcement 2014–22, page 1066.This document contains corrections to final and temporaryregulations (TD 9650) that were published in the Federal Reg-ister on Tuesday, December 31, 2013 (78 FR 79602). Theregulations provide guidance on determining ownership of apassive foreign investment company (“PFIC”) and on the annualfiling requirements for shareholders of PFICs.

Announcement 2014–23, page 1067.This document contains corrections to a notice of proposedrulemaking by cross-reference to temporary regulations (REG–140974–11) that was published in the Federal Register onTuesday, December 31, 2013 (78 FR 79650). The proposedregulations provide guidance on determining the ownership ofa passive foreign investment company (PFIC), the annual filingrequirements for shareholders of PFICs, and an exclusion fromcertain filing requirements for shareholders that constructivelyown interests in certain foreign corporations.

Rev. Proc. 2014–33, page 1060.This revenue procedure provides the exclusive procedures fortaxpayers to obtain the automatic consent of the Commis-sioner to change a method of accounting for sales-basedroyalties and sales-based vendor chargebacks to comply withfinal regulations under §§ 263A and 471 of the Code. The finalregulations (TD 9652) were published in the Federal Registeron January 13, 2014.

Notice 2014–36, page 1058.Credit for Renewable Electricity Production, Refined Coal Pro-duction, and Indian Coal Production, and Publication of InflationAdjustment Factors and Reference Prices for Calendar Year2014: The notice reports for 2014 the inflation adjustmentfactors and reference prices used to determine the availabilityof the section 45 credit for electricity produced from qualifiedenergy resources and refined coal and includes the creditamounts for renewable electricity production and refined coalproduction. The notice also reports the inflation adjustmentfactor for Indian coal and includes the credit amounts for Indiancoal production.

T.D. 9663, page 1038.Final regulations provide rules under section 36B of the Coderelating to requirements for Affordable Insurance Exchanges toreport information relating to the health insurance premium taxcredit, enacted by section 1401 of the Affordable Care Act.

T.D. 9664, page 1045.Final Regulations under section 67 of the Code provide thatcertain costs incurred by estates or non-grantor trusts aremiscellaneous itemized deductions that are deductible only tothe extent they exceed 2 percent of the adjusted gross incomeof the estate or non-grantor trust. This limitation is often re-ferred to as the “2-percent floor.” Other costs incurred byestates or non-grantor trusts are deductible without regard tothe 2-percent floor. These final regulations provide guidance onthe types of costs that are and are not subject to the 2-percentfloor.

(Continued on the next page)

Finding Lists begin on page ii.Index for July through May begins on page iv.

Bulletin No. 2014–22May 27, 2014

T.D. 9665, page 1050.These final regulations clarify the general rule under section402(a) that amounts held in a qualified retirement plan that areused to pay accident or health insurance premiums are taxabledistributions unless described in certain statutory exceptions.The final regulations do not extend this result to arrangementsunder which amounts are used to pay premiums for disabilityinsurance that replaces retirement plan contributions in theevent of a participant’s disability.

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.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

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 cautioned

against 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, TaxConventions and Other Related Items, and Subpart B, Legisla-tion 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 Sec-retary (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 index forthe 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.

May 27, 2014 Bulletin No. 2014–22

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 36.— RefundableCredit for Coverage Undera Qualified Health Plan26 CFR 1.36B-5: Information reporting by Exchanges.

T.D. 9663

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Information Reporting forAffordable InsuranceExchanges

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations relating to requirementsfor Affordable Insurance Exchanges(Exchanges) to report information relat-ing to the health insurance premium taxcredit enacted by the Patient Protectionand Affordable Care Act and the HealthCare and Education Reconciliation Actof 2010. These final regulations apply toExchanges that make qualified healthplans available to individuals.

DATES: Effective date: These regulationsare effective on May 7, 2014.

Applicability Dates: For dates of appli-cability, see § 1.36B–1(o).

FOR FURTHER INFORMATIONCONTACT: Shareen S. Pflanz or ArvindRavichandran, (202) 317-4718 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these regulations has been re-viewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545-2232.

The collection of information in thesefinal regulations is in § 1.36B–5 and willbe reported on Form 1095–A. The col-lection of information is necessary tocompute the premium tax credit and toreconcile the amount of the premium taxcredit with advance payments of the pre-mium tax credit (advance credit pay-ments) made under section 1412 of thePatient Protection and Affordable CareAct (42 U.S.C. 18082). The collectionof information is needed for compliancewith the provisions of section 36B(f)(3)of the Internal Revenue Code (Code).The likely respondents are Exchangesestablished under section 1311 or 1321of the Patient Protection and AffordableCare Act (42 U.S.C. 13031 or 42 U.S.C.18041).

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less it displays a valid control numberassigned by the Office of Managementand Budget.

The estimated total annual reportingburden is 10,050 hours. The estimatedannual burden per respondent is 670hours. The estimated number of respon-dents is 15.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service, Attn: IRS Re-ports Clearance Officer SE:W:CAR:MP:TM:S, Washington, DC 20224, and tothe Office of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington,DC 20503.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andreturn information are confidential, as re-quired by section 6103.

Background

This document contains final regula-tions that amend § 1.36B–5 of the IncomeTax Regulations (26 CFR part 1), provid-

ing detailed rules for information report-ing by Exchanges on enrollments in qual-ified health plans. Section 36B(f)(3)directs Exchanges to report to the IRS andto taxpayers certain information necessaryto reconcile the premium tax credit withadvance credit payments and to adminis-ter the premium tax credit generally.

On July 2, 2013, a notice of proposedrulemaking (REG–140789–12) was pub-lished in the Federal Register (78 FR39644). Written comments responding tothe proposed regulations were receivedand considered. The comments are availablefor public inspection at www.regulations.govor on request. No public hearing was re-quested or held. After consideration of allthe comments, the proposed regulationsare adopted as amended by this Treasurydecision.

Explanation of Provisions andSummary of Comments

1. Individuals Subject to ExchangeReporting.

The proposed regulations required Ex-changes to report information for all indi-viduals who enroll in a qualified healthplan. The proposed regulations used theterms taxpayer and responsible adult todescribe, respectively, an individual whoapplies to enroll one or more members ofthe individual’s family in a qualifiedhealth plan and who requests advancecredit payments and to describe an indi-vidual who enrolls one or more membersof the individual’s family and does notrequest advance credit payments.

A commenter suggested that theseterms do not accommodate nontraditionalfamily structures because the definitionsassume that the individual who claims adependent also enrolled the dependent incoverage. Commenters also felt the termswere confusing.

The terms taxpayer and responsibleadult in the proposed regulations were in-tended to describe the individual who isexpected to file an income tax return forthe year of coverage for the enrolling fam-ily. Whether that individual is the one whocompletes the enrollment application is

May 27, 2014 Bulletin No. 2014–221038

not significant. Accordingly, the final reg-ulations clarify that these terms describethe individual who is expected to file anincome tax return for the year of coveragewith respect to individuals enrolling in aqualified health plan.

To avoid confusion with other uses ofthe term taxpayer, the final regulationsinstead use the term tax filer to identifyindividuals on behalf of whose familiesadvance credit payments are made. Thisterm is used in regulations at 45 CFR155.300 to describe a taxpayer and thus ismore familiar to Exchanges.

The final regulations clarify that ifmore than one tax family enrolls in thesame qualified health plan there is a taxfiler or responsible adult for each familyand that the tax filer or responsible adultmay or may not enroll in coverage.

The final regulations clarify the infor-mation required to be reported for quali-fied health plan enrollments for which ad-vance credit payments are made or notmade. Because the primary difference inthe information reported relates towhether or not advance credit paymentsare made on behalf of an individual, thefinal regulations distinguish the reportingcategories based on whether or not ad-vance credit payments are made on behalfof an individual, rather than on whether anindividual requests advance credit pay-ments.

2. Information Required to be Reported

a. Specific data elements

The proposed regulations required Ex-changes to report information concerningall individuals enrolled in qualified healthplans. For each plan, the information in-cludes the name, address, and taxpayeridentification numbers (TINs), or dates ofbirth if a TIN is not available, for eachindividual covered under the plan; appli-cable benchmark plan premiums or theamount that would be the benchmark pre-mium that would apply to all enrolledindividuals (unless that information ismade available to individuals through analternative method that they can access attax return filing); the amount of the pre-mium for the qualified health plan theindividuals enroll in; the name of the qual-ified health plan issuer and the issuer’s

employer identification number (EIN); thequalified health plan policy number; theExchange’s unique identification number;and the unique number that identifies thefamily’s specific account to enable dataassociation from month to month. For in-dividuals enrolled in a plan for whichadvance credit payments were re-quested, the proposed regulations re-quired Exchanges to report the amountof advance credit payments, whether theindividuals enrolled are the taxpayer’sdependents, and certain informationconcerning employers.

The final regulations generally requireExchanges to report the data elementsidentified in the proposed regulations butmake several minor changes and clarifica-tions in response to comments and basedon what is needed to determine the pre-mium tax credit.

Commenters requested that the finalregulations omit certain data elementsfrom the reporting requirements. A com-menter expressed concern that it wouldnot be able to report accurate informationabout the amount of advance credit pay-ments. Another commenter questioned theneed to report the family’s specific ac-count number. Other commenters advisedthat issuers often do not assign a policynumber and that HHS regulations do notrequire issuers to report policy numbers toExchanges.

The final regulations require Ex-changes to report the policy identificationnumber assigned by the Exchange insteadof a policy number created by an issuerand clarify that the “specific account num-ber” is the unique identifying number theExchange uses to report data that enablesthe IRS to associate the data with theproper account. These data elements, in-cluding the amount of advance credit pay-ments and the unique data associationnumber, are available to Exchanges andessential for the IRS to properly adminis-ter the premium tax credit.

The proposed regulations required Ex-changes to report whether an individualenrolled in a qualified health plan by ataxpayer is the taxpayer’s dependent. Acommenter suggested that Exchangesshould not be required to report this infor-mation because Exchanges will obtain thisinformation from the IRS as part of theverification of an applicant’s information.

The final regulations do not adopt thiscomment because information the IRSprovides as part of the verification processis from the taxpayer’s most recently filedtax return, which may be two years old.Accordingly, the final regulations retainthe rule in the proposed regulations that,for plans for which advance credit pay-ments are made, Exchanges will reportwhich covered individuals a tax filer rep-resented to the Exchange that he or shewould claim as a dependent for the cov-erage year. This information is necessarybecause advance credit payments arebased, in part, on information concerningthe individuals whom a tax filer expects toclaim as dependents for the taxable yearfor which the advance credit payments aremade.

In addition, the final regulations makeseveral minor changes to the data ele-ments reported based on what is needed todetermine the premium tax credit.

The proposed regulations provided thatExchanges must report the issuer’s EINon both the annual statement and themonthly statements. The final regulationsprovide that Exchanges will report the is-suer’s EIN on a monthly basis only, as thisinformation is not needed on the annualreport. The proposed regulations providedthat Exchanges must report an address fora taxpayer’s spouse. The final regulationsomit this information, as it is unnecessary.Finally, the proposed regulations providedthat Exchanges must report the dates ofeach individual’s coverage under the qual-ified health plan. The final regulationsprovide that Exchanges also must reportthe start and end dates for the qualifiedhealth plan itself, as this information maybe needed to determine the amount of thepremium tax credit.

b. Information on applicable benchmarkpremium

The proposed regulations required Ex-changes to report to the IRS informationconcerning the monthly premium for theapplicable benchmark plan. For qualifiedhealth plans for which advance credit pay-ments were approved, the proposed regu-lations provided that Exchanges must re-port the monthly premium for theapplicable benchmark plan used to com-pute advance credit payments. For plans

Bulletin No. 2014–22 May 27, 20141039

for which advance credit payments werenot requested or were not approved, theproposed regulations required Exchangesto report the premium for the applicablebenchmark plan that would apply to theindividuals enrolled in a qualified healthplan, unless the information is made avail-able through an alternative method. Com-menters requested clarification on the dis-tinction between the benchmark premiuminformation reported in each case.

The proposed and final regulations re-quire Exchanges to report the monthlypremium for the applicable benchmarkplan that applies to the coverage family(the members of the family enrolling andeligible for a premium tax credit subsidy)that is used to compute advance creditpayments. If no advance credit paymentsare made, Exchanges may not determinewhich individuals enrolled would be partof the coverage family and the applicablebenchmark premium that would apply tothat coverage family. Nonetheless, the fi-nal regulations, like the proposed regula-tions, require reporting the benchmarkpremium that would apply if the coveragefamily included everyone covered underthe plan because individuals for whomadvance credit payments are not mademay claim the premium tax credit on thetax return for the year of coverage andmust know the premium for the applicablebenchmark plan to compute the amount ofthe credit. In lieu of reporting this bench-mark premium, however, Exchanges mayprovide a reasonable method for taxpayersto use to determine at the time of filing thetax return the premium for the applicablebenchmark plan that applies to a coveragefamily.

c. Verification of employmentinformation

For individuals enrolled in a qualifiedhealth plan for which advance credit pay-ments were requested, the proposed regu-lations required Exchanges to report infor-mation on employment, including thename, address, and EIN of each employerof each enrolled individual and whetherthe employer offered minimum essentialcoverage to the extent provided to theExchange. A commenter requested confir-mation that the requirement to report em-ployment information does not obligate

the Exchange to request or verify a tax-payer’s employment information on amonthly basis or otherwise ensure the ac-curacy of the information supplied.

The proposed and final regulations pro-vide that Exchanges must report employ-ment information “to the extent this infor-mation is provided to the Exchange.”Thus, Exchanges must report only em-ployment information provided to the Ex-change and are not obligated to verify theaccuracy, except to the extent required byDepartment of Health and Human Ser-vices regulations. However, if during theyear an enrollee provides updated or cor-rected employment information to an Ex-change, the Exchange must report thatinformation to the IRS in its next monthlyreport. Exchanges must submit correctedmonthly reports for the coverage year byApril 15th following the year of coverage.

d. Annual versus monthly reporting

The proposed regulations required Ex-changes to report certain information tothe IRS annually by January 31 of the yearfollowing the calendar year of coverage.Exchanges must report certain informa-tion on a monthly basis by the 15th of themonth for the previous month and all pre-vious months in that calendar year. Acommenter requested that the final regu-lations delete the amount of the advancecredit payments made on a taxpayer’s be-half each month from the annual report tothe IRS. The commenter suggested thatthe IRS already will have this informationfrom monthly reports.

The final regulations do not adopt thiscomment. The information provided onthe annual report is identical to the infor-mation reported on the statement to indi-viduals, discussed later in this preamble. Itsummarizes for the year the informationsubmitted monthly that taxpayers claim-ing the premium tax credit must have toproperly claim the credit on their returnsand to reconcile the premium tax creditwith advance credit payments. Accord-ingly, the final regulations do not omit thisinformation from the annual report.

e. Family members with enrollments orexemptions at different exchanges

A commenter asked how Exchangeswill identify the members of a tax house-hold if the members enroll in, or receiveminimum essential coverage exemptionsfrom, different Exchanges. The final reg-ulations clarify that an Exchange will re-port only information on enrollments andexemptions at that Exchange. The IRSwill associate information reports frommultiple Exchanges with the appropriatetax return.

f. Multiple families enrolled in onequalified health plan

Under § 1.36B–3(h), if more than onetax family enrolls in a single policy, eachapplicable taxpayer covered by the planmay claim a premium tax credit, com-puted using the applicable percentage,household income, and benchmark planthat applies to that taxpayer. Under thesecircumstances, each applicable taxpayermust have the information specific to thattax family to claim the premium tax crediton the income tax return. Accordingly, thefinal regulations clarify that Exchangeswill report the specified information foreach family enrolled in a qualified healthplan, whether receiving advance creditpayments or not, including multiple fam-ilies submitting a single application or en-rolled in a single qualified health plan.

3. Information Reporting on the SHOP

Commenters asked whether Exchangesmust report information for taxpayers ob-taining health care coverage through aSmall Business Health Options Program(SHOP) Exchange. The final regulationsclarify that section 36B(f)(3) and theseregulations do not require the reporting ofinformation for taxpayers enrolling inhealth care coverage through a SHOP Ex-change. However, under regulations at 45CFR 155.720, SHOP Exchanges will re-port to the IRS information concerningemployer participation, employer contri-bution, and employee enrollment in a timeand format to be determined by the De-partment of Health and Human Services.

May 27, 2014 Bulletin No. 2014–221040

4. Time for Reporting

The proposed regulations required Ex-changes to report certain information tothe IRS on or before the 15th day follow-ing each month of coverage (monthly re-porting), commencing in February, 2014.Commenters requested that the IRS delaythe initial monthly report until June orJuly, 2014, to allow Exchanges sufficienttime to develop the systems and processesnecessary to support the monthly report-ing requirements. In response to thesecomments, the final regulations providethat the Commissioner may establish aninitial monthly reporting date in otherguidance, see § 601.601(d), but no earlierthan June 15, 2014. The report must in-clude cumulative information for enroll-ments for the period January 1 through theend of the month preceding the initialmonthly reporting date. For example, aninitial report due June 15, 2014, must in-clude cumulative information for the pe-riod January 1 to May 31, 2014.

5. Statements Furnished to Individuals

a. Individual receiving the statement

The proposed regulations directed Ex-changes to furnish to each individual whoenrolled one or more family members in aqualified health plan through the Ex-change a written statement that includesthe information the Exchange must reportto the IRS annually. Exchanges may useForm 1095–A for the statement and mustfurnish the statement on or before January31 of the year following the calendar yearof coverage.

The proposed regulations required thatan Exchange furnish a statement only tothe individual who enrolls one or morefamily members through the Exchange.Several commenters indicated that Ex-change regulations allow an individual ap-plying for coverage to designate anotherperson as an authorized representative fordealing with the Exchange on the individ-ual’s behalf. They requested that the finalregulations recognize an individual’s au-thorization of a third person as a represen-tative for Exchange purposes as sufficientauthority to allow Exchanges to providethe statement required under these regula-tions to the authorized representative, or

that the final regulations require Ex-changes to do so. Other commenters askedthat the final regulations accommodatenontraditional family arrangements by al-lowing Exchanges to provide statementsto individuals such as a grandparent ornoncustodial parent who may claim achild as a dependent and would requirethe information on the statement to claimthe premium tax credit for that depen-dent’s coverage.

The final regulations do not prohibitExchanges from providing statements tothird parties if permitted under other law.However, section 36B(f)(3) does not au-thorize the IRS to require Exchanges to doso. In addition, the IRS is not able toprovide statements to third parties basedon authorization to an Exchange becauseinformation obtained pursuant to section36B(f)(3) is return information and, undersection 6103, return information may bedisclosed only under express authority ofthe Code.

Commenters recommended signifi-cantly limiting the information reportedon the statement to protect victims of do-mestic violence and children they enroll incoverage. The final regulations requireExchanges to send statements only to thetax filer or responsible adult whom theExchange identifies. This person is likelyto be the individual enrolling the child incoverage. A person claiming an individualas a dependent who is not identified as atax filer or responsible adult will not re-ceive a statement reporting the depen-dent’s coverage. Therefore, if a victim ofdomestic abuse enrolls, or enrolls a child,in coverage as a tax filer or responsibleadult, the Exchange will send a statementonly to that person, even if another tax-payer claims the child as a dependent. Inaddition, the statement will include an ad-dress only for the person to whom it ismailed. Accordingly, on this issue, thefinal regulations adopt the proposed regu-lations without change.

b. Electronic delivery of statements torecipients

The proposed regulations provided thatstatements to individuals may be sentelectronically only to individuals who af-firmatively consent to the electronic for-mat. Commenters requested that the final

regulations permit electronic delivery ofstatements, paper delivery of statements,or both. Other commenters stated that theelectronic statement rules are too complexand should be simplified.

The final regulations do not prohibit anExchange from sending both paper andelectronic statements to an individual.However, the final regulations retain theelectronic statement procedures in theproposed regulations, which provide foraffirmative consent to receive statementselectronically, and clarify that the consentrequirement is not satisfied if the recipientwithdraws the consent. These proceduresare the same as long-standing proceduresthat also apply in other information re-porting contexts. The procedures are in-tended to ensure that all individuals, in-cluding those who do not have access toor are not fully comfortable with elec-tronic technology, are able to access in-formation necessary to prepare their taxreturns.

The proposed regulations provided thatif an Exchange furnishes a statement to anindividual by mail, the statement must besent to the individual’s last known perma-nent address, or if no permanent address isknown, to a temporary address. A com-menter requested more definitive guid-ance on what constitutes the proper fur-nishing of a statement to an individualwhen the individual does not receive thestatement, for example if the statement isreturned undelivered. The commentersuggested that the final regulations adopt arule that applies to other information re-porting requirements that a first classmailing discharges the reporting entity’sobligation to furnish a statement. To pro-vide more certainty, the final regulationsinclude this rule, which is consistent withother information reporting requirements.

Effective/Applicability Date

These regulations apply to taxableyears ending after December 31, 2013.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It has also been

Bulletin No. 2014–22 May 27, 20141041

determined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and, because the regulations do notimpose a collection of information re-quirement on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section7805(f) of the Code, the notice of pro-posed rulemaking preceding these regula-tions were submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business. The Small Business Ad-ministration did not submit comments.

Drafting Information

The principal authors of these final reg-ulations are Shareen S. Pflanz and StephenJ. Toomey of the Office of AssociateChief Counsel (Income Tax and Account-ing). However, other personnel from theIRS and the Treasury Department partic-ipated in the development of the regula-tions.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Section 1.36B–0 also issued under 26

U.S.C. 36B(g).Section 1.36B–5 also issued under 26

U.S.C. 36B(g).Par. 2. Section 1.36B–0 is amended by

revising the entries for § 1.36B–5 to readas follows:

§ 1.36B–0 Table of Contents

* * * * *

§ 1.36B–5 Information reporting byExchanges.

(a) In general.(b) Individual filing a return.(c) Information required to be reported.(1) Information reported annually.

(2) Information reported monthly.(3) Special rules for information re-

ported.(i) Multiple families enrolled in a sin-

gle qualified health plan.(ii) Alternative to reporting applicable

benchmark plan.(4) Exemptions.(d) Time for reporting.(1) Annual reporting.(2) Monthly reporting.(i) In general.(ii) Initial monthly reporting in 2014.(3) Corrections to information re-

ported.(e) Electronic reporting.(f) Annual statement to be furnished to

individuals.(1) In general.(2) Form of statements.(3) Time and manner for furnishing

statements.(g) Electronic furnishing of statements.(1) In general.(2) Consent.(i) In general.(ii) Withdrawal of consent.(iii) Change in hardware or software

requirements.(iv) Examples.(3) Required disclosures.(i) In general.(ii) Paper statement.(iii) Scope and duration of consent.(iv) Post-consent request for a paper

statement.(v) Withdrawal of consent.(vi) Notice of termination.(vii) Updating information.(viii) Hardware and software require-

ments.(4) Format.(5) Notice.(i) In general.(ii) Undeliverable electronic address.(iii) Corrected statement.(6) Access period.(7) Paper statements after withdrawal

of consent.Par. 3. Section 1.36B–5 is revised to

read as follows:

§ 1.36B–5 Information reporting byExchanges.

(a) In general. An Exchange must re-port to the Internal Revenue Service (IRS)

information required by section 36B(f)(3)and this section relating to individual mar-ket qualified health plans in which indi-viduals enroll through the Exchange. Noreporting is required under this section forenrollment in plans through the SmallBusiness Health Options Exchange.

(b) Individual filing a return. For pur-poses of this section, the terms tax filerand responsible adult describe the indi-vidual who is expected to be the taxpayerfiling an income tax return for the year ofcoverage with respect to individuals en-rolling in a qualified health plan. A taxfiler is an individual on behalf of whomadvance payments of the premium taxcredit are made. A responsible adult is anindividual on behalf of whom advancepayments of the premium tax credit arenot made. An individual may be a tax fileror responsible adult whether or not en-rolled in coverage. If more than one fam-ily (within the meaning of § 1.36B–1(d))enrolls in the same qualified health plan,there is a tax filer or responsible adult foreach family.

(c) Information required to be report-ed—(1) Information reported annually.An Exchange must report to the IRS thefollowing information for each qualifiedhealth

plan—(i) The name, address, and taxpayer

identification number (TIN), or date ofbirth if a TIN is not available, of the taxfiler or responsible adult;

(ii) The name and TIN, or date of birthif a TIN is not available, of a tax filer’sspouse;

(iii) The amount of the advance creditpayments paid for coverage under the planeach month;

(iv) For plans for which advance creditpayments are made, the premium (exclud-ing the premium allocated to benefits inexcess of essential health benefits, see§ 1.36B–3(j)) for the applicable bench-mark plan for purposes of computing ad-vance credit payments;

(v) Except as provided in paragraph(c)(3)(ii) of this section, for plans forwhich advance credit payments are notmade, the premium (excluding the pre-mium allocated to benefits in excess ofessential health benefits, see § 1.36B–3(j))for the applicable benchmark plan thatwould apply to all individuals enrolled in

May 27, 2014 Bulletin No. 2014–221042

the qualified health plan if advance creditpayments were made for the coverage;

(vi) The name and TIN, or date of birthif a TIN is not available, and dates ofcoverage for each individual covered un-der the plan;

(vii) The coverage start and end datesof the qualified health plan;

(viii) The monthly premium for theplan in which the individuals enroll, how-ever —

(A) The premium allocated to benefitsin excess of essential health benefits isexcluded, see § 1.36B–3(j);

(B) The premium for a stand-alonedental plan allocated to pediatric dentalbenefits is added, see § 1.36B–3(k), but ifa family (within the meaning of § 1.36B–1(d)) is enrolled in more than one quali-fied health plan, the pediatric dental pre-mium is added to the premium for onlyone qualified health plan; and

(C) The amount is not reduced for ad-vance credit payments;

(ix) The name of the qualified healthplan issuer;

(x) The Exchange-assigned policyidentification number;

(xi) The Exchange’s unique identifier;and

(xii) Any other information specifiedby forms or instructions or in publishedguidance, see § 601.601(d) of this chapter.

(2) Information reported monthly. Foreach calendar month, an Exchange mustreport to the IRS for each qualified healthplan, the information described in para-graph (c)(1) of this section and the follow-ing information—

(i) For plans for which advance creditpayments are made—

(A) The names, TINs, or dates of birthif no TIN is available, of the individualsenrolled in the qualified health plan whoare expected to be the tax filer’s depen-dent; and

(B) Information on employment (to theextent this information is provided to theExchange) consisting of—

(1) The name, address, and EIN of eachemployer of the tax filer, the tax filer’sspouse, and each individual covered bythe plan; and

(2) An indication of whether an em-ployer offered affordable minimum essen-tial coverage that provided minimumvalue, and, if so, the amount of the em-

ployee’s required contribution for self-only coverage;

(ii) The unique identifying number theExchange uses to report data that enablesthe IRS to associate the data with theproper account from month to month;

(iii) The issuer’s employer identifica-tion number (EIN); and

(iv) Any other information specified byforms or instructions or in published guid-ance, see § 601.601(d) of this chapter.

(3) Special rules for information re-ported—(i) Multiple families enrolled in asingle qualified health plan. An Exchangemust report the information specified inparagraphs (c)(1) and (c)(2) of this sectionfor each family (within the meaning of§ 1.36B–1(d)) enrolled in a qualifiedhealth plan, including families submittinga single application or enrolled in a singlequalified health plan.

(ii) Alternative to reporting applicablebenchmark plan. An Exchange satisfiesthe requirement in paragraph (c)(1)(v) ofthis section if, on or before January 1 ofeach year after 2014, the Exchange pro-vides a reasonable method that a respon-sible adult may use to determine the pre-mium (after adjusting for benefits inexcess of essential health benefits) for theapplicable benchmark plan that applies tothe responsible adult’s coverage familyfor the prior calendar year for purposes ofdetermining the premium tax credit on thetax return.

(4) Exemptions. For each calendarmonth, an Exchange must report to theIRS the name and TIN, or date of birth ifa TIN is not available, of each individualfor whom the Exchange has granted anexemption from coverage under section5000A(e) and the related regulations,the months for which the exemption isin effect, and the exemption certificatenumber.

(d) Time for reporting—(1) Annual re-porting. An Exchange must submit to theIRS the annual report required under para-graph (c)(1) of this section on or beforeJanuary 31 of the year following the cal-endar year of coverage.

(2) Monthly reporting—(i) In general.Except as provided in paragraph (d)(2)(ii)of this section, an Exchange must submitto the IRS the monthly reports requiredunder paragraphs (c)(2) and (c)(4) of this

section on or before the 15th day followingeach month of coverage.

(ii) Initial monthly reporting in 2014.Exchanges must submit to the IRS theinitial monthly report required under para-graphs (c)(2) and (c)(4) of this section ona date that the Commissioner may estab-lish in other guidance, see § 601.601(d) ofthis section, but no earlier than June 15,2014. The initial report must include cu-mulative information for enrollments forthe period January 1, 2014, through thelast day of the month preceding the monthfor submitting the initial monthly report.

(3) Corrections to information re-ported. In general, an Exchange must cor-rect erroneous or outdated monthly-reported information in the next monthlyreport. If the information must be cor-rected after the final monthly submissionon January 15 following the coverageyear, corrections should be submitted bythe 15th day of the month following themonth in which the incorrect informationis identified. However, no monthly reportcorrection is permitted after April 15 fol-lowing the year of coverage. Errors on theannual report must be corrected and re-ported to the IRS and to the individualrecipient identified in paragraph (f) of thissection as soon as possible.

(e) Electronic reporting. An Exchangemust submit the reports to the IRS re-quired under this section in electronic for-mat. The information reported monthlywill be submitted to the IRS through theDepartment of Health and Human Ser-vices.

(f) Annual statement to be furnished toindividuals—(1) In general. An Exchangemust furnish to each tax filer or responsi-ble adult (the recipient for purposes ofparagraphs (f) and (g) of this section) awritten statement showing—

(i) The name and address of the recip-ient and

(ii) The information described in para-graph (c)(1) of this section for the previ-ous calendar year.

(2) Form of statements. A statementrequired under this paragraph (f) may bemade by furnishing to the recipient iden-tified in the annual report either a copy ofthe report filed with the IRS or a substitutestatement. A substitute statement must in-clude the information required to beshown on the report filed with the IRS and

Bulletin No. 2014–22 May 27, 20141043

must comply with requirements in pub-lished guidance (see § 601.601(d)(2) ofthis chapter) relating to substitute state-ments. A reporting entity may use an IRStruncated taxpayer identification numberas the identification number for an indi-vidual in lieu of the identification numberappearing on the corresponding informa-tion report filed with the IRS.

(3) Time and manner for furnishingstatements. An Exchange must furnish thestatements required under this paragraph(f) on or before January 31 of the yearfollowing the calendar year of coverage. Ifmailed, the statement must be sent to therecipient’s last known permanent addressor, if no permanent address is known, tothe recipient’s temporary address. Forpurposes of this paragraph (f)(3), an Ex-change’s first class mailing to the lastknown permanent address, or if no perma-nent address is known, the temporary ad-dress, discharges the Exchange’s require-ment to furnish the statement. AnExchange may furnish the statement elec-tronically in accordance with paragraph(g) of this section.

(g) Electronic furnishing of state-ments—(1) In general. An Exchange re-quired to furnish a statement under para-graph (f) of this section may furnish thestatement to the recipient in an electronicformat in lieu of a paper format. An Ex-change that meets the requirements ofparagraphs (g)(2) through (g)(7) of thissection is treated as furnishing the state-ment in a timely manner.

(2) Consent—(i) In general. A recipi-ent must have affirmatively consented toreceive the statement in an electronic for-mat. The consent may be made electroni-cally in any manner that reasonably dem-onstrates that the recipient is able toaccess the statement in the electronic for-mat in which it will be furnished. Alter-natively, the consent may be made in apaper document that is confirmed elec-tronically.

(ii) Withdrawal of consent. The con-sent requirement of this paragraph (g)(2)is not satisfied if the recipient withdrawsthe consent and the withdrawal takes ef-fect before the statement is furnished. AnExchange may provide that the with-drawal of consent takes effect either onthe date the Exchange receives it or onanother date no more than 60 days later.

The Exchange may provide that a requestby the recipient for a paper statement willbe treated as a withdrawal of consent toreceive the statement in an electronic for-mat. If the Exchange furnishes a statementafter the withdrawal of consent takes ef-fect, the recipient has not consented toreceive the statement in electronic format.

(iii) Change in hardware or softwarerequirements. If a change in the hardwareor software required to access the state-ment creates a material risk that a recipi-ent will not be able to access a statement,an Exchange must, prior to changing thehardware or software, notify the recipient.The notice must describe the revised hard-ware and software required to access thestatement and inform the recipient that anew consent to receive the statement inthe revised electronic format must be pro-vided to the Exchange. After implement-ing the revised hardware and software, theExchange must obtain a new consent orconfirmation of consent from the recipientto receive the statement electronically.

(iv) Examples. The following examplesillustrate the rules of this paragraph (g)(2):

Example 1. Furnisher F sends Recipient R a letterstating that R may consent to receive the statementrequired under section 36B electronically on a website instead of in a paper format. The letter containsinstructions explaining how to consent to receive thestatement electronically by accessing the web site,downloading and completing the consent document,and e-mailing the completed consent to F. The con-sent document posted on the web site uses the sameelectronic format that F will use for the electroni-cally furnished statement. R reads the instructionsand submits the consent in the manner provided inthe instructions. R has consented to receive the state-ment required under section 36B electronically in themanner described in paragraph (g)(2)(i) of this sec-tion.

Example 2. Furnisher F sends Recipient R ane-mail stating that R may consent to receive thestatement required under section 36B electronicallyinstead of in a paper format. The e-mail contains anattachment instructing R how to consent to receivethe statement required under section 36B electroni-cally. The e-mail attachment uses the same elec-tronic format that F will use for the electronicallyfurnished statement. R opens the attachment, readsthe instructions, and submits the consent in the man-ner provided in the instructions. R has consented toreceive the statement required under section 36Belectronically in the manner described in paragraph(g)(2)(i) of this section.

Example 3. Furnisher F posts a notice on its website stating that Recipient R may receive the state-ment required under section 36B electronically in-stead of in a paper format. The web site containsinstructions on how R may access a secure web pageand consent to receive the statements electronically.

R accesses the secure web page and follows theinstructions for giving consent. R has consented toreceive the statement required under section 36Belectronically in the manner described in paragraph(g)(2)(i) of this section.

(3) Required disclosures—(i) In gen-eral. Prior to, or at the time of, a recipi-ent’s consent, an Exchange must provideto the recipient a clear and conspicuousdisclosure statement containing each ofthe disclosures described in paragraphs(g)(3)(ii) through (g)(3)(viii) of thissection.

(ii) Paper statement. An Exchangemust inform the recipient that the state-ment will be furnished on paper if therecipient does not consent to receive itelectronically.

(iii) Scope and duration of consent. AnExchange must inform the recipient of thescope and duration of the consent. Forexample, the Exchange must inform therecipient whether the consent applies toeach statement required to be furnishedafter the consent is given until it is with-drawn or only to the first statement re-quired to be furnished following theconsent.

(iv) Post-consent request for a paperstatement. An Exchange must inform therecipient of any procedure for obtaining apaper copy of the recipient’s statementafter giving the consent described in para-graph (g)(2)(i) of this section and whethera request for a paper statement will betreated as a withdrawal of consent.

(v) Withdrawal of consent. An Ex-change must inform the recipient that—

(A) The recipient may withdraw con-sent by writing (electronically or on pa-per) to the person or department whosename, mailing address, telephone number,and e-mail address is provided in the dis-closure statement;

(B) An Exchange will confirm thewithdrawal and the date on which it takeseffect in writing (either electronically oron paper); and

(C) A withdrawal of consent does notapply to a statement that was furnishedelectronically in the manner described inthis paragraph (g) before the date onwhich the withdrawal of consent takeseffect.

(vi) Notice of termination. An Ex-change must inform the recipient of theconditions under which the Exchange will

May 27, 2014 Bulletin No. 2014–221044

cease furnishing statements electronicallyto the recipient.

(vii) Updating information. An Ex-change must inform the recipient of theprocedures for updating the informationneeded to contact the recipient and notifythe recipient of any change in the Ex-change’s contact information.

(viii) Hardware and software require-ments. An Exchange must provide the re-cipient with a description of the hardwareand software required to access, print, andretain the statement, and the date when thestatement will no longer be available onthe web site. The Exchange must advisethe recipient that the statement may berequired to be printed and attached to aFederal, State, or local income tax return.

(4) Format. The electronic version ofthe statement must contain all requiredinformation and comply with applicablepublished guidance (see § 601.601(d) ofthis chapter) relating to substitute state-ments to recipients.

(5) Notice—(i) In general. If a state-ment is furnished on a web site, the Ex-change must notify the recipient. The no-tice may be delivered by mail, electronicmail, or in person. The notice must pro-vide instructions on how to access andprint the statement and include the follow-ing statement in capital letters, “IMPOR-TANT TAX RETURN DOCUMENTAVAILABLE.” If the notice is providedby electronic mail, this statement must beon the subject line of the electronic mail.

(ii) Undeliverable electronic address.If an electronic notice described in para-graph (g)(5)(i) of this section is returnedas undeliverable, and the Exchange cannotobtain the correct electronic address fromthe Exchange’s records or from the recip-ient, the Exchange must furnish the noticeby mail or in person within 30 days afterthe electronic notice is returned.

(iii) Corrected statement. An Exchangemust furnish a corrected statement to therecipient electronically if the originalstatement was furnished electronically. Ifthe original statement was furnishedthrough a web site posting, the Exchangemust notify the recipient that it has postedthe corrected statement on the web site inthe manner described in paragraph(g)(5)(i) of this section within 30 days ofthe posting. The corrected statement or the

notice must be furnished by mail or inperson if—

(A) An electronic notice of the web siteposting of an original statement or thecorrected statement was returned as unde-liverable; and

(B) The recipient has not provided anew e-mail address.

(6) Access period. Statements fur-nished on a web site must be retained onthe web site through October 15 of theyear following the calendar year to whichthe statements relate (or the first businessday after October 15, if October 15 fallson a Saturday, Sunday, or legal holiday).The furnisher must maintain access to cor-rected statements that are posted on theweb site through October 15 of the yearfollowing the calendar year to which thestatements relate (or the first business dayafter October 15, if October 15 falls on aSaturday, Sunday, or legal holiday) or thedate 90 days after the corrected forms areposted, whichever is later.

(7) Paper statements after withdrawalof consent. An Exchange must furnish apaper statement if a recipient withdrawsconsent to receive a statement electroni-cally and the withdrawal takes effect be-fore the statement is furnished. A paperstatement furnished under this paragraph(g)(7) after the statement due date istimely if furnished within 30 days afterthe date the Exchange receives the with-drawal of consent.

John Dalrymple,Deputy Commissioner

for Services and Enforcement.

Approved: May 1, 2014

Mark J. Mazur,Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 2, 2014,4:15 p.m., and published in the issue of the Federal Registerfor May 7, 2014, 79 F.R. 26113)

Section 67.—2-percentfloor on miscellaneousitemized deductions26 CFR 1.67-4: Costs paid or incurred by estates ornon-grantor trusts.

T.D. 9664

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Limitations on Estates orTrusts

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations that provide guidance onwhich costs incurred by estates or trustsother than grantor trusts (non-grantortrusts) are subject to the 2-percent floorfor miscellaneous itemized deductions un-der section 67(a) of the Internal RevenueCode. These regulations affect estates andnon-grantor trusts.

DATES: Effective Date: These regula-tions are effective on May 9, 2014.

Applicability Date: For date of appli-cability, see § 1.67–4(d).

FOR FURTHER INFORMATIONCONTACT: Jennifer N. Keeney, (202)317-6852 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income TaxRegulations (26 CFR Part 1) under section67 of the Internal Revenue Code (Code)by adding § 1.67–4 regarding which costsincurred by an estate or a non-grantor trustare subject to the 2-percent floor for mis-cellaneous itemized deductions under sec-tion 67(a).

Section 67(a) of the Code providesthat, for an individual taxpayer, miscella-neous itemized deductions are allowedonly to the extent that the aggregate ofthose deductions exceeds 2 percent of ad-justed gross income. Section 67(b) ex-

Bulletin No. 2014–22 May 27, 20141045

cludes certain itemized deductions fromthe definition of “miscellaneous item-ized deductions.” Section 67(e) providesthat, for purposes of section 67, the ad-justed gross income of an estate or trustshall be computed in the same manneras in the case of an individual. However,section 67(e)(1) provides that the deduc-tions for costs paid or incurred in con-nection with the administration of theestate or trust that would not have beenincurred if the property were not held insuch estate or trust shall be treated asallowable in arriving at adjusted grossincome. Therefore, deductions describedin section 67(e)(1) are not subject to the2-percent floor for miscellaneous itemizeddeductions under section 67(a).

A notice of proposed rulemaking(REG–128224–06) was published in theFederal Register (72 FR 41243) on July27, 2007 (the 2007 proposed regulations).The 2007 proposed regulations providedthat a cost is fully deductible to theextent that the cost is unique to an estateor trust. If a cost is not unique to anestate or trust, such that an individualcould have incurred the expense, thenthat cost was subject to the 2-percentfloor. The 2007 proposed regulationsalso addressed costs subject to the2-percent floor that are included as partof a comprehensive fee paid to thetrustee or executor (bundled fees). Writ-ten comments were received in responseto the notice of proposed rulemaking. Apublic hearing was held on November14, 2007, at which several commenta-tors offered comments on the notice ofproposed rulemaking.

On January 16, 2008, the SupremeCourt of the United States issued its deci-sion in Michael J. Knight, Trustee of theWilliam L. Rudkin Testamentary Trust v.Commissioner, 552 U.S. 181, 128 S. Ct.782 (2008), holding that fees paid to aninvestment advisor by an estate or non-grantor trust generally are subject to the2-percent floor for miscellaneous itemizeddeductions under section 67(a). The Courtreached this decision based upon an inter-pretation of section 67(e) that differedfrom the 2007 proposed regulations. TheCourt held that the proper reading of thelanguage in section 67(e), which askswhether the expense “would not havebeen incurred if the property were not

held in such trust or estate,” requires aninquiry into whether a hypothetical indi-vidual who held the same property outsideof a trust “customarily” or “commonly”would incur such expenses. Expenses thatare “customarily” or “commonly” in-curred by individuals are subject to the2-percent floor.

After consideration of the Court’sholding in Knight, the Treasury Depart-ment and the IRS issued Notice 2008–32(2008–11 IRB 593) (March 17, 2008) toprovide interim guidance on the treatmentof bundled fees. Subsequent notices ex-tended the interim guidance. (Notice2008–116 (2008–52 IRB 1372) (Decem-ber 29, 2008); Notice 2010–32 (2010–16IRB 594) (April 19, 2010); Notice2011–37 (2011–20 IRB 785) (May 16,2011)). On September 7, 2011, a notice ofproposed rulemaking and a notice of pub-lic hearing (REG–128224–06) were pub-lished in the Federal Register (76 FR55322) (the 2011 proposed regulations)and the 2007 proposed regulations werewithdrawn.

A public hearing on the 2011 proposedregulations was scheduled for December19, 2011, but later was cancelled becauseno one requested to speak. However, com-ments responding to the 2011 proposedregulations were received. After consider-ation of these comments, the 2011 pro-posed regulations are adopted as revisedby this Treasury decision. These final reg-ulations generally retain the provisions ofthe 2011 proposed regulations with minormodifications.

Summary of Comments andExplanation of Revisions

A. Commonly or Customarily Incurred –In General

The proposed regulations provide thata cost is subject to the 2-percent floor tothe extent that it is included in the defini-tion of miscellaneous itemized deductionsunder section 67(b), is incurred by an es-tate or non-grantor trust, and commonly orcustomarily would be incurred by a hy-pothetical individual holding the sameproperty. To determine whether the costcommonly or customarily would be in-curred by a hypothetical individual own-ing the same property, it is the type ofproduct or service rendered to the estate

or non-grantor trust that is determina-tive. The proposed regulations also pro-vide that costs that do not depend on theidentity of the payor (in particular,whether the payor is an individual or,instead, is an estate or trust) are coststhat are incurred commonly or custom-arily by individuals.

One commentator stated that treatingcosts that do not depend on the identity ofthe payor as costs that are commonly orcustomarily incurred in all cases is overlybroad, and that such treatment effec-tively represents a disguised reassertionof the standard rejected by Knight ofmaking the 2-percent floor applicable toany expense that could be incurred by anindividual. In response to this comment,the final regulations remove the refer-ence to costs that do not depend on theidentity of the payor.

B. Ownership costs

The proposed regulations provide that,for purposes of section 67(e), ownershipcosts are costs that are commonly or cus-tomarily incurred by a hypothetical indi-vidual owner of such property. Therefore,ownership costs are subject to the2-percent floor. The proposed regulationsdefine ownership costs as costs that arechargeable to or incurred by an owner ofproperty simply by reason of being theowner of the property, such as condomin-ium fees, real estate taxes, insurance pre-miums, maintenance and lawn services,automobile registration and insurancecosts, and partnership costs deemed to bepassed through to and reportable by apartner. One commentator suggested thatthe final regulations adopt a rebuttablepresumption that ownership costs are notsubject to the 2-percent floor. The finalregulations do not adopt this commentbecause the Treasury Department and theIRS believe that ownership costs are coststhat commonly or customarily would beincurred by a hypothetical individualholding the same property, and accord-ingly, should be subject to the 2-percentfloor.

Several commentators stated that theexamples used to illustrate ownershipcosts in the proposed regulations are prob-lematic. First, commentators correctlypointed out that real estate taxes are not a

May 27, 2014 Bulletin No. 2014–221046

miscellaneous itemized deduction becausethey are fully deductible under section62(a)(4) or section 164(a). Second, com-mentators suggested that the final regu-lations clarify that costs incurred in con-nection with a trade or business or forthe production of rents or royalties arefully deductible under section 162 orsection 62(a)(4) and thus are not miscel-laneous deductions. Third, a commenta-tor requested that the final regulationsclarify that the partnership costs report-able by a partner are subject to the2-percent floor only if those costs aremiscellaneous itemized deductions un-der section 67(b). Thus, for example, apartnership cost that is fully deductibleis not subject to the 2-percent floor.The final regulations adopt these clari-fications.

C. Tax Return Preparation Costs

The proposed regulations provide thatthe application of the 2-percent floor tothe cost of preparing tax returns on behalfof the estate, decedent, or non-grantortrust will depend upon the particular taxreturn. The proposed regulations providethat all costs of preparing estate andgeneration-skipping transfer tax returns,fiduciary income tax returns, and the de-cedent’s final individual income tax re-turns are not subject to the 2-percent floor.However, the proposed regulations alsoprovide that costs of preparing other indi-vidual income tax returns, gift tax returns,and tax returns for a sole proprietorship ora retirement plan, for example, are costscommonly and customarily incurred byindividuals and thus are subject to the2-percent floor.

Several commentators pointed out thatit would be very rare for a trust to pay forthe preparation of the tax return of anindividual other than the decedent. In theunlikely event that it did, such a costwould either be a deemed beneficiarydistribution or would represent a breachof fiduciary duty. Furthermore, tax prep-aration fees for sole proprietorships andretirement plans would be fully deduct-ible as business expenses under section162.

To resolve these ambiguities in theproposed regulations, the final regulationsprovide an exclusive list of tax return

preparation costs that are not subject tothe 2-percent floor. Any other tax returnpreparation cost that is included in thedefinition of miscellaneous itemized de-duction under section 67(b) is subject tothe 2-percent floor.

A few commentators suggested that thefinal regulations should expressly pro-vide that the cost of preparing all gift taxreturns should be exempt from the ap-plication of the 2-percent floor. How-ever, gifts are made by individuals, andthe gift tax returns required to reportthose gifts are commonly and customar-ily required to be prepared and filed byor on behalf of individuals. Therefore,the final regulations do not adopt therecommendation to include gift tax re-turns within the category of returnswhose preparation costs are exemptfrom the 2-percent floor.

D. Investment advisory fees

The proposed regulations provide thatfees for investment advice (including anyrelated services that would be provided toany individual investor as part of an in-vestment advisory fee) are incurred com-monly or customarily by a hypotheticalindividual investor and, therefore, are sub-ject to the 2-percent floor. The proposedregulations also provide guidance regard-ing a special type of investment advicediscussed by the Supreme Court inKnight. The Court noted that it is conceiv-able “that a trust may have an unusualinvestment objective, or may require aspecialized balancing of the interests ofvarious parties, such that a reasonablecomparison with individual investorswould be improper.” The Court furtherstated that, “in such a case, the incremen-tal cost of expert advice beyond whatwould normally be required for the ordi-nary taxpayer would not be subject to the2-percent floor.”

The proposed regulations provide that,to the extent that a portion (if any) of aninvestment advisory fee exceeds the feegenerally charged to an individual inves-tor, and that excess is attributable to anunusual investment objective of the trustor estate or to a specialized balancing ofthe interests of various parties such that areasonable comparison with individual in-vestors would be improper, that excess is

not subject to the 2-percent floor. Thepreamble to the proposed regulations ex-plained that individual investors com-monly have investment objectives thatmay require a balancing between invest-ing for income and investing for growthand/or a specialized approach for particu-lar assets. The preamble requested com-ments on the types of incremental charges,as described in this paragraph, that may beincurred by trusts or estates, as well as aspecific description and rationale for anysuch charges. No response to this requestwas received, and the final regulationsretain this provision as proposed.

E. Appraisal Fees and Certain OtherFiduciary Expenses

One commentator suggested that thefinal regulations include appraisal fees in-curred by an estate or trust as a categoryof expense that is not subject to the2-percent floor. Although individualscommonly or customarily would have as-sets appraised, estates and non-grantortrusts are required to undertake valuationsfor the maintenance and administration ofthese entities that an individual would notundertake. For example, Form 5227,“Split-Interest Trust Information Return”,requires taxpayers to determine the fairmarket value of the trust’s assets for eachtaxable year.

Accordingly, in response to these com-ments, the final regulations expressly pro-vide that certain appraisal fees incurred byan estate or non-grantor trust are not sub-ject to the 2-percent floor. Those appraisalfees are for appraisals needed to deter-mine value as of the decedent’s date ofdeath (or the alternate valuation date), todetermine value for purposes of makingdistributions, or as otherwise required toproperly prepare the estate’s or trust’s taxreturns. Appraisals for these purposes arenot customarily obtained by individuals(unlike, for example, appraisals to deter-mine the proper amount of insuranceneeded on certain property) and thus meetthe requirements for exemption from the2-percent floor under section 67(e).

One commentator requested confirma-tion of the inapplicability of the 2-percentfloor to certain other fiduciary expenses.The final regulations contain such a state-ment with regard to some examples of

Bulletin No. 2014–22 May 27, 20141047

fiduciary expenses that are not commonlyor customarily incurred by individuals.

F. Bundled Fees

The proposed regulations provide thata bundled fee (generally, a fee for bothcosts that are subject to the 2-percent floorand costs that are not) must be allocatedbetween those two categories of costs.However, the proposed regulations pro-vide an exception to this allocation re-quirement for a bundled fee that is notcomputed on an hourly basis. Specifically,for such a fee, only the portion attributableto investment advice (including any re-lated services that would be provided toany individual investor as part of the in-vestment advisory fee) will be subject tothe 2-percent floor. Notwithstanding thisexception, payments made to third partiesout of the bundled fee that would havebeen subject to the 2-percent floor if theyhad been paid directly by the estate ornon-grantor trust, and any payments forexpenses separately assessed by the fidu-ciary or other service provider that arecommonly or customarily incurred by anindividual owner of such property will besubject to the 2-percent floor.

The proposed regulations contain anexample to illustrate a type of expensethat is separately assessed: an additionalfee charged by the fiduciary for managingrental real estate owned by the estate ornon-grantor trust. Several commentatorscorrectly noted that the expense in thisexample is not a miscellaneous itemizeddeduction, but is instead fully deductible.See sections 62(a)(4), 212, and 611.Therefore, the final regulations delete thisexample.

Most commentators objected to the re-quirement that a fiduciary commission beunbundled. They recommended that a sin-gle fiduciary commission that is not com-puted on an hourly basis, or otherwiseseparately stated, be entirely exempt fromthe 2-percent floor. The primary reasonthat commentators gave for this recom-mendation is the administrative difficultyand burden of the required calculationsand recordkeeping. At least one commen-tator, however, acknowledged that unbun-dling a fiduciary commission is appropri-ate to provide the same tax treatment to

the same expenses, regardless of howthose expenses are billed.

Commentators also challenged the reg-ulatory authority to require this unbun-dling, arguing that there is no statutoryambiguity with regard to a fiduciary com-mission and thus no authority to apply the2-percent floor to any portion of that com-mission.

The Treasury Department and IRS be-lieve the authority to unbundle rests withthe authority to define expenses that“would not have been incurred if the prop-erty were not held in such trust or estate.”Consistent with the Knight decision, thesefinal regulations interpret this statutoryexception to the 2-percent floor to capturethose expenses that would not commonlyor customarily be incurred by an individ-ual. In identifying these expenses, theKnight Court specifically recognized thatunbundling may be required in the case ofinvestment advisory fees, the costs ofwhich exceed the costs charged to an in-dividual investor and which are incurredeither because the investment advice isbeing rendered to a fiduciary or because ofan unusual investment objective or theneed for a specialized balancing of inter-ests of various parties. The final regula-tions adopt this reasoning and, consistentwith the Knight decision, provide that theportion of such a fee in excess of whatwould have been charged to an individualinvestor may be exempt from the2-percent floor. Based upon the Knightdecision and the authority to promulgateinterpretative regulations, the TreasuryDepartment and IRS believe that the finalregulations are within the scope of regu-latory authority.

The Treasury Department and IRS alsobelieve that retaining the unbundling re-quirement in the final regulations is appro-priate because it provides equitable taxtreatment to similarly situated taxpayers.Taxpayers that pay investment fees to athird-party investment advisor and thosethat pay investment fees as part of a bun-dled fee should receive similar tax treat-ment.

The Treasury Department and IRS alsobelieve that the limitations to the unbun-dling requirement reduce administrativeburdens. For example, a fiduciary fee, anattorney’s fee, or an accountant’s fee thatis not computed on an hourly basis is fully

deductible except for (i) amounts alloca-ble to investment advice; (ii) amountspaid out of the bundled fee by the fidu-ciary to third parties if those amountswould have been subject to the 2-percentfloor if they had been paid directly by thenon-grantor estate or trust; and (iii)amounts that are separately assessed (inaddition to the usual or basic fiduciary feeor commission) by the fiduciary or otherservice provider that are commonly orcustomarily incurred by an individualowner of such property. Because the lattertwo categories relate to amounts that aretraceable to separate payments, the Trea-sury Department and IRS believe that theadministrative burden associated withsubjecting these amounts to the 2-percentfloor is insubstantial.

Furthermore, where amounts are allo-cable to investment advice but are nottraceable to separate payments, the finalregulations retain the flexibility of allow-ing the use of any reasonable method tomake the allocation to investment advice.The Treasury Department and the IRS be-lieve that the availability of any reason-able method mitigates administrative bur-den. However, to provide additionalguidance, these final regulations providenon-exclusive factors to further reduce ad-ministrative burden for both taxpayers andthe IRS.

In the preamble to the proposed regu-lations, the Treasury Department and theIRS requested comments on the types ofmethods for making a reasonable alloca-tion to investment advice, including pos-sible factors on which a reasonable allo-cation is most likely to be based, and onthe related substantiation needed to satisfythe reasonable method standard. TheTreasury Department and the IRS re-ceived only one comment in response tothis request, which explained that there isno single standard that could be applied tomultiple trusts or even to the same trust indifferent years.

In finalizing these regulations, theTreasury Department and the IRS recon-sidered comments received in response toNotice 2008–32. Although some com-ments supported a percentage safe harbor,the percentages suggested assumed thatall fees that are customarily incurred byindividuals (and not just investment advi-sory fees) would be required to be unbun-

May 27, 2014 Bulletin No. 2014–221048

dled. For this reason, the percentages thatwere suggested are not readily applied tothe framework of the final regulations.The final regulations, however, permit theTreasury Department and the IRS to pro-vide safe harbors in future published guid-ance.

Effective/Applicability Date

The final regulations apply to taxableyears beginning on or after May 9, 2014.

Availability of IRS Documents

The IRS notices cited in this preambleare available at www.irs.gov.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because these regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking thatpreceded these regulations was submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business, andno comments were received.

Drafting Information

The principal author of these regula-tions is Jennifer N. Keeney, Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the Treasury Departmentand the IRS participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended 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 * * *Par. 2. Section 1.67–4 is added to read

as follows:

§ 1.67–4 Costs paid or incurred byestates or non-grantor trusts.

(a) In general. Section 67(e) providesan exception to the 2-percent floor on mis-cellaneous itemized deductions for coststhat are paid or incurred in connectionwith the administration of an estate or atrust not described in § 1.67–2T(g)(1)(i) (anon-grantor trust) and that would not havebeen incurred if the property were notheld in such estate or trust. A cost issubject to the 2-percent floor to the extentthat it is included in the definition of mis-cellaneous itemized deductions under sec-tion 67(b), is incurred by an estate ornon-grantor trust, and commonly or cus-tomarily would be incurred by a hypothet-ical individual holding the same property.

(b) “Commonly” or “Customarily” In-curred—(1) In general. In analyzing acost to determine whether it commonly orcustomarily would be incurred by a hypo-thetical individual owning the same prop-erty, it is the type of product or servicerendered to the estate or non-grantor trustin exchange for the cost, rather than thedescription of the cost of that product orservice, that is determinative. In additionto the types of costs described as com-monly or customarily incurred by individ-uals in paragraphs (b)(2), (3), (4), and (5)of this section, costs that are incurredcommonly or customarily by individualsalso include, for example, costs incurredin defense of a claim against the estate, thedecedent, or the non-grantor trust that areunrelated to the existence, validity, or ad-ministration of the estate or trust.

(2) Ownership costs. Ownership costsare costs that are chargeable to or incurredby an owner of property simply by reasonof being the owner of the property. Thus,for purposes of section 67(e), ownershipcosts are commonly or customarily in-curred by a hypothetical individual ownerof such property. Such ownership costsinclude, but are not limited to, partnershipcosts deemed to be passed through to and

reportable by a partner if these costs aredefined as miscellaneous itemized deduc-tions pursuant to section 67(b), condomin-ium fees, insurance premiums, mainte-nance and lawn services, and automobileregistration and insurance costs. Other ex-penses incurred merely by reason of theownership of property may be fully de-ductible under other provisions of theCode, such as sections 62(a)(4), 162, or164(a), which would not be miscellaneousitemized deductions subject to section67(e).

(3) Tax preparation fees. Costs relatingto all estate and generation-skipping trans-fer tax returns, fiduciary income tax re-turns, and the decedent’s final individualincome tax returns are not subject to the2-percent floor. The costs of preparing allother tax returns (for example, gift taxreturns) are costs commonly and custom-arily incurred by individuals and thus aresubject to the 2-percent floor.

(4) Investment advisory fees. Fees forinvestment advice (including any relatedservices that would be provided to anyindividual investor as part of an invest-ment advisory fee) are incurred com-monly or customarily by a hypotheticalindividual investor and therefore are sub-ject to the 2-percent floor. However, cer-tain incremental costs of investment ad-vice beyond the amount that normallywould be charged to an individual inves-tor are not subject to the 2-percent floor.For this purpose, such an incremental costis a special, additional charge that is addedsolely because the investment advice isrendered to a trust or estate rather than toan individual or attributable to an unusualinvestment objective or the need for aspecialized balancing of the interests ofvarious parties (beyond the usual balanc-ing of the varying interests of current ben-eficiaries and remaindermen) such that areasonable comparison with individual in-vestors would be improper. The portionof the investment advisory fees not sub-ject to the 2-percent floor by reason ofthe preceding sentence is limited to theamount of those fees, if any, that ex-ceeds the fees normally charged to anindividual investor.

(5) Appraisal fees. Appraisal fees in-curred by an estate or a non-grantor trustto determine the fair market value of as-sets as of the decedent’s date of death (or

Bulletin No. 2014–22 May 27, 20141049

the alternate valuation date), to determinevalue for purposes of making distribu-tions, or as otherwise required to properlyprepare the estate’s or trust’s tax returns,or a generation-skipping transfer tax re-turn, are not incurred commonly or cus-tomarily by an individual and thus are notsubject to the 2-percent floor. The cost ofappraisals for other purposes (for exam-ple, insurance) is commonly or customar-ily incurred by individuals and is subjectto the 2-percent floor.

(6) Certain Fiduciary Expenses. Cer-tain other fiduciary expenses are not com-monly or customarily incurred by individ-uals, and thus are not subject to the2-percent floor. Such expenses includewithout limitation the following: probatecourt fees and costs; fiduciary bond pre-miums; legal publication costs of noticesto creditors or heirs; the cost of certifiedcopies of the decedent’s death certificate;and costs related to fiduciary accounts.

(c) Bundled fees—(1) In general. If anestate or a non-grantor trust pays a singlefee, commission, or other expense (suchas a fiduciary’s commission, attorney’sfee, or accountant’s fee) for both costs thatare subject to the 2-percent floor and costs(in more than a de minimis amount) that arenot, then, except to the extent provided oth-erwise by guidance published in the InternalRevenue Bulletin, the single fee, commis-sion, or other expense (bundled fee) must beallocated, for purposes of computing theadjusted gross income of the estate or non-grantor trust in compliance with section67(e), between the costs that are subject tothe 2-percent floor and those that are not.

(2) Exception. If a bundled fee is notcomputed on an hourly basis, only theportion of that fee that is attributable toinvestment advice is subject to the2-percent floor; the remaining portion isnot subject to that floor.

(3) Expenses Not Subject to Allocation.Out-of-pocket expenses billed to the es-tate or non-grantor trust are treated asseparate from the bundled fee. In addition,payments made from the bundled fee tothird parties that would have been subjectto the 2-percent floor if they had been paiddirectly by the estate or non-grantor trustare subject to the 2-percent floor, as areany fees or expenses separately assessedby the fiduciary or other payee of thebundled fee (in addition to the usual or

basic bundled fee) for services rendered tothe estate or non-grantor trust that arecommonly or customarily incurred by anindividual.

(4) Reasonable Method. Any reason-able method may be used to allocate abundled fee between those costs that aresubject to the 2-percent floor and thosecosts that are not, including without limi-tation the allocation of a portion of a fi-duciary commission that is a bundled feeto investment advice. Facts that may beconsidered in determining whether an al-location is reasonable include, but are notlimited to, the percentage of the value of thecorpus subject to investment advice,whether a third party advisor would havecharged a comparable fee for similar advi-sory services, and the amount of the fidu-ciary’s attention to the trust or estate that isdevoted to investment advice as comparedto dealings with beneficiaries and distribu-tion decisions and other fiduciary functions.The reasonable method standard does notapply to determine the portion of the bun-dled fee attributable to payments made tothird parties for expenses subject to the2-percent floor or to any other separatelyassessed expense commonly or customarilyincurred by an individual, because thosepayments and expenses are readily identifi-able without any discretion on the part of thefiduciary or return preparer.

(d) Effective/applicability date. Thissection applies to taxable years beginningon or after May 9, 2014.

§ 1.67–4T [Removed]

Par. 3. Section 1.67–4T is removed.

John DalrympleDeputy Commissioner for

Services and Enforcement.

Approved: April 1, 2014

Mark J. MazurAssistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 8, 2014,8:45 a.m., and published in the issue of the Federal Registerfor May 9, 2014, 79 F.R. 26616)

Section 402.— Taxabilityof Beneficiary ofEmployee’s Trust

T.D. 9665DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Tax Treatment of QualifiedRetirement Plan Payment ofAccident or Health InsurancePremiums

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains fi-nal regulations clarifying the rules re-garding the tax treatment of paymentsby qualified retirement plans for acci-dent or health insurance. The final reg-ulations set forth the general rule undersection 402(a) that amounts held in aqualified plan that are used to pay acci-dent or health insurance premiums aretaxable distributions unless described incertain statutory exceptions. The finalregulations do not extend this result toarrangements under which amounts areused to pay premiums for disability in-surance that replaces retirement plancontributions in the event of a partici-pant’s disability. These regulations af-fect sponsors, administrators, partici-pants, and beneficiaries of qualifiedretirement plans.

DATES: Effective Date: These regula-tions are effective on May 12, 2014.

Applicability Date: These regulationsgenerally apply for taxable years that be-gin on or after January 1, 2015. However,taxpayers may elect to apply the regula-tions to earlier taxable years. See the“Effective/Applicability Dates” sectionin this preamble for additional informa-tion regarding the applicability of theseregulations.

FOR FURTHER INFORMATIONCONTACT: Michael P. Brewer or LausonC. Green at (202) 317-6700 (not a toll-freenumber).

May 27, 2014 Bulletin No. 2014–221050

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 1 under section 402(a) ofthe Internal Revenue Code (Code), as wellas conforming amendments under sec-tions 72, 105, 106, 401, 402(c), 403(a),and 403(b).

Section 104(a)(3) provides, in general,that gross income does not includeamounts received through accident orhealth insurance (or through an arrange-ment having the effect of accident orhealth insurance) for personal injuries orsickness. This exclusion does not applyto amounts attributable to (and not inexcess of) deductions allowed undersection 213 for any prior taxable year, orto other amounts received by an em-ployee to the extent the amounts eitherare attributable to contributions by theemployer that were not includible in thegross income of the employee or arepaid by the employer.

Section 105(a) provides that, except asotherwise provided, amounts receivedby an employee through accident orhealth insurance for personal injuries orsickness are included in gross income tothe extent the amounts (1) are attribut-able to contributions by the employerthat were not includible in the grossincome of the employee or (2) are paidby the employer.

Section 105(b) generally provides that,except in the case of amounts attributableto deductions allowed under section 213for any prior taxable year, gross incomedoes not include amounts referred to insection 105(a) if the amounts are paid,directly or indirectly, to the taxpayer toreimburse the taxpayer for expenses in-curred by the taxpayer for the medicalcare of the taxpayer and his or herspouse or dependents (as defined in sec-tion 152, determined without regard toparagraphs (b)(1), (b)(2), and (d)(1)(B)thereof) and any child (as defined insection 152(f)(1)) of the taxpayer whoas of the end of the taxable year has notattained age 27.

Section 106(a) provides that, except asotherwise provided, the gross income of

an employee does not include employer-provided coverage under an accident orhealth plan. Section 1.106 –1 of the In-come Tax Regulations provides that thegross income of an employee does notinclude contributions that the employermakes to “an accident or health plan forcompensation (through insurance or oth-erwise) to the employee for personalinjuries or sickness incurred” by the em-ployee or the employee’s spouse ordependents.

For purposes of the Code, section7702B(a) treats a qualified long-term careinsurance contract as an accident andhealth insurance contract, and a plan of anemployer providing coverage under aqualified long-term care insurance con-tract as an accident and health plan withrespect to that coverage.

Section 213 generally allows a deduc-tion for expenses paid during the taxableyear, not compensated for by insurance orotherwise, for medical care of the tax-payer and the taxpayer’s spouse and de-pendents, to the extent that the expensesexceed 10 percent of the taxpayer’s ad-justed gross income.1 Section 213(d)(1)provides that the term “medical care” in-cludes amounts paid for insurance cover-ing medical care (including eligible long-term care premiums with respect toqualified long-term care insurance con-tracts).

Section 401(a) sets forth requirementsfor a trust forming part of a pension,profit-sharing, or stock bonus plan to bequalified under section 401(a).

Section 401(h) provides that a pensionor annuity plan may provide for the pay-ment of benefits for sickness, accident,hospitalization, and medical expenses ofretired employees, their spouses and theirdependents only if certain enumeratedconditions are met. Those conditions in-clude: (1) the aggregate actual contribu-tions for medical benefits (when added toactual contributions for life insurance pro-tection under the plan) may not exceed 25percent of the total actual contributions tothe plan (other than contributions to fundpast service credits) after the date onwhich the account is established; (2) aseparate account must be established andmaintained for such benefits; (3) the em-

ployer’s contributions to the separate ac-count must be reasonable and ascertain-able; (4) it must be impossible, at any timeprior to the satisfaction of all liabilitiesunder the plan to provide such benefits,for any part of the corpus or income ofsuch separate account to be (within thetaxable year or thereafter) used for, ordiverted to, any purpose other than theproviding of such benefits; (5) any amountremaining after satisfaction of all liabili-ties must, under the terms of the plan, bereturned to the employer; and (6) speciallimitations for the accounts of key em-ployees (as defined in section 401(h))must be satisfied.

Section 402(a) provides, in general,that any amount actually distributed by aqualified plan is taxable under section 72in the taxable year in which distributed.

Section 72(a) provides that, except asotherwise provided, gross income in-cludes any amount received as an annuity(whether for a period certain or during oneor more lives) under an annuity, endow-ment, or life insurance contract. Sections72(d) and (e), which apply to anyamount received as an annuity and anyamount not received as an annuity, re-spectively, provide rules for determin-ing the portion of any distribution that isnot includable in gross income as a re-covery of a participant’s investment inthe contract (generally the amount of theunrecovered after-tax employee contri-butions) under a qualified employer re-tirement plan.

Section 402(l) provides a limited ex-clusion from gross income for distribu-tions from an eligible retirement plan usedto pay health or long-term care insurancepremiums of an eligible retired publicsafety officer to the extent that the aggre-gate amount of the distributions for thetaxable year is not in excess of the quali-fied health insurance premiums of the re-tired public safety officer and his or herspouse or dependents. The total amountexcluded from gross income pursuant tosection 402(l) is limited to $3,000.

Section 1.72–15 provides rules relatingto the tax treatment of amounts paid froman employer-established plan to whichsection 72 applies and which provides fordistributions of accident or health benefits.

1The 7.5 percent threshold applicable before 2013 continues to apply through 2016 for individuals age 65 and older. See section 213(f).

Bulletin No. 2014–22 May 27, 20141051

With respect to benefits that are attribut-able to employer contributions, § 1.72–15(d) provides that any amount receivedas an accident or health benefit is includ-ible in gross income, except to the extentexcludable from gross income under sec-tion 105(b) (relating to reimbursements ofmedical care expenses as defined in sec-tion 213(d)).2 Section 1.72–15(e) providesthat the taxability of benefits that are notaccident or health benefits is determinedunder section 72 without regard to anyexclusion under section 104 or 105.

Section 1.401–1(b)(1)(i) provides thata plan is not a pension plan within themeaning of section 401(a) if it providesfor the payment of benefits not customar-ily included in a pension plan, such aslayoff benefits or benefits for sickness,accident, hospitalization, or medical ex-penses (except for medical benefits de-scribed in section 401(h)).

Section 1.401–1(b)(1)(ii) provides thata profit-sharing plan within the meaningof section 401(a) is primarily a plan ofdeferred compensation, but that amountsallocated to the account of a participantmay be used to provide incidental life oraccident or health insurance for the par-ticipant and the participant’s family. Sec-tion 1.401–1(b)(1)(iii) provides that astock bonus plan is a plan established andmaintained by the employer to providebenefits similar to those of a profit-sharingplan.

Rev. Rul. 61–164 (1961–2 CB 99) (see§ 601.601(d)(2)(ii)(b)) holds that a profit-sharing plan does not violate the inciden-tal benefit rule in § 1.401–1(b)(1)(ii)merely because, in accordance with theplan’s terms, each participant’s accountunder the plan is charged with the cost ofhealth insurance for the participant undergroup hospitalization insurance for theemployer’s employees, provided that thetotal amount used for life or accident orhealth insurance for the employee and theemployee’s family is incidental. The rul-ing also holds that the use of profit-sharing plan funds to pay for medical in-surance for a participant and his or herbeneficiary is a distribution within themeaning of section 402.

Rev. Rul. 73–501 (1973–2 CB 127)(see § 601.601(d)(2)(ii)(b)) applies the in-cidental benefit rule to the purchase of lifeinsurance by a profit-sharing plan. Theruling states that “[u]nder a qualifiedprofit-sharing plan, the use of trust fundsto pay the cost of life, accident, or healthinsurance for an employee is a distributionwithin the purview of section 402 of theCode.”

Rev. Rul. 2003–62 (2003–1 CB 1034)holds that amounts distributed from aqualified retirement plan that the distribu-tee elects to have applied to pay healthinsurance premiums under a cafeteria planare includible in the distributee’s grossincome. The ruling also holds that thesame conclusion applies if amounts dis-tributed from the plan are applied directlyto reimburse medical care expenses in-curred by a participant.

Rev. Rul. 2005–55 (2005–2 CB 284)holds that a profit-sharing plan that pro-vides a sub-account that permits distribu-tions only for the purpose of reimbursingthe participant for substantiated medicalexpenses imposes conditions on the enti-tlement of the participant to amounts heldin the sub-account and, as a result of theconditions, does not meet the nonforfeit-ability requirements of section 411.

Proposed regulations (REG–148393–06) under section 402(a) (proposed regu-lations) were published by the TreasuryDepartment and the IRS in the FederalRegister on August 20, 2007 (72 FR46421). Corrections to the proposed reg-ulations were published in Announcement2007–98 (2007–2 CB 896). The TreasuryDepartment and the IRS received writtencomments on the proposed regulationsand a public hearing was held on Decem-ber 6, 2007.

After consideration of the commentsreceived in response to the proposedregulations, these final regulations gen-erally adopt the provisions of the pro-posed regulations with certain modifica-tions as described under the heading“Summary of Comments and Explana-tion of Provisions.”

Summary of Comments andExplanation of Provisions

General Treatment of Accident orHealth Insurance

Consistent with the proposed regula-tions, the final regulations clarify that apayment from a qualified plan for an ac-cident or health insurance premium gen-erally constitutes a distribution under sec-tion 402(a) that is taxable to thedistributee under section 72 in the taxableyear in which the premium is paid. Thetaxable amount generally equals theamount of the premium charged againstthe participant’s benefits under the plan. Ifa defined contribution plan pays these pre-miums from a current year contribution orforfeiture that has not been allocated to aparticipant’s account, then the amount ofthe premium for each participant will betreated as first being allocated to the par-ticipant and then charged against the par-ticipant’s benefits under the plan. There-fore, the payment of an accident or healthplan premium from unallocated contribu-tions or forfeitures also will constitute adistribution to the participant under sec-tion 402(a) that is taxable under section 72in the taxable year in which the premiumis paid.

Like the proposed regulations, theseregulations provide that a distribution forthe payment of the premiums by a quali-fied plan generally is not excluded fromgross income under sections 104, 105, or106. However, the distribution may con-stitute a payment for medical care undersection 213. Furthermore, to the extentthat the payment of premiums for accidentor health insurance has been treated as adistribution from a qualified plan,amounts received through the accident orhealth insurance for personal injuries orsickness are excludable from gross in-come under section 104(a)(3) and are nottreated as distributions from the plan.

The general rule that the payment of anaccident and health insurance premiumfrom a qualified plan constitutes a distri-bution that is taxable under section 402does not apply if another statutory provi-sion provides for a different result. For

2Section 1.72–15(d) also refers to benefits excludible under section 105(c) (relating to certain payments unrelated to absence from work) or section 105(d), which was repealed in 1983 (andwhich related to certain disability payments).

May 27, 2014 Bulletin No. 2014–221052

example, section 402(l) provides an exclu-sion from gross income, up to $3,000 an-nually, for distributions paid directly to aninsurer to purchase accident or health in-surance or qualified long-term care insur-ance for an eligible retired public safetyofficer and his or her spouse or depen-dents. A similar exclusion applies formedical benefits for retired employeesprovided from an account described insection 401(h).

In accordance with these regulations,as with the proposed regulations, if a pay-ment of a premium for accident or healthinsurance is treated as a distribution fromthe trust, then the insurance contractwould not be treated as an investmentunder which the insurer’s payments to thetrust are treated as a return on that invest-ment. As a result, payments from such acontract that are made to the trust (ratherthan made to the medical service provideror the participant as reimbursement forcovered expenses) are treated as havingbeen made to the participant and then con-tributed by the participant to the plan.

Special Rule for Disability InsuranceCoverage

The preamble to the proposed regula-tions requested comments on whetherthere should be limited exceptions to thegeneral rule in the proposed regulations,including whether there should be an ex-ception for a provision that has the effectof a waiver of premium in the case ofdisability. All of the commenters that ad-dressed the issue of payment of premiumsfor disability insurance from a plan rec-ommended an exception for disability in-surance arrangements that replace retire-ment plan contributions, describing thesearrangements as having the same effect asa waiver of premiums in the case of dis-ability. For example, commenters de-scribed an employer’s general disabilityprogram that not only provides for wagereplacement, but also provides for the pur-chase of insurance to make payments to aqualified plan in the event of a partici-pant’s disability that are intended to re-place the contributions that would havebeen made if the participant was not dis-abled. These commenters requested thatthe regulations provide that a participantnot be currently taxable on the premiums

paid by the plan for this type of disabilitycoverage. Similarly, they recommendedthe participant not be taxed when pay-ments from the disability insurance con-tract are allocated to the participant’s ac-count after the participant becomesdisabled. These comments pointed outthat the payments would be taxable whenbenefits are ultimately distributed fromthe plan.

The Treasury Department and the IRSagree that the purchase of this type ofdisability coverage by a qualified plan isdistinguishable from the purchase of med-ical insurance by a plan because the func-tional purpose of the disability insurancecoverage is to replace retirement contribu-tions to the plan, instead of providingmedical benefits outside of the plan. Ac-cordingly, these final regulations providean exception for the payment of disabilityinsurance premiums from a qualifiedplan if the insurance contract providesfor payment of benefits to be made tothe trust in the event of an employee’sinability to continue employment withthe employer due to disability, providedthat the payment of benefits with respectto an employee’s account does not ex-ceed the reasonable expectation of theannual contributions that would havebeen made to the plan on the employee’sbehalf during the period of disability, re-duced by any other contributions made onthe employee’s behalf for the period ofdisability within the year. For example,under this standard, the payment of bene-fits with respect to an employee’s accountmay increase to reflect reasonably ex-pected future salary increases. To the ex-tent these conditions are satisfied, the in-surance does not constitute a distributionto which section 402(a) applies and in-stead will be treated as any other planinvestment. However, if the insurancecontract provides for payment of benefitsthat exceed the reasonable expectation ofthe annual contributions that would havebeen made to the plan on the employee’sbehalf during the period of disability, thenthe exception for disability coveragewould not apply and all of the premiumpayments made to provide the benefits tothe employee would be treated as distrib-uted to the employee under section 402(a)and (as described in this preamble) bene-fits from the coverage paid to the plan

would constitute contributions. This limi-tation on the benefits payable under a con-tract is consistent with treating the disabil-ity coverage as a waiver of premium incase of disability, similar to the provisionin § 1.408–3(a) under which a contract isnot treated as other than an individualretirement annuity merely because it pro-vides for waiver of premium upon disabil-ity. Additionally, the limitation means thatbenefits provided by the plan in the eventof disability generally will be comparableto the disability benefits provided by aqualified disability benefit under a definedbenefit plan, as described in section411(a)(9) and § 1.411(a)–7(c)(3).

Some commenters recommended thatthe exception for disability coverage notresult in different tax treatment for planparticipants depending upon whether theiremployer insured or self-insured the dis-ability benefit. The final regulations onlyaddress the situation in which payment ofpremiums is made from the plan. TheTreasury Department and the IRS haveconcluded that, to the extent the insurancepremiums are not paid by the plan or outof contributions to the plan, the disabilityinsurance contract is not an asset of theplan and the amounts received by the planunder the disability insurance contract arenot properly treated as a return on a planinvestment. Instead, in such a case, theamounts paid from the insurance contractto the plan would be treated as contribu-tions to the plan and would be subject tothe general rules that apply to qualifiedplan contributions, including section415(c). Similarly, to the extent the em-ployer self-insures or makes arrangementsto finance the disability coverage otherthan through third party insurance, theamounts paid to the plan on account ofdisability would be considered a contribu-tion to the plan and would be subject tothe general rules that apply to qualifiedplan contributions, including section415(c). Payments to the plan will not beproperly characterized as a return on aplan investment in any of these situations.

Conforming Amendments

The regulations contain conformingamendments to the Income Tax Regula-tions under sections 72, 105, 106, 401,and 402(c). These conforming amend-

Bulletin No. 2014–22 May 27, 20141053

ments remove obsolete provisions, as wellas cite to the rules in these regulations fordetermining the tax treatment of the pay-ment of premiums for accident and healthinsurance from a qualified plan.3

Conforming amendments to the regu-lations under sections 403(a) and 403(b)also add a cross-reference applying theserules under section 402(a) to sections403(a) and 403(b) arrangements. As a re-sult, amounts paid for disability insurancepremiums from an annuity or account un-der section 403(a) or 403(b) do not con-stitute distributions (and the disability in-surance contracts are treated as planinvestments) if the requirements applica-ble to the purchase of disability insuranceby qualified plans are met. As in the caseof a plan described in section 401(a), if theplan sponsor of an annuity or custodialaccount under section 403(a) or section403(b) financed the disability protectionby paying premiums for disability insur-ance that provides coverage to protectagainst a loss of contributions during aperiod of disability, then the benefits paidby the disability insurer would be treatedas employer contributions to the annuityor account. However, if the premiums forthe disability insurance were paid fromthe annuity or account in accordance withthe rules that apply to qualified plans, thenthe benefits paid by the disability insurerwill be treated as a return on plan invest-ment.

In addition, the regulations revise thefirst sentence of § 1.106–1 in order toupdate the definition of the term “depen-dent” to reflect section 207 of the Work-ing Families Tax Relief Act of 2004, Pub-lic Law 108–311 (118 Stat. 1166 (2004))and Notice 2004–79 (2004–2 CB 898)and to reflect the amendment of section105(b) made by section 1004(d)(1) of theHealth Care and Education ReconciliationAct of 2010, Public Law 111–152 (124Stat. 1029 (2010)), to include certain chil-dren who have not attained age 27. Forperiods before the applicability date of theregulations, taxpayers can rely on the in-terpretation of this latter provision setforth in Notice 2010–38 (2010–20 IRB682).

These regulations also include a cross-reference to section 402(l) and amend§ 1.402(c)–2, Q&A–4, to add distribu-tions of premiums for accident or healthinsurance under § 1.402(a)–1(e)(1) to thelist of items that are not eligible rolloverdistributions.

Effective/Applicability Date

The regulations apply for taxable yearsbeginning on or after January 1, 2015. Noinference should be drawn that the pay-ment of accident or health premiums froma qualified plan does not constitute a tax-able distribution if made in an earlier tax-able year. However, taxpayers may electto apply the regulations to earlier taxableyears.

Statement of Availability of IRSDocuments

The recently issued IRS notices andrevenue rulings cited in this preamble arepublished in the Internal Revenue Bulletinor Cumulative Bulletin and are availablefrom the Superintendent of Documents,P.O. Box 979050, St. Louis, MO 63197-9000, or by visiting the IRS Web site athttp://www.irs.gov.

Special Analyses

It has been determined that these reg-ulations are not a significant regulatoryaction as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause these regulations do not impose acollection of information on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Code, the proposedregulations preceding these final regula-tions were submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

The principal authors of these regula-tions are Michael P. Brewer and LausonC. Green, Office of Division Counsel/As-sociate Chief Counsel (Tax Exempt andGovernment Entities). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART I—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.72–15 is amended by:

1. Revising the last sentence of para-graph (a).

2. Revising paragraph (d).3. Removing and reserving paragraph

(f).4. Revising paragraphs (h) and (i).

The revisions read as follows:

§ 1.72–15 Applicability of section 72 toaccident or health plans.

(a) Applicability of section. * * * Para-graphs (d), (h), and (i) of this sectionapply for taxable years beginning on orafter January 1, 2015.

* * * * *(d) Accident or health benefits attrib-

utable to employer contributions. Anyamounts received as accident or healthbenefits and not attributable to contribu-tions of the employee are includible ingross income except to the extent that theamounts are excludable from gross in-come under section 105(b) or (c) and theregulations under those sections. See§ 1.402(a)–1(e) for rules relating to theuse of a qualified plan under section401(a) to pay premiums for accident orhealth insurance.

* * * * *

3The regulations do not alter the incidental benefit rule of § 1.401–1(b)(1)(ii) (which provides that a profit-sharing plan may provide incidental life or accident or health insurance for theparticipant and the participant’s family) nor do they alter the tax treatment of the payment of life insurance. For the tax treatment of payments for life insurance, see section 72(m)(3) and§ 1.72–16.

May 27, 2014 Bulletin No. 2014–221054

(h) Medical benefits for retired em-ployees, etc. See § 1.402(a)–1(e)(2) forrules relating to the payment of medicalbenefits described in section 401(h) undera qualified pension or annuity plan.

(i) Special rules—(1) In general. Forpurposes of section 72(b) and (d) and thissection, the taxpayer must maintain suchrecords as are necessary to substantiatethe amount treated as an investment in thetaxpayer’s annuity contract.

(2) Delegation to Commissioner. TheCommissioner may prescribe a form andinstructions with respect to the taxpayer’spast and current treatment of amounts re-ceived under section 72 or 105, and thetaxpayer’s computation, or recomputa-tion, of the taxpayer’s investment in his orher annuity contract. This form may berequired to be filed with the taxpayer’sreturns for years in which the amounts areexcluded under section 72 or 105.

§ 1.105–4 [Removed]

Par. 3. Section 1.105–4 is removed.

§ 1.105–6 [Removed]

Par. 4. Section 1.105–6 is removed.Par. 5. Section 1.106–1 is amended by:

1. Redesignating the existing text asparagraph (a).

2. In new-designated paragraph (a),revising the first sentence andadding a new sentence at the endof the paragraph.

3. Adding a new paragraph (b).

The revisions and additions read as fol-lows:

§ 1.106–1 Contributions by employer toaccident and health plans.

(a) The gross income of an employeedoes not include the contributions that theemployer makes to an accident or healthplan for compensation (through insuranceor otherwise) to the employee for personalinjuries or sickness incurred by the em-ployee, the employee’s spouse, the em-ployee’s dependents (as defined in section152 determined without regard to section152(b)(1), (b)(2), or (d)(1)(B)), or anychild (as defined in section 152(f)(1)) ofthe employee who as of the end of thetaxable year has not attained age 27. * * *

For the treatment of the payment of pre-miums for accident or health insurancefrom a qualified trust under section401(a), see §§ 1.72–15 and 1.402(a)–1(e).

(b) Effective/applicability date. Thefirst and last sentences of paragraph (a) ofthis section apply for taxable years begin-ning on or after January 1, 2015.

Par. 6. Section 1.401–1 is amended byadding a new sentence at the end of para-graph (b)(1)(ii) to read as follows:

§ 1.401–1 Qualified pension, profit-sharing, and stock bonus plans.

* * * * *(b) * * *(1) * * *(ii) * * * See §§ 1.72–15, 1.72–16, and

1.402(a)–1(e) for rules regarding the taxtreatment of incidental life or accident orhealth insurance.

* * * * *Par. 7. Section 1.402(a)–1 is amended

by:

1. Revising the next to last sentence inparagraph (a)(1)(ii).

2. Removing the last sentence in para-graph (a)(1)(ii).

3. Adding paragraph (e).

The revision and addition read as fol-lows:

§ 1.402(a)–1 Taxability of beneficiaryunder a trust which meets therequirements of section 401(a).

(a) * * *(1) * * *(ii) * * * Paragraph (e) of this section

provides rules relating to use of a qualifiedpension, annuity, profit-sharing, or stockbonus plan to provide accident or healthbenefits or coverage otherwise describedin sections 104, 105, or 106.

* * * * *(e) Medical, accident, etc. benefits paid

from a qualified pension, annuity, profit-sharing, or stock bonus plan—(1) Pay-ment of premiums—(i) General rule. Ex-cept as provided in paragraph (e)(1)(iii) ofthis section, a payment made from a qual-ified trust that is a premium for accident orhealth insurance (including a qualifiedlong-term care insurance contract undersection 7702B) constitutes a distribution

under section 402(a) to the participant forwhose benefit the premium is charged.The amount of the distribution equals theamount of the premium charged againstthe participant’s benefits under the plan. Ifa defined contribution plan pays these pre-miums from a current year contribution orforfeiture that has not been allocated to aparticipant’s account, then the amount ofthe premium for each participant is treatedas first being allocated to the participantand then charged against the participant’sbenefits under the plan, so that the amountof the distribution is treated in the samemanner as determined under the precedingsentence. Except as provided in para-graphs (e)(2) and (e)(3) of this section, adistribution described in this paragraph(e)(1) is not excludable from gross in-come.

(ii) Treatment of amounts receivedthrough accident or health insurance. Tothe extent that the payment of a premiumfor accident or health insurance consti-tutes a distribution under this paragraph(e)(1), amounts received through accidentor health insurance are neither paid by theemployer nor attributable to contributionsby the employer that are excludable fromthe gross income of the employee. Ac-cordingly, to the extent the premium foraccident or health insurance constitutes adistribution under this paragraph (e)(1),amounts received through the accident orhealth insurance for personal injuries orsickness are excludable from gross in-come under section 104(a)(3) and are nottreated as distributions from the plan. Ifthose amounts are paid to the plan insteadof to the employee, those amounts aretreated as having been paid to the em-ployee and then contributed by the em-ployee to the plan (and must satisfy thequalification requirements applicable toemployee contributions).

(iii) Exception for disability insurancethat replaces retirement contributions.The rules of paragraph (e)(1)(i) of thissection do not apply to the payment madefrom a qualified trust that is a premiumpaid to an insurance company for a con-tract providing for payment of benefits tobe made to the trust in the event of anemployee’s inability to continue employ-ment with the employer due to disability,provided that the payment of benefits withrespect to the employee’s account for each

Bulletin No. 2014–22 May 27, 20141055

year does not exceed the reasonable ex-pectation of the annual contributions thatwould have been made to the plan on theemployee’s behalf for the period of dis-ability within that year, reduced by anyother contributions made on the employ-ee’s behalf for the period of disabilitywithin that year. The payment of premi-ums described in the preceding sentence isnot treated as a distribution under section402(a), but instead constitutes incidentalaccident or health insurance as providedin § 1.401–1(b)(1)(ii). The Commissionermay issue rules of general applicability inrevenue rulings, notices, or other guidancepublished in the Internal Revenue Bulletinfurther describing the tax treatment of dis-ability coverage described in this para-graph (e)(1)(iii).

(2) Medical benefits for retired em-ployees provided under an account de-scribed in section 401(h). The payment ofmedical benefits under a pension or annu-ity plan from an account described in sec-tion 401(h) is treated in the same manneras a payment of accident or health benefitsattributable to employer contributions, oremployer-provided coverage under an ac-cident or health plan. See § 1.401–14(a)for the definition of medical benefits de-scribed in section 401(h). Accordingly,amounts applied for the payment of acci-dent or health benefits, or for the paymentof accident or health coverage, from asection 401(h) account are not includiblein the gross income of the participant onwhose behalf such contributions are madeto the extent they are excludible fromgross income under section 104, 105, or106.

(3) Distributions to eligible retiredpublic safety officers. See section 402(l)(and any guidance issued under section402(l)) for a limited exclusion from grossincome for distributions used to pay forcertain accident or health premiums (in-cluding premiums for qualified long-termcare insurance contracts). This limited ex-clusion applies to eligible retired publicsafety officers, as defined in section402(l)(4)(B).

(4) Effect of distribution of insurancepremiums on plan qualification. See§ 1.401–1(b)(1) for rules concerning thetypes and amount of medical coverageand benefits that are permitted to be pro-vided under a plan that is part of a trust

described in section 401(a). For example,§ 1.401–1(b)(1)(ii) provides that a profit-sharing plan is primarily a plan of de-ferred compensation, but the amounts al-located to the account of a participant maybe used to provide incidental accident orhealth insurance for the participant andthe participant’s family. See also section401(k)(2)(B) for certain restrictions on thedistribution of elective contributions.

(5) Applicability to beneficiaries andalternate payees. This paragraph (e) ap-plies to the payment of premiums chargedagainst the benefits of a beneficiary or analternate payee in the same manner as thepayment of premiums charged against theaccount of a participant.

(6) Examples. The provisions of thisparagraph (e) are illustrated by the follow-ing examples:

Example 1. (i) Facts. Employer A sponsors aprofit-sharing plan qualified under section 401(a).The plan provides solely for non-elective employerprofit-sharing contributions. The plan’s trustee entersinto a contract with a third-party insurance carrier toprovide health insurance for certain plan partici-pants. The insurance contract provides for the pay-ment of medical expenses incurred by those partic-ipants. The plan limits the amounts used to providemedical benefits to comply with the incidental ben-efit rules. The trustee makes monthly payments of$1,000 to pay the premiums due for Participant P’shealth insurance and Participant P’s account balanceis reduced by $1,000 at the time of each premiumpayment. In June 2015, Participant P is admitted tothe hospital for covered medical care, and in July2015, the health insurer pays the hospital $5,000 forthe medical care provided to Participant P in June.

(ii) Conclusion. Under paragraph (e)(1) of thissection, each of the trustee’s payments of $1,000constitutes a taxable distribution under section402(a) to Participant P on the date of each payment.The amount of these distributions may constitutepayments for medical care under section 213. The$5,000 payment to the hospital is excludable fromParticipant P’s gross income under section 104(a)(3)and is not treated as a distribution from the plan.

Example 2. (i) Facts. Employer B sponsors aprofit-sharing plan qualified under section 401(a).The plan provides for elective contributions de-scribed in section 401(k) and matching contributionsas well as non-elective employer profit-sharing con-tributions. The plan does not provide that a disabledparticipant’s compensation for purposes of determin-ing plan contributions includes amounts that the par-ticipant would have received in the absence of thedisability, and accordingly Employer B does notmake any contributions to the plan for the benefit ofa disabled employee for the period of disability. Theplan’s trustee enters into a contract with a third-partyinsurance carrier to provide disability insurance forplan participants who elect to be covered under theinsurance contract. The insurance contract providesfor the payment of an amount to the trustee on a

participant’s behalf during the period of the partici-pant’s disability. Amounts to be paid to the trusteefrom the insurance contract with respect to a partic-ipant are equal to the sum of the elective, matching,and non-elective employer profit-sharing contribu-tions that would have been made on the participant’sbehalf during the participant’s disability (based onthe participant’s rate of compensation before becom-ing disabled) with the payments to continue for theduration of the disability until age 65 (or 5 yearsafter the participant became disabled, if later). Par-ticipant Q elects to be covered under the insurancecontract, and the trustee makes the periodic premiumpayments out of the account balance of ParticipantQ. In June 2015, Participant Q becomes disabled.During the period Participant Q is absent from em-ployment due to disability, the insurer pays the trustthe amount of the elective contributions and non-elective employer profit-sharing contributions thatwould have been made to the trust with respect toParticipant Q had Participant Q not been disabled.The amount of the premiums for the insurance con-tract satisfies the limitations on incidental benefitsunder § 1.401–1(b)(1)(ii).

(ii) Conclusion. The payment of premiums fromthe trust is described in paragraph (e)(1)(iii) of thissection. Accordingly, none of the premium paymentsunder the contract constitute a distribution undersection 402(a) to Participant Q. Further, amountspaid from the insurance contract to the trust also donot constitute a distribution to Participant Q. How-ever, when Participant Q’s account balance is dis-tributed from the trust, the distribution will be sub-ject to taxation in the year of distribution inaccordance with the rules in section 402.

(7) Effective/applicability date. Thisparagraph (e) applies for taxable yearsbeginning on or after January 1, 2015.

Par. 8. Section 1.402(c)–2 is amendedby redesignating paragraph A–4(j) asparagraph A–4(k) and adding a new para-graph A–4(j) to read as follows:

§ 1.402(c)–2 Eligible rollovercontributions; questions and answers.

* * * * *A–4: * * *(j) Distributions of premiums for acci-

dent or health insurance under § 1.402(a)–1(e)(1)(i). This paragraph A–4(j) appliesfor taxable years beginning on or afterJanuary 1, 2015.

* * * * *Par. 9. Section 1.403(a)–1 is amended

by revising paragraph (g) to read as fol-lows:

§ 1.403(a)–1 Taxability of beneficiaryunder a qualified annuity plan.

* * * * *

May 27, 2014 Bulletin No. 2014–221056

(g) The rules of § 1.402(a)–1(e) applyfor purposes of determining the treatmentof amounts paid to provide accident andhealth insurance benefits.

Par. 10. Section 1.403(b)–6 isamended by revising paragraph (g) byadding two new sentences at the end ofthe paragraph to read as follows:

§ 1.403(b)–6 Timing of distributions andbenefits.

* * * * *(g) * * * The rules of § 1.402(a)–1(e)

apply for purposes of determining when

certain incidental benefits are treated asdistributed and included in gross income.See §§ 1.72–15 and 1.72–16.

* * * * *

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

Approved May 6, 2014.

Mark J. Mazur,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 5, 2014,8:45 a.m., and published in the issue of the Federal Registerfor May 12, 2014, 79 F.R. 26838)

Section 471.—Trade orBusiness Expenses

The exclusive procedures are provided for tax-payers to obtain the automatic consent of the Com-missioner to change a method of accounting forsales-based royalties and sales-based vendor charge-backs to comply with final regulations under§§ 263A and 471 of the Code. The final regulations(TD 9652) were published in the Federal Register onJanuary 13, 2014. See Rev. Proc. 2014–33, page.

Bulletin No. 2014–22 May 27, 20141057

Part III. Administrative, Procedural, and MiscellaneousCredit for RenewableElectricity Production,Refined Coal Production,and Indian Coal Production,and Publication of InflationAdjustment Factors andReference Prices forCalendar Year 2014

Notice 2014–36

This notice publishes the inflation ad-justment factors and reference prices forcalendar year 2014 for the renewable elec-tricity production credit, the refined coalproduction credit, and the Indian coal pro-duction credit under section 45 of the In-ternal Revenue Code. The 2014 inflationadjustment factors and reference pricesare used in determining the availability ofthe credits. The 2014 inflation adjustmentfactors and reference prices apply to cal-endar year 2014 sales of kilowatt hours ofelectricity produced in the United Statesor a possession thereof from qualified en-ergy resources and to calendar year 2014sales of refined coal and Indian coal pro-duced in the United States or a possessionthereof.

BACKGROUND

Section 45(a) provides that the renew-able electricity production credit for anytax year is an amount equal to the productof 1.5 cents multiplied by the kilowatthours of specified electricity produced bythe taxpayer and sold to an unrelated per-son during the tax year. This electricitymust be produced from qualified energyresources and at a qualified facility dur-ing the 10-year period beginning on thedate the facility was originally placed inservice.

Section 45(b)(1) provides that theamount of the credit determined undersection 45(a) is reduced by an amountwhich bears the same ratio to the amountof the credit as (A) the amount by whichthe reference price for the calendar year inwhich the sale occurs exceeds 8 cents,bears to (B) 3 cents. Under section45(b)(2), the 1.5 cent amount in section45(a), the 8 cent amount in section

45(b)(1), the $4.375 amount in section45(e)(8)(A), the $2.00 amount in section45(e)(8)(D)(ii)(I), and in section45(e)(8)(B)(i), the reference price offuel used as feedstock (within the mean-ing of section 45(c)(7)(A)) in 2002 areeach adjusted by multiplying the amountby the inflation adjustment factor for thecalendar year in which the sale occurs. Ifany amount as increased under the preced-ing sentence is not a multiple of 0.1 cent,the amount is rounded to the nearest mul-tiple of 0.1 cent. In the case of electricityproduced in open-loop biomass facilities,small irrigation power facilities, landfillgas facilities, trash facilities, qualifiedhydropower facilities, and marine andhydrokinetic renewable energy facili-ties, section 45(b)(4)(A) requires theamount in effect under section 45(a)(1)(before rounding to the nearest 0.1 cent)to be reduced by one-half.

Section 45(c)(1) defines qualified en-ergy resources as wind, closed-loop bio-mass, open-loop biomass, geothermal en-ergy, solar energy, small irrigation power,municipal solid waste, qualified hydro-power production, and marine and hydro-kinetic renewable energy.

Section 45(d)(1) defines a qualified fa-cility using wind to produce electricity asany facility owned by the taxpayer that isoriginally placed in service after Decem-ber 31, 1993, and the construction ofwhich begins before January 1, 2014. Seesection 45(e)(7) for rules relating to theinapplicability of the credit to electricitysold to utilities under certain contracts.

Section 45(d)(2)(A) defines a qualifiedfacility using closed-loop biomass to pro-duce electricity as any facility (i) ownedby the taxpayer that is originally placed inservice after December 31, 1992, and theconstruction of which begins before Jan-uary 1, 2014; or (ii) owned by the tax-payer which before January 1, 2014, isoriginally placed in service and modifiedto use closed-loop biomass to co-fire withcoal, with other biomass, or with both, butonly if the modification is approved underthe Biomass Power for Rural Develop-ment Programs or is part of a pilot projectof the Commodity Credit Corporation asdescribed in 65 Fed. Reg. 63052. For pur-poses of section 45(d)(2)(A)(ii), a facility

shall be treated as modified before Janu-ary 1, 2014, if the construction of suchmodification begins before such date. Sec-tion 45(d)(2)(C) provides that in the caseof a qualified facility described in section45(d)(2)(A)(ii), (i) the 10-year period re-ferred to in section 45(a) is treated asbeginning no earlier than the date of en-actment of section 45(d)(2)(C)(i) (October22, 2004); and (ii) if the owner of thefacility is not the producer of the electric-ity, the person eligible for the credit al-lowable under section 45(a) is the lesseeor the operator of the facility.

Section 45(d)(3)(A) defines a qualifiedfacility using open-loop biomass to pro-duce electricity as any facility owned bythe taxpayer which (i) in the case of afacility using agricultural livestock wastenutrients, (I) is originally placed in serviceafter the date of enactment of section45(d)(3)(A)(i)(I) (October 22, 2004) andthe construction of which begins beforeJanuary 1, 2014, and (II) the nameplatecapacity rating of which is not less than150 kilowatts; and (ii) in the case of anyother facility, the construction of whichbegins before January 1, 2014. In the caseof any facility described in section45(d)(3)(A), if the owner of the facility isnot the producer of the electricity, section45(d)(3)(C) provides that the person eligi-ble for the credit allowable under section45(a) is the lessee or the operator of thefacility.

Section 45(d)(4) defines a qualified fa-cility using geothermal or solar energy toproduce electricity as any facility ownedby the taxpayer which is originally placedin service after the date of enactment ofsection 45(d)(4) (October 22, 2004) andwhich, (A) in the case of a facility usingsolar energy, is placed in service beforeJanuary 1, 2006, or (B) in the case of afacility using geothermal energy, the con-struction of which begins before January1, 2014. A qualified facility using geother-mal or solar energy does not include anyproperty described in section 48(a)(3) thebasis of which is taken into account by thetaxpayer for purposes of determining theenergy credit under section 48.

Section 45(d)(5) defines a qualified fa-cility using small irrigation power to pro-duce electricity as any facility owned by

May 27, 2014 Bulletin No. 2014–221058

the taxpayer which is originally placed inservice after the date of enactment of sec-tion 45(d)(5) (October 22, 2004) and be-fore October 3, 2008.

Section 45(d)(6) defines a qualified fa-cility using gas derived from the biodeg-radation of municipal solid waste to pro-duce electricity as any facility owned bythe taxpayer which is originally placed inservice after the date of enactment of sec-tion 45(d)(6) (October 22, 2004) and theconstruction of which begins before Jan-uary 1, 2014.

Section 45(d)(7) defines a qualified fa-cility (other than a facility described insection 45(d)(6)) that burns municipalsolid waste to produce electricity as anyfacility owned by the taxpayer which isoriginally placed in service after the dateof enactment of section 45(d)(7) (October22, 2004) and the construction of whichbegins before January 1, 2014. A qualifiedfacility burning municipal solid waste in-cludes a new unit placed in service in con-nection with a facility placed in service onor before the date of enactment of section45(d)(7), but only to the extent of the in-creased amount of electricity produced atthe facility by reason of such new unit.

Section 45(d)(8) provides in the case ofa facility that produces refined coal, theterm “refined coal production facility”means (A) with respect to a facility produc-ing steel industry fuel, any facility (or anymodification to a facility) which is placed inservice before January 1, 2010, and (B) withrespect to any other facility producing re-fined coal, any facility placed in serviceafter the date of the enactment of the Amer-ican Jobs Creation Act of 2004 (October 22,2004) and before January 1, 2012.

Section 45(d)(9) defines a qualified fa-cility producing qualified hydroelectricproduction described in section 45(c)(8)as (i) any facility producing incrementalhydropower production, but only to theextent of its incremental hydropower pro-duction attributable to efficiency improve-ments or additions to capacity describedin section 45(c)(8)(B) placed in serviceafter the date of enactment of section45(d)(9)(A)(i) (August 8, 2005) and be-fore January 1, 2014; and (ii) any otherfacility placed in service after the date ofenactment of section 45(d)(9)(A)(ii) (Au-gust 8, 2005) and the construction ofwhich begins before January 1, 2014. Sec-

tion 45(d)(9)(B) provides that in the caseof a qualified facility described in section45(d)(9)(A), the 10-year period referred toin section 45(a) is treated as beginning onthe date the efficiency improvements or ad-ditions to capacity are placed in service.Section 45(d)(9)(C) provides that for pur-poses of section 45(d)(9)(A)(i), an effi-ciency improvement or addition to capacityis treated as placed in service before January1, 2014, if the construction of such improve-ment or addition begins before such date.

Section 45(d)(10) provides in the caseof a facility that produces Indian coal, theterm “Indian coal production facility”means a facility which is placed in servicebefore January 1, 2009.

Section 45(d)(11) provides in the caseof a facility producing electricity frommarine and hydrokinetic renewable en-ergy, the term “qualified facility” meansany facility owned by the taxpayer which(A) has a nameplate capacity rating of atleast 150 kilowatts, and (B) which is orig-inally placed in service on or after the dateof the enactment of section 45(d)(11)(B)(October 3, 2008) and the construction ofwhich begins before January 1, 2014.

Section 45(e)(8)(A) provides that therefined coal production credit is anamount equal to $4.375 per ton of quali-fied refined coal (i) produced by the tax-payer at a refined coal production facilityduring the 10-year period beginning onthe date the facility was originally placedin service, and (ii) sold by the taxpayer (I)to an unrelated person and (II) during the10-year period and the tax year. Section45(e)(8)(B) provides that the amount ofcredit determined under section45(e)(8)(A) is reduced by an amountwhich bears the same ratio to the amountof the increase as (i) the amount by whichthe reference price of fuel used as feed-stock (within the meaning of section45(c)(7)(A)) for the calendar year inwhich the sale occurs exceeds an amountequal to 1.7 multiplied by the referenceprice for such fuel in 2002, bears to (ii)$8.75. Section 45(e)(8)(D)(ii)(I) providesthat in the case of a taxpayer who pro-duces steel industry fuel, section45(e)(8)(A) shall be applied by substitut-ing “$2 per barrel-of-oil equivalent” for“$4.375 per ton.” Section 45(e)(8)(D)(ii)(II)provides that in lieu of the 10-year periodreferred to in sections 45(e)(8)(A)(i) and

45(e)(8)(A)(ii)(II), the credit period shallbe the period beginning on the later of thedate such facility was originally placed inservice, the date the modifications de-scribed in section 45(e)(8)(D)(iii) wereplaced in service, or October 1, 2008, andending on the later of December 31, 2009,or the date which is 1 year after the datesuch facility or the modifications describedin section 45(e)(8)(D)(iii) were placed in ser-vice. Section 45(e)(8)(D)(ii)(III) providesthat section 45(e)(8)(B) (dealing with thephaseout of the credit) will not apply.

Section 45(e)(10)(A) provides in thecase of a producer of Indian coal, thecredit determined under section 45 for anytaxable year shall be increased by anamount equal to the applicable dollaramount per ton of Indian coal (i) producedby the taxpayer at an Indian coal produc-tion facility during the 8-year period be-ginning on January 1, 2006, and (ii) soldby the taxpayer (I) to an unrelated person,and (II) during such 8-year period andsuch taxable year.

Section 45(e)(10)(B)(i) defines “appli-cable dollar amount” for any taxable yearas (I) $1.50 in the case of calendar years2006 through 2009, and (II) $2.00 in thecase of calendar years beginning after2009.

Section 45(e)(2)(A) requires the Secre-tary to determine and publish in the Fed-eral Register each calendar year the infla-tion adjustment factor and the referenceprice for the calendar year. The inflationadjustment factors and the referenceprices for the 2014 calendar year werepublished in the Federal Register on April16, 2014.

Section 45(e)(2)(B) defines the infla-tion adjustment factor for a calendar yearas the fraction the numerator of which isthe GDP implicit price deflator for thepreceding calendar year and the denomi-nator of which is the GDP implicit pricedeflator for the calendar year 1992. Theterm “GDP implicit price deflator” meansthe most recent revision of the implicitprice deflator for the gross domestic prod-uct as computed and published by theDepartment of Commerce before March15 of the calendar year.

Section 45(e)(2)(C) provides that thereference price is the Secretary’s determi-nation of the annual average contract priceper kilowatt hour of electricity gener-

Bulletin No. 2014–22 May 27, 20141059

ated from the same qualified energy re-source and sold in the previous year inthe United States. Only contracts en-tered into after December 31, 1989, aretaken into account.

Under section 45(e)(8)(C), the deter-mination of the reference price for fuelused as feedstock within the meaning ofsection 45(c)(7)(A) is made according torules similar to the rules under section45(e)(2)(C).

Under section 45(e)(10)(B)(ii), in thecase of any calendar year after 2006, eachof the dollar amounts under section45(e)(10)(B)(i) shall be equal to the prod-uct of such dollar amount and the inflationadjustment factor determined under sec-tion 45(e)(2)(B) for the calendar year, ex-cept that section 45(e)(2)(B) shall be ap-plied by substituting 2005 for 1992.

INFLATION ADJUSTMENTFACTORS AND REFERENCEPRICES

The inflation adjustment factor for cal-endar year 2014 for qualified energy re-sources and refined coal is 1.5088. Theinflation adjustment factor for Indian coalis 1.1587.

The reference price for calendar year2014 for facilities producing electricityfrom wind (based upon information pro-vided by the Department of Energy) is4.85 cents per kilowatt hour. The refer-ence prices for fuel used as feedstockwithin the meaning of section 45(c)(7)(A),relating to refined coal production (basedupon information provided by the Depart-ment of Energy) are $31.90 per ton forcalendar year 2002 and $56.88 per ton forcalendar year 2014. The reference pricesfor facilities producing electricity fromclosed-loop biomass, open-loop biomass,geothermal energy, solar energy, small ir-rigation power, municipal solid waste,qualified hydropower production, and ma-rine and hydrokinetic energy have notbeen determined for calendar year 2014.

PHASEOUT CALCULATION

Because the 2014 reference price forelectricity produced from wind (4.85 centsper kilowatt hour) does not exceed 8 centsmultiplied by the inflation adjustment fac-tor, the phaseout of the credit provided insection 45(b)(1) does not apply to such

electricity sold during calendar year2014. Because the 2014 reference priceof fuel used as feedstock for refined coal($56.88) does not exceed $81.82 (whichis the $31.90 reference price of such fuelin 2002 multiplied by the inflation ad-justment factor (1.5088) and 1.7), thephaseout of credit provided in section45(e)(8)(B) does not apply to refinedcoal sold during calendar year 2014.Further, for electricity produced fromclosed-loop biomass, open-loop bio-mass, geothermal energy, solar energy,small irrigation power, municipal solidwaste, qualified hydropower production,and marine and hydrokinetic energy, thephaseout of credit provided in section45(b)(1) does not apply to such electric-ity sold during calendar year 2014.

CREDIT AMOUNT BY QUALIFIEDENERGY RESOURCE ANDFACILITY, REFINED COAL, ANDINDIAN COAL

As required by section 45(b)(2), the 1.5cent amount in section 45(a)(1), the 8 centamount in section 45(b)(1), the $4.375amount in section 45(e)(8)(A) and the$2.00 amount in section 45(e)(8)(D) areeach adjusted by multiplying suchamount by the inflation adjustment fac-tor for the calendar year in which thesale occurs. If any amount as increasedunder the preceding sentence is not amultiple of 0.1 cent, such amount isrounded to the nearest multiple of 0.1cent. In the case of electricity producedin open-loop biomass facilities, smallirrigation power facilities, landfill gasfacilities, trash facilities, qualified hy-dropower facilities, and marine and hy-drokinetic renewable energy facilities,section 45(b)(4)(A) requires the amountin effect under section 45(a)(1) (beforerounding to the nearest 0.1 cent) to bereduced by one-half. Under the calcula-tion required by section 45(b)(2), thecredit for renewable electricity produc-tion for calendar year 2014 under sec-tion 45(a) is 2.3 cents per kilowatt houron the sale of electricity produced fromthe qualified energy resources of wind,closed-loop biomass, geothermal en-ergy, and solar energy, and 1.1 cents perkilowatt hour on the sale of electricity pro-duced in open-loop biomass facilities, smallirrigation power facilities, landfill gas facil-

ities, trash facilities, qualified hydropowerfacilities, and marine and hydrokinetic en-ergy facilities. Under the calculation re-quired by section 45(b)(2), the credit forrefined coal production for calendar year2014 under section 45(e)(8)(A) is $6.601per ton on the sale of qualified refinedcoal. The credit for Indian coal productionfor calendar year 2014 under section45(e)(10)(B) is $2.317 per ton on the saleof Indian coal.

DRAFTING AND CONTACTINFORMATION

The principal author of this notice isPhilip Tiegerman of the Office of AssociateChief Counsel (Passthroughs & Special In-dustries). For further information regardingthis notice contact Philip Tiegerman on(202) 317-6853 (not a toll-free Number).

26 CFR 601.204: Changes in accounting periodsand in methods of accounting.(Also Part I, §§ 263A, 446, 471, 481)

Rev. Proc. 2014–33SECTION 1. PURPOSE

This revenue procedure provides theexclusive procedures by which a taxpayerobtains the consent of the Commissionerunder § 446(e) of the Internal RevenueCode to (1) change its method of account-ing for royalties described in § 1.263A–1(e)(3)(ii)(U)(2) of the Income Tax Reg-ulations, (2) change its method ofaccounting for sales-based vendor charge-backs described in § 1.471–3(e)(1), or (3)change its simplified production methodor simplified resale method for costs allo-cated only to inventory property that hasbeen sold, to comply with final regulationsunder §§ 263A and 471.

SECTION 2. BACKGROUND

.01 Section 263A requires taxpayers tocapitalize the direct costs and indirectcosts that are properly allocable to realproperty or tangible personal property thetaxpayer produces and real property or per-sonal property described in § 1221(a)(1) thatthe taxpayer acquires for resale. Taxpayersmust allocate costs required to be capital-ized to property produced or acquired forresale during the taxable year using a costallocation method described in the regula-

May 27, 2014 Bulletin No. 2014–221060

tions. For example, taxpayers may use thesimplified methods provided in § 1.263A–2(b) (the simplified production method) or§ 1.263A–3(d) (the simplified resalemethod) to allocate costs to inventory prop-erty produced or acquired for resale.

.02 Under § 471, when the use of in-ventories is necessary to clearly determinethe income of any taxpayer, inventoriesmust be taken on the basis that mostclearly reflects income. Section 1.471–2(c) permits merchants and manufacturersto value inventories at either (1) cost, or (2)cost or market, whichever is lower. Under§ 1.471–3(b), the cost of merchandise pur-chased by taxpayers is, in general, the in-voice price less trade or other discounts.

.03 On January 13, 2014, the InternalRevenue Service and Treasury Depart-ment published final regulations under§§ 263A and 471 (TD 9652, 79 Fed. Reg.2094) relating to (1) the capitalization andallocation of royalties that a taxpayer in-curs only upon the sale of property pro-duced or acquired for resale (sales-basedroyalties), and (2) the adjustment of the costof inventory for sales-based vendor charge-backs, a type of sales-based vendor allow-ance. The final regulations apply to taxableyears ending on or after January 13, 2014.

.04 Section 1.263A–1(e)(3)(ii)(U) ofthe final regulations clarifies that sales-based royalties, which are royalties in-curred in securing the contractual right touse a trademark, corporate plan, manufac-turing procedure, special recipe, or othersimilar right associated with property pro-duced or property acquired for resale, areindirect costs and are properly allocable toproperty produced or acquired for resaleto the extent the costs directly benefit orare incurred by reason of production orresale activities. Under § 1.263A–1(e)(3)(ii)(U)(2) of the final regulations, ataxpayer may allocate capitalizable sales-based royalties entirely to the units ofproperty produced or acquired for resalethat are sold and, in the case of inventoryproperty, allocate these costs only to costof goods sold.

.05 Under § 1.263A–1(c)(5) of the finalregulations, a cost that is allocated entirelyto inventory property sold must be includedin cost of goods sold and may not be in-cluded in determining the cost of goods onhand at the end of the taxable year.

.06 Section 1.471–3(e)(1) of the finalregulations provides that a sales-basedvendor chargeback, one type of sales-based vendor allowance, is an allowanceor price rebate that reduces only cost ofgoods sold and does not adjust the cost ofgoods on hand at the end of the taxableyear. A sales-based vendor chargeback isdefined as an allowance, discount, or pricerebate to which a taxpayer becomes un-conditionally entitled by selling a ven-dor’s merchandise to specific customersidentified by the vendor at a price deter-mined by the vendor. The final regulationsreserve rules addressing other types ofsales-based vendor allowances.

.07 The final regulations under§§ 1.263A–2(b) and 1.263A–3(d) revisethe simplified production method and thesimplified resale method by providing thatadditional § 263A costs incurred duringthe taxable year, § 471 costs incurred dur-ing the taxable year, and § 471 costs re-maining on hand at year end do not in-clude costs specifically described in§ 1.263A–1(e)(3)(ii) (currently only capi-talizable depletion and sales-based royal-ties) and cost reductions described in§ 1.471–3(e) (such as sales-based vendorchargebacks) that are properly allocated toproperty that has been sold. Consequently,a taxpayer allocating sales-based royaltiesor sales-based vendor chargebacks to costof goods sold and currently includingthese amounts in § 471 costs or additional§ 263A costs must remove the sales-basedroyalties or sales-based vendor charge-backs in the same manner that the tax-payer included them. Changes in methodsof accounting for depletion under theseregulations will be addressed in separateguidance.

.08 Sections 446(e) and 1.446–1(e)(2)state that, except as otherwise provided, ataxpayer must secure the consent of theCommissioner before changing a methodof accounting for federal income tax pur-poses. Section 1.446–1(e)(3)(ii) autho-rizes the Commissioner to prescribe ad-ministrative procedures setting forth thelimitations, terms, and conditions neces-sary to permit a taxpayer to obtain consentto change a method of accounting in ac-cordance with § 446(e).

.09 Rev. Proc. 97–27, 1997–1 C.B.680, modified and amplified by Rev. Proc.2002–19, 2002–1 C.B. 696, amplified and

clarified by Rev. Proc. 2002–54, 2002–2C.B. 432, modified by Rev. Proc. 2007–67, 2007–2 C.B. 1072, clarified and mod-ified by Rev. Proc. 2009–39, 2009–38C.B. 371, modified by Rev. Proc. 2011–14,2011–4 C.B. 330, and clarified andmodified by Rev. Proc. 2012–39,2012–41 C.B. 470, provides the generalprocedures for obtaining the advance con-sent of the Commissioner to change amethod of accounting. See also Rev. Proc.2014–1, 2014–1 I.R.B. 1 (or successor).

.10 Rev. Proc. 2011–14, 2011–1 C.B.330, provides procedures for a taxpayer toobtain automatic consent of the Commis-sioner to change to a method of account-ing described in the APPENDIX of Rev.Proc. 2011–14.

.11 Section 481(a) requires the adjust-ments necessary to prevent amounts frombeing duplicated or omitted when a tax-payer’s taxable income is determined un-der a method of accounting different fromthe method used to determine taxable in-come for the preceding taxable year.

SECTION 3. SCOPE

This revenue procedure applies to a tax-payer that wants to make one or more of theaccounting method changes described insection 4 of this revenue procedure.

SECTION 4. CHANGES INMETHOD OF ACCOUNTING

.01 Rev. Proc. 2011–14 is modified toadd new section 11.11 of the APPENDIX,to read as follows:

.11 Sales-Based Royalties

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for sales-basedroyalties (as described in § 1.263A–1(e)(3)(ii)(U)(2)) that are properly alloca-ble to inventory property:

(a) From not capitalizing sales-basedroyalties to capitalizing these costs andallocating them entirely to cost of goodssold under a taxpayer’s method of ac-counting;

(b) From not capitalizing sales-basedroyalties to capitalizing these costs andallocating them to inventory property un-der a taxpayer’s method of accounting;

(c) From capitalizing sales-based roy-alties and allocating these costs to inven-

Bulletin No. 2014–22 May 27, 20141061

tory property to allocating them entirely tocost of goods sold; or

(d) From capitalizing sales-based roy-alties and allocating these costs entirely tocost of goods sold to allocating them toinventory property.

(2) Limitations.(a) A taxpayer may not make a change

in method of accounting under this section11.11 of the APPENDIX if the taxpayerwants to change to capitalizing sales-based royalties and allocating them to in-ventory property using an other reason-able allocation method within themeaning of § 1.263A–1(f)(4).

(b) A taxpayer making the changes de-scribed in section 11.11(1)(a) or11.11(1)(c) of the APPENDIX that uses asimplified method to determine the addi-tional § 263A costs allocable to inventoryproperty on hand at year end must removesales-based royalties allocated to cost ofgoods sold from the formulas used to al-locate additional § 263A costs to endinginventory in the same manner that thetaxpayer included these amounts in theformulas.

(c) A taxpayer making a change inmethod of accounting under this section11.11 of the APPENDIX that uses a sim-plified method with an historic absorptionratio election (see §§ 1.263A–2(b)(4) and1.263A–3(d)(4)) and currently includes,or is changing its method to include, sales-based royalties in any part of its historicabsorption ratio must revise its previousand current historic absorption ratios. Torevise its historic absorption ratios, thetaxpayer must apply its proposed methodof accounting during the test period, dur-ing all recomputation years, and during allupdated test periods to determine the§ 471 costs and additional § 263A coststhat were incurred. The revised historicabsorption ratios must be used to revaluebeginning inventory and must be ac-counted for in the taxpayer’s § 481(a)adjustment. The taxpayer must use amethod described in § 1.263A–7(c) to re-value beginning inventory.

(3) Certain scope limitations tempo-rarily inapplicable. The scope limitationsin section 4.02(1) through (4) and (7) ofthis revenue procedure do not apply to thischange for a taxpayer’s first and secondtaxable years ending on or after January13, 2014.

(4) Concurrent automatic changes. Ataxpayer that wants to make a change un-der this section 11.11 of the APPENDIXand one or more automatic changes inmethod of accounting under § 263A forthe same year of change may file a singleForm 3115 for all changes, provided thetaxpayer enters the designated automaticchange numbers for all changes on theappropriate line on the Form 3115 andcomplies with the ordering rules of§ 1.263A–7(b)(2).

(5) Ogden copy of Form 3115 requiredin lieu of national office copy. A taxpayerchanging its method of accounting underthis section 11.11 of the APPENDIX mustfile a signed copy of its completed Form3115 with the IRS in Ogden, UT in lieu offiling the national office copy no earlierthan the first day of the year of change andno later than the date the taxpayer files theoriginal Form 3115 with its federal in-come tax return for the year of change. Ataxpayer that makes both this change anda concurrent automatic change under§ 263A on a single Form 3115 for thesame year of change must file a signedcopy of the completed Form 3115 with theIRS in Ogden, UT in lieu of filing thenational office copy no earlier than thefirst day of the year of change and no laterthan the date the taxpayer files the originalForm 3115 with its federal income taxreturn for the year of change. See sections6.02(3)(a)(ii)(B) (providing the generalrules) and 6.02(7)(b) (providing the mail-ing address) of this revenue procedure.

(6) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in method of account-ing under section 11.11 of the APPEN-DIX is No. 201.

(7) Contact information. For further in-formation regarding a change under thissection, contact John Roman Faron at(202) 317-7005 (not a toll-free call).

.02 Rev. Proc. 2011–14 is modified toadd new section 11.12 of the APPENDIX,to read as follows:

.12 Treatment of Sales-Based VendorChargebacks under a Simplified Method

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting to no longer in-clude cost adjustments for sales-basedvendor chargebacks described in § 1.471–

3(e)(1) in the formulas used to allocateadditional § 263A costs to ending inven-tory under a simplified method.

(2) Limitations.(a) A taxpayer making this change that

uses a simplified method to determine theadditional § 263A costs allocable to in-ventory property on hand at year end mustremove sales-based vendor chargebacksfrom the formulas used to allocate addi-tional § 263A costs to ending inventory inthe same manner that the taxpayer in-cluded these amounts in the formulas.

(b) A taxpayer making a change inmethod of accounting under this section11.12 of the APPENDIX that uses a sim-plified method with an historic absorptionratio election (see §§ 1.263A–2(b)(4) and1.263A–3(d)(4)) and currently includessales-based vendor chargebacks in anypart of its historic absorption ratio mustrevise its previous and current historic ab-sorption ratio(s). To revise its historic ab-sorption ratios, the taxpayer must apply itsproposed method of accounting during thetest period, during all recomputationyears, and during all updated test periodsto determine the § 471 costs and addi-tional § 263A costs that were incurred.The revised historic absorption ratiosmust be used to revalue beginning inven-tory and must be accounted for in thetaxpayer’s § 481(a) adjustment. The tax-payer must use a method described in§ 1.263A–7(c) to revalue beginning in-ventory.

(3) Certain scope limitations tempo-rarily inapplicable. The scope limitationsin section 4.02(1) through (4) and (7) ofthis revenue procedure do not apply to thischange for a taxpayer’s first and secondtaxable years ending on or after January13, 2014.

(4) Concurrent automatic changes. Ataxpayer that wants to make both thischange and one or more automaticchanges in method of accounting under§ 263A, or both this change and thechange described in section 21.15 of theAPPENDIX for the same taxable year ofchange may file a single Form 3115 forboth changes, provided the taxpayer en-ters the designated automatic changenumbers for all changes on the appropri-ate line on the Form 3115 and complieswith the ordering rules of § 1.263A–7(b)(2).

May 27, 2014 Bulletin No. 2014–221062

(5) Ogden copy of Form 3115 requiredin lieu of national office copy. A taxpayerchanging its method of accounting underthis section 11.12 of the APPENDIX mustfile a signed copy of its completed Form3115 with the IRS in Ogden, UT in lieu offiling the national office copy no earlierthan the first day of the year of change andno later than the date the taxpayer files theoriginal Form 3115 with its federal in-come tax return for the year of change. Ifa taxpayer makes both this change and aconcurrent automatic change under§ 263A or both this change and the changedescribed in section 21.15 of the APPEN-DIX on a single Form 3115 for the sameyear of change, then the taxpayer must filea signed copy of that completed Form3115 with the IRS in Ogden, UT in lieu offiling the national office copy no earlierthan the first day of the year of change andno later than the date the taxpayer files theoriginal Form 3115 with its federal in-come tax return for the year of change.See sections 6.02(3)(a)(ii)(B) (providingthe general rules) and 6.02(7)(b) (provid-ing the mailing address) of this revenueprocedure.

(6) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in method of account-ing under section 11.12 of the APPEN-DIX is No. 202.

(7) Contact information. For further in-formation regarding a change under thissection, contact John Roman Faron at(202) 317-7005 (not a toll-free call).

.03 Rev. Proc. 2011–14 is modified toadd new section 21.15 of the APPENDIX,to read as follows:

.15 Sales-Based Vendor Chargebacks(1) Description of change. This change

applies to a taxpayer that wants to changeits method of accounting to treat sales-based vendor chargebacks as a reductionin cost of goods sold in accordance with§ 1.471–3(e)(1).

(2) Certain scope limitations tempo-rarily inapplicable. The scope limitationsin section 4.02(1) through (4) and (7) ofthis revenue procedure do not apply to thischange for a taxpayer’s first and secondtaxable years ending on or after January13, 2014.

(3) Concurrent automatic changes. Ataxpayer that wants to make both thischange and the change described in sec-tion 11.12 of the APPENDIX for the sametaxable year of change may file a singleForm 3115 for both changes, provided thetaxpayer enters the designated automaticchange numbers for both changes on theappropriate line on the Form 3115, andcomplies with the ordering rules of§ 1.263A–7(b)(2).

(4) Ogden copy of Form 3115 requiredin lieu of national office copy. A taxpayerchanging its method of accounting underthis section 21.15 of the APPENDIX mustfile a signed copy of its completed Form3115 with the IRS in Ogden, UT in lieu offiling the national office copy no earlierthan the first day of the year of change andno later than the date the taxpayer files theoriginal Form 3115 with its federal in-come tax return for the year of change. Ifa taxpayer makes both this change and aconcurrent automatic change described insection 11.12 of the APPENDIX on asingle Form 3115 for the same year ofchange, then the taxpayer must file asigned copy of that completed Form 3115with the IRS in Ogden, UT in lieu of filingthe national office copy no earlier than thefirst day of the year of change and no laterthan the date the taxpayer files the originalForm 3115 with its federal income taxreturn for the year of change. See sections6.02(3)(a)(ii)(B) (providing the generalrules) and 6.02(7)(b) (providing the mail-ing address) of this revenue procedure.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in methods of ac-counting under section 21.15 of the AP-PENDIX is 203. See section 6.02(4) ofthis revenue procedure.

(6) Contact information. For further in-formation regarding a change under thissection, contact John Roman Faron at(202) 317-7005 (not a toll-free call).

SECTION 5. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2011–14 is modified to addnew sections 11.11, 11.12, and 21.15 tothe APPENDIX.

SECTION 6. EFFECTIVE DATE

.01 In general. Except as provided insection 6.02 of this revenue procedure,this revenue procedure is effective for tax-able years ending on or after January 13,2014.

.02 Transition rule. If before May 6,2014, a taxpayer properly filed an appli-cation under Rev. Proc. 97–27 requestingconsent for a change in method of ac-counting described in section 4 of thisrevenue procedure, and the Form 3115 ispending with the national office on May 6,2014, the taxpayer may make the changeunder this revenue procedure if the tax-payer is otherwise eligible. The taxpayermust notify the national office of its intentto make the change under this revenueprocedure prior to the issuance of a letterruling granting or denying consent for thechange. If the taxpayer timely notifies thenational office that it will make the changeunder this revenue procedure, the nationaloffice ordinarily will return the Form 3115to the taxpayer to make the necessarymodifications to comply with the applica-ble provisions of this revenue procedureand will refund the user fee submittedwith the Form 3115. A Form 3115 that isreturned to the taxpayer for necessarymodifications will be converted to an ap-plication under this revenue procedure ifthe taxpayer resubmits the Form 3115with the necessary modifications, alongwith a copy of the national office lettersent with the returned Form 3115, to thenational office within 30 calendar daysafter the date of the IRS’s letter returningthe Form 3115 to the taxpayer.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is John Roman Faron of theOffice of Associate Chief Counsel (In-come Tax and Accounting). For furtherinformation regarding this revenue proce-dure, contact Mr. Faron at (202) 317-7005(not a toll-free number).

Bulletin No. 2014–22 May 27, 20141063

Part IV. Items of General InterestNotice of proposedrulemakingAcquiring Corporation forPurposes of Section 381

REG–131239–13

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposedrulemaking.

SUMMARY: This document containsproposed regulations under section 381 ofthe Internal Revenue Code (Code). Theproposed regulations modify the defini-tion of an acquiring corporation for pur-poses of section 381 with regard to certainacquisitions of assets. The proposed reg-ulations affect corporations that acquirethe assets of other corporations in corpo-rate reorganizations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by August 5, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–131239–13), Room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. to:CC:PA:LPD:PR (REG–131239–13), Cou-rier’s Desk, Internal Revenue Service, 1111Constitution Avenue, N.W., Washington,DC. Submissions may also be sent electron-ically via the Federal eRulemaking Portal athttp://www.regulations.gov (IRSREG–131239–13).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Stephanie D. Floyd at (202)317-6065 or Isaac W. Zimbalist at (202)317-5363; concerning submissions ofcomments and/or requests for a publichearing, Oluwafunmilayo (Funmi) Taylorat (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 1 under sec-tion 381 of the Code. Section 381(a) gen-erally provides that in certain acquisitionsof the assets of a distributor or transferorcorporation by another corporation, theacquiring corporation succeeds to the taxattributes, including the earnings and prof-its, of the distributor or transferor corpo-ration. For this purpose, § 1.381(a)–1(b)(2) defines the acquiring corporationwith regard to transactions described insection 381(a)(2) (relating to certain reor-ganizations under section 368), as eitherthe corporation that ultimately acquires allof the assets transferred by the transferorcorporation, or the corporation that di-rectly acquires the assets transferred bythe transferor corporation if no single cor-poration ultimately acquires all of the as-sets so transferred.

1. Proposed Section 312 Regulations

A notice of proposed rulemaking con-taining proposed regulations (REG–141268–11) under section 312 was pub-lished in the Federal Register on April16, 2012 (77 FR 22515) (proposed section312 regulations) to clarify the regulationsunder § 1.312–11 regarding the allocationof earnings and profits in non-recognitiontransfers of property from one corporationto another. The proposed section 312 reg-ulations provide that, in a transfer de-scribed in section 381(a), the acquiringcorporation, as defined in § 1.381(a)–1(b)(2), succeeds to the earnings and prof-its of the distributor or transferor corpora-tion. For example, if in a reorganizationunder section 368(a)(1) by reason of sec-tion 368(a)(2)(C), the transferee corpora-tion that directly acquires a transferor cor-poration’s assets transfers some, but notall, of the acquired assets to a controlledsubsidiary, the transferee corporation (theacquiring corporation under § 1.381(a)–1(b)(2)) retains the earnings and profits.However, if the transferee corporation in-stead transfers all of the transferor corpo-ration’s assets to a controlled subsidiary,then that controlled subsidiary (the acquir-

ing corporation under § 1.381(a)–1(b)(2))would succeed to the transferor corpora-tion’s earnings and profits. Comments re-sponding to the notice of proposed rule-making were received. No public hearingwas requested or held.

2. Summary of Comments Received withRespect to the Proposed Section 312Regulations

Some commenters recommended thatthe definition of acquiring corporation un-der § 1.381(a)–1(b)(2) be changed for pur-poses of determining the location of thetransferor corporation’s earnings andprofits. These commenters believed thatthe rule in the proposed section 312 reg-ulations allowing the section 381 acquir-ing corporation to succeed to the earningsand profits of the transferor inappropri-ately allows electivity of the location ofthe transferor corporation’s earningsand profits in connection with section381(a)(2) transactions based on whetherthe transferee corporation that directlyacquires the transferor corporation’s as-sets retains a single asset. These com-menters also expressed concern that thisrule raises difficult practical issues indetermining whether all of the acquiredassets have been transferred to a con-trolled subsidiary.

As an alternative to the proposed sec-tion 312 regulations, some commentersrecommended adopting a rule that pro-vides that the corporation that acquiressubstantially all of the assets transferredby a transferor corporation in a section381(a)(2) transfer succeeds to the transfer-or’s earnings and profits. One commenterrecommended that earnings and profits re-main with the direct acquiring corporationeven if all of the acquired assets are trans-ferred to another corporation pursuant tothe plan of reorganization. Another com-menter suggested that there should not bedisparate treatment of earnings and profitsin non-recognition transfers to controlledsubsidiaries merely because a reorganiza-tion has occurred, and therefore the rulefor determining the location of earningsand profits in connection with section381(a)(2) transfers should be consistent

May 27, 2014 Bulletin No. 2014–221064

with rules that govern non-recognitiontransfers to controlled subsidiaries.

The IRS and the Treasury Departmentbelieve that adopting a substantially allapproach would introduce unnecessaryuncertainty surrounding the measurementof “substantially all.” The IRS and theTreasury Department, however, agreewith the recommendation that the directacquiring corporation should succeed tothe earnings and profits. The IRS and theTreasury Department believe that this ap-proach addresses the other comments re-ceived regarding consistency among non-recognition transactions. Moreover, afterconsidering all comments received withregard to the proposed section 312 regu-lations, the IRS and the Treasury Depart-ment have concluded that this recom-mended change is appropriate not merelywith respect to the determination of thelocation of the transferor corporation’searnings and profits but also with respectto the other tax attributes governed bysection 381. Accordingly, this notice ofproposed rulemaking (proposed section381 regulations) revises the definition ofacquiring corporation as described underthe Explanation of Provisions. Becausethe proposed section 312 regulationsmerely cross-reference the section 381regulations, those proposed regulationswill remain outstanding. It is anticipatedthat the proposed section 312 regulationsand the proposed section 381 regulationswill be concurrently published as finalregulations in the Federal Register afterthe comment period for the proposed sec-tion 381 regulations has closed on August5, 2014 and the IRS and the TreasuryDepartment have had an opportunity toconsider the comments received.

Explanation of Provisions

1. Direct Transferee Corporation is theAcquiring Corporation

The proposed section 381 regulationsprovide that, in a transaction described insection 381(a)(2), the acquiring corpora-tion is the corporation that directly ac-quires the assets transferred by the trans-feror corporation, even if the transfereecorporation ultimately retains none of theassets so transferred. The current regula-tions under section 381 yield an identicalresult, except when a single controlled

subsidiary of the direct transferee corpo-ration acquires all of the assets transferredby the transferor corporation pursuant to aplan of reorganization. In that case, thecurrent regulations treat the subsidiary asthe acquiring corporation, a result that ef-fectively permits a taxpayer to choose thelocation of a transferor corporation’s attri-butes by causing the direct transferee cor-poration either to retain or not to retain asingle asset. The IRS and the TreasuryDepartment believe the proposed rule pro-duces more appropriate results because itwould eliminate this electivity. The pro-posed rule also eliminates the administra-tive burden under the current regulationsassociated with determining whether aparticular corporation in fact has acquiredall of the assets transferred by the trans-feror corporation pursuant to a plan ofreorganization. In addition, it eliminatesthe disparate effect of the presence or ab-sence of a plan of reorganization and pro-duces results consistent with those ob-tained if a corporation that has notengaged in a reorganization transfers as-sets to a controlled subsidiary in a nonrec-ognition transaction.

Finally, the IRS and the Treasury De-partment believe the proposed rule is ap-propriate with respect to determining thelocation of the earnings and profits of atransferor corporation because the pro-posed rule generally maintains such earn-ings and profits at the corporation closestto the transferor corporation’s formershareholders, except in the case of trian-gular reorganizations. The IRS and theTreasury Department considered an alter-native approach that would achieve thisresult in all cases by treating the corpora-tion that issues stock pursuant to a plan ofreorganization (the “issuing corporation”)as the acquiring corporation. An issuingcorporation approach would, however,present complex considerations in thecontext of cross-border transactions, po-tentially requiring a number of specialrules to preclude opportunities for theavoidance of tax. Accordingly, the IRSand the Treasury Department believe thatthe proposed rule produces more appro-priate results than the current regulations(including in the context of cross-bordertransactions) while preserving simplicityand administrability.

2. Removal of § 1.381(a)–1(b)(3)(ii)

The proposed section 381 regulationsalso remove § 1.381(a)–1(b)(3)(ii) relat-ing to a transfer by the acquiring corpora-tion of the acquired assets to a controlledsubsidiary. Section 1.381(a)–1(b)(3)(ii)provides that if the corporation that di-rectly acquires the assets transferred bythe transferor corporation is the acquiringcorporation, and it transfers any acquiredassets to one or more controlled subsid-iaries, then the carryover of items de-scribed in section 381(c) to any controlledsubsidiary is not governed by section 381.Although that rule is correct, it is unnec-essary in light of the proposed section 381regulations. Accordingly, the paragraph isremoved.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. It hasalso been determined that section 553(b)of the Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseproposed regulations, and because theseregulations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section7805(f) of the Code, these regulations willbe submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The IRS and the Treasury Depart-ment request comments on all aspects ofthe proposed regulations. All commentswill be available for public inspection andcopying. A public hearing will be sched-uled if requested in writing by any personthat timely submits written or electroniccomments. If a public hearing is sched-

Bulletin No. 2014–22 May 27, 20141065

uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.

Drafting Information

The principal author of these proposedregulations is Stephanie D. Floyd of theOffice of Associate Chief Counsel (Cor-porate). Other personnel from the IRS andthe Treasury Department participated intheir development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to 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 * * *Par. 2. Section 1.381(a)–1 is amended

by:

1. Removing the third, fourth, and fifthsentences of paragraph (b)(2)(i) andadding one sentence in its place.

2. Removing from the last sentence ofparagraph (b)(2)(ii) Example 2 “Y”and adding “X” in its place.

3. Redesignating paragraph (b)(3)(i) asparagraph (b)(3).

4. Removing paragraph (b)(3)(ii).5. Adding a sentence at the end of para-

graph (e).

The revisions and additions read as fol-lows:

§ 1.381(a)–1 General rule relating tocarryovers in certain corporateacquisitions.

* * * * *(b) * * *(2) * * * (i) * * * In a transaction to

which section 381(a)(2) applies, the ac-quiring corporation is the corporation that,pursuant to the plan of reorganization, di-rectly acquires the assets transferred bythe transferor corporation, even if that cor-poration ultimately retains none of the as-sets so transferred.

* * * * *

(e) * * * Paragraph (b)(2) of this sec-tion applies to transactions occurring onor after the date of publication of theTreasury decision adopting this rule as afinal regulation in the Federal Register.

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

(Filed by the Office of the Federal Register on May 6, 2014,8:45 a.m., and published in the issue of the Federal Registerfor May 7, 2014, 79 F.R. 26190)

Definitions and ReportingRequirements forShareholders of PassiveForeign InvestmentCompanies; InsuranceIncome of a ControlledForeign Corporation forTaxable Years BeginningAfter December 31, 1986;Correction

Announcement 2014–22

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correcting amendment.

SUMMARY: This document containscorrections to final and temporary regula-tions (TD 9650) that were published in theFederal Register on Tuesday, December31, 2013 (78 FR 79602). The regulationsprovide guidance on determining owner-ship of a passive foreign investment com-pany (“PFIC”) and on the annual filingrequirements for shareholders of PFICs.

DATES: This correction is effective May12, 2014 and applicable beginning De-cember 31, 2013.

FOR FURTHER INFORMATIONCONTACT: Susan Massey at (202) 317-6934 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations(TD 9650) that are the subject of thiscorrection are under sections 1291, 1298,

6038, and 6046 of the Internal RevenueCode.

Need for Correction

As published, the final and temporaryregulations (TD 9650) contain errors thatmay prove to be misleading and are inneed of clarification.

* * * * *

Correction of Publication

Accordingly, 26 CFR part 1 is cor-rected by making the following correctingamendments:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. The section heading for

§ 1.6038–2T is revised to read as follows:§ 1.6038–2T Information returns re-

quired of United States persons withrespect to annual accounting periods ofcertain foreign corporations beginningafter December 31, 1962 (temporary).

* * * * *Par. 3. Section 1.6046–1 is amended as

follows:

1. Paragraphs (a)(2)(i)(a) and (b) and(c)(1) and (3) are revised.

2. The language “in value” is removedwherever it appears in paragraphs(a)(3) Example 2.(i), (a)(3) Example3., and (c)(2).

3. The language “M” in the first sen-tence of paragraphs (a)(3) Example2.(i), (c)(2) Example 3.(i), and (c)(2)Example 5.(i) is removed and the lan-guage “M Corporation” added in itsplace.

4. The language “liability” in paragraph(a)(3) Example 2. (ii) is removed andthe language “liability for A” addedin its place.

5. The language “U.S.” in paragraph (c)introductory text and paragraph(c)(1) introductory text is removedand the language “United States”added in its place.

6. Paragraph (l)(2) is revised.

The revisions read as follows:

May 27, 2014 Bulletin No. 2014–221066

§ 1.6046–1 Returns as to organizationsor reorganizations of foreigncorporations and as to acquisitions oftheir stock.

(a) * * *(2) * * *(i) * * *(a) Acquires (whether in one or more

transactions) outstanding stock of suchcorporation which equals, or which whenadded to any such stock then owned byhim equals, 10 percent or more of the totalcombined voting power of all classes ofstock of the foreign corporation entitled tovote or the total value of the stock of theforeign corporation;

(b) Acquires (whether in one or moretransactions) an additional 10 percent ormore of the total combined voting powerof all classes of stock of the foreign cor-poration entitled to vote or the total valueof the stock of the foreign corporation; or

* * * * *(c) Returns required of United States

when liability to file arises after January1, 1963—(1) United States persons re-quired to file. A return on Form 5471,containing the information required byparagraph (c)(4) of this section, shall bemade by each United States person whenat any time after January 1, 1963:

(i) Such person acquires (whether inone or more transactions) outstandingstock of such foreign corporation whichequals, or which when added to any suchstock then owned by him equals, 10 per-cent or more of the total combined votingpower of all classes of stock of the foreigncorporation entitled to vote or the totalvalue of the stock of the foreign corpora-tion;

(ii) Such person, having already ac-quired the interest referred to in paragraph(b) of this section or in paragraph (c)(1)(i)of this section —

(a) Acquires (whether in one or moretransactions) an additional 10 percent ormore of the total combined voting powerof all classes of stock of the foreign cor-poration entitled to vote or the total valueof the stock of the foreign corporation;

(b) Owns 10 percent or more of thetotal combined voting power of all classesof stock of the foreign corporation entitledto vote or the total value of the stock ofthe foreign corporation when such foreign

corporation is reorganized (as defined inparagraph (f)); or

(c) Disposes of sufficient stock in suchforeign corporation to reduce his interestto less than 10 percent of the total com-bined voting power of all classes of stockof the foreign corporation entitled to voteor the total value of the stock of the for-eign corporation; or

(iii) Such person is, at any time afterJanuary 1, 1987, treated as a United Statesshareholder under section 953(c) with re-spect to a foreign corporation.

* * * * *(3) Shareholders who become United

States persons. A return on Form 5471,containing the information required byparagraph (c)(4) of this section, shall bemade by each person who at any timeafter January 1, 1963, becomes a UnitedStates person while owning 10 percent ormore of the total combined voting powerof all classes of stock of the foreign cor-poration entitled to vote or the total valueof the stock of the foreign corporation.

* * * * *(l) * * *(2) Paragraph (c)(1)(iii) of this section

applies to taxable years ending on or afterDecember 31, 2013.

* * * * *Par. 4. Section 1.6046–1T is amended

by revising paragraph (e)(5) to read asfollows:

§ 1.6046–1T Returns as toorganizations or reorganizations offoreign corporations and as toacquisitions of their stock (temporary).

* * * * *(e) * * *(5) Persons excepted from furnishing

items of information. Any person requiredto furnish any item of information underparagraph (b) or (c) of this section withrespect to a foreign corporation may, ifsuch item of information is furnished byanother person having an equal or greaterstock interest (measured in terms of thetotal combined voting power of allclasses of stock of the foreign corpora-tion entitled to vote or the total value ofthe stock of the foreign corporation) insuch foreign corporation, satisfy suchrequirement by filing a statement withhis return on Form 5471 indicating that

such liability has been satisfied andidentifying the return in which suchitem of information was included. Thisparagraph (e)(5) does not apply to per-sons excepted from filing a return byreason of the provisions of paragraph(e)(4) of this section.

* * * * *

Martin V. Franks,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on May 9, 2014,8:45 a.m., and published in the issue of the Federal Registerfor May 12, 2014, 79 F.R. 26837)

Definitions and ReportingRequirements forShareholders of PassiveForeign InvestmentCompanies; Correction

Announcement 2014–23

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correction to a notice of pro-posed rulemaking by cross reference totemporary regulations.

SUMMARY: This document containscorrections to a notice of proposed rule-making by cross-reference to temporaryregulations (REG–140974–11) that waspublished in the Federal Register onTuesday, December 31, 2013 (78 FR79650). The proposed regulations provideguidance on determining the ownership ofa passive foreign investment company(PFIC), the annual filing requirements forshareholders of PFICs, and an exclusionfrom certain filing requirements for share-holders that constructively own interestsin certain foreign corporations.

DATES: Written or electronic com-ments and requests for a public hearingfor the notice of proposed rulemaking bycross-reference to temporary regulationspublished at 78 FR 79650, December 31,2013, the comment period ended onMarch 31, 2014.

Bulletin No. 2014–22 May 27, 20141067

FOR FURTHER INFORMATIONCONTACT: Susan E. Massey at (202)317-6934 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking bycross-reference to temporary regulations(REG–140974–11) that is the subject ofthis document is under sections 1297,1298, 6038, and 6046 of the Internal Rev-enue Code.

Need for Correction

As published, the notice of proposedrulemaking by cross-reference to tempo-

rary regulations (REG–140974–11) con-tains errors that may prove to be mislead-ing and are in need of clarification.

Correction of Publication

Accordingly, the notice of proposedrulemaking (REG–140974–11), that wasthe subject of FR Doc. 2013–30845, iscorrected as follows:

1. The authority citation for part 1 isamended by correcting the sectional au-thority for § 1.1298–1 to read in part asfollows:

Authority: 26 U.S.C. 7805* * *Section 1.1298–1 also issued under 26

U.S.C. 1298(f) and (g) * * *

§ 1.1298–1 [Corrected]

2. On Page 79652, column 1, the sev-enth line from the top of the page, thelanguage “as the text of § 1.1298–1T(h)published” is corrected to read “as the textof § 1.1298–1T published”.

Martin V. Franks,Chief, Publications and

Regulations BranchLegal Processing Division,

Associate Chief Counsel(Procedure and Administration).

May 27, 2014 Bulletin No. 2014–221068

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

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling 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 thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded 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 isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, 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 namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the 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 ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published 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.

Bulletin No. 2014–22 May 27, 2014i

Numerical Finding List1

Bulletins 2014–1 through 2014–22

Announcements

2014-1, 2014-2 I.R.B. 3932014-2, 2014-4 I.R.B. 4482014-4, 2014-7 I.R.B. 5232014-05, 2014-6 I.R.B. 5072014-06, 2014-6 I.R.B. 5082014-07, 2014-6 I.R.B. 5082014-08, 2014-6 I.R.B. 5082014-09, 2014-6 I.R.B. 5082014-10, 2014-6 I.R.B. 5082014-11, 2014-6 I.R.B. 5082014-12, 2014-6 I.R.B. 5092014-13, 2014-10 I.R.B. 6202014-14, 2014-16 I.R.B. 9482014-15, 2014-16 I.R.B. 9732014-16, 2014-17 I.R.B. 9832014-17, 2014-18 I.R.B. 10072014-18, 2014-17 I.R.B. 9832014-19, 2014-17 I.R.B. 9842014-20, 2014-20 I.R.B. 10272014-21, 2014-20 I.R.B. 10302014-22, 2014-22 I.R.B. 10662014-23, 2014-22 I.R.B. 1067

Notices

2014-1, 2014-2 I.R.B. 2702014-2, 2014-3 I.R.B. 4072014-3, 2014-3 I.R.B. 4082014-4, 2014-2 I.R.B. 2742014-5, 2014-2 I.R.B. 2762014-6, 2014-2 I.R.B. 2792014-7, 2014-4 I.R.B. 4452014-8, 2014-5 I.R.B. 4522014-9, 2014-5 I.R.B. 4552014-10, 2014-9 I.R.B. 6052014-11, 2014-13 I.R.B. 8802014-12, 2014-9 I.R.B. 6062014-13, 2014-10 I.R.B. 6162014-14, 2014-13 I.R.B. 8812014-15, 2014-12 I.R.B. 6612014-16, 2014-14 I.R.B. 9202014-17, 2014-13 I.R.B. 8812014-18, 2014-15 I.R.B. 9262014-19, 2014-17 I.R.B. 9792014-20, 2014-16 I.R.B. 9372014-21, 2014-16 I.R.B. 9382014-22, 2014-16 I.R.B. 9402014-23, 2014-16 I.R.B. 9422014-24, 2014-16 I.R.B. 9422014-25, 2014-17 I.R.B. 9812014-27, 2014-18 I.R.B. 9872014-28, 2014-18 I.R.B. 9902014-29, 2014-18 I.R.B. 9912014-31, 2014-20 I.R.B. 1006

Notice—Continued

2014-32, 2014-20 I.R.B. 10062014-33, 2014-21 I.R.B. 10332014-36, 2014-22 I.R.B. 1058

Proposed Regulations

REG-154890-03, 2014-6 I.R.B. 504REG-159420-04, 2014-2 I.R.B. 374REG-144468-05, 2014-6 I.R.B. 474REG-163195-05, 2014-15 I.R.B. 930REG-119305-11, 2014-8 I.R.B. 524REG-140974-11, 2014-3 I.R.B. 438REG-121534-12, 2014-6 I.R.B. 473REG-122706-12, 2014-11 I.R.B. 647REG-134361-12, 2014-13 I.R.B. 895REG-136984-12, 2014-2 I.R.B. 378REG-113350-13, 2014-3 I.R.B. 440REG-130967-13, 2014-13 I.R.B. 884REG-131239-13, 2014-22 I.R.B. 1064REG-141036-13, 2014-7 I.R.B. 516REG-143172-13, 2014-2 I.R.B. 383REG-108641-14, 2014-15 I.R.B. 928

Revenue Procedures

2014-1, 2014-1 I.R.B. 12014-2, 2014-1 I.R.B. 902014-3, 2014-1 I.R.B. 1112014-4, 2014-1 I.R.B. 1252014-5, 2014-1 I.R.B. 1692014-6, 2014-1 I.R.B. 1982014-7, 2014-1 I.R.B. 2382014-8, 2014-1 I.R.B. 2422014-9, 2014-2 I.R.B. 2812014-10, 2014-2 I.R.B. 2932014-11, 2014-3 I.R.B. 4112014-12, 2014-3 I.R.B. 4152014-13, 2014-3 I.R.B. 4192014-14, 2014-2 I.R.B. 2952014-15, 2014-5 I.R.B. 4562014-16, 2014-9 I.R.B. 6062014-17, 2014-12 I.R.B. 6612014-18, 2014-7 I.R.B. 5132014-19, 2014-10 I.R.B. 6192014-20, 2014-9 I.R.B. 6142014-21, 2014-11 I.R.B. 6412014-22, 2014-11 I.R.B. 6462014-23, 2014-12 I.R.B. 6852014-24, 2014-13 I.R.B. 8792014-25, 2014-15 I.R.B. 9272014-28, 2014-16 I.R.B. 9442014-30, 2014-20 I.R.B. 10092014-31, 2014-20 I.R.B. 10092014-33, 2014-22 I.R.B. 1060

Revenue Rulings

2014-1, 2014-2 I.R.B. 2632014-2, 2014-2 I.R.B. 255

Revenue Rulings—Continued

2014-3, 2014-2 I.R.B. 2592014-4, 2014-5 I.R.B. 4492014-6, 2014-7 I.R.B. 5102014-8, 2014-11 I.R.B. 6242014-9, 2014-17 I.R.B. 9752014-10, 2014-14 I.R.B. 9062014-11, 2014-14 I.R.B. 9062014-12, 2014-15 I.R.B. 9232014-13, 2014-19 I.R.B. 1003

Treasury Decisions

9649, 2014-2 I.R.B. 2659650, 2014-3 I.R.B. 3949651, 2014-4 I.R.B. 4419652, 2014-12 I.R.B. 6559653, 2014-6 I.R.B. 4609654, 2014-6 I.R.B. 4619655, 2014-9 I.R.B. 5419656, 2014-11 I.R.B. 6269657, 2014-13 I.R.B. 6879658, 2014-13 I.R.B. 7489659, 2014-12 I.R.B. 6539660, 2014-13 I.R.B. 8429661, 2014-13 I.R.B. 8559662, 2014-16 I.R.B. 9339663, 2014-22 I.R.B. 10389664, 2014-22 I.R.B. 10459665, 2014-22 I.R.B. 1050

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2013–27 through 2013–52 is in Internal Revenue Bulletin2013–52, dated December 23, 2013.

May 27, 2014 Bulletin No. 2014–22ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2014–1 through 2014–22

Announcements:

2007-44Modified byAnn. 2014-4, 2014-7 I.R.B. 523

2011-49Modified byAnn. 2014-4, 2014-7 I.R.B. 523

Notices:

2003-37Obsoleted byREG-163195-05 2014-15 I.R.B. 930

2006-87, 2006-2 C.B. 766Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2006-109Modified byNotice 2014-4, 2014-2 I.R.B. 274

2007-25, 2007-1 C.B. 760Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2007-59Obsoleted byREG-163195-05 2014-15 I.R.B. 930

2007-77, 2007-2 C.B. 735Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2008-107, 2008-2 C.B. 1266Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2009-78Superseded byT.D. 9654 2014-6 I.R.B. 461

2010-27, 2010-1 C.B. 531Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2010-27, 2010-1 C.B. 531Superseded byNotice 2014-29, 2014-18 I.R.B. 991

2013-1Modified byNotice 2014-22, 2014-16 I.R.B. 940

Notices—Continued:

2013-13Obsoleted byREG-163195-05 2014-15 I.R.B. 930

2013-17Amplified byNotice 2014-1, 2014-2 I.R.B. 270

Revenue Procedures:

2003-49Modified and superseded byRev. Proc. 2014-14, 2014-2 I.R.B. 295

2004-42Obsoleted byREG-163195-05 2014-15 I.R.B. 930

2004-43Obsoleted byREG-163195-05 2014-15 I.R.B. 930

2011-4Modified byRev. Proc. 2014-17, 2014-12 I.R.B. 661

2011-14Modified byRev. Proc. 2014-16, 2014-9 I.R.B. 606

2011-14Clarified byRev. Proc. 2014-16, 2014-9 I.R.B. 606

2011-14Modified byRev. Proc. 2014-17, 2014-12 I.R.B. 661

2011-14Modified byRev. Proc. 2014-33, 2014-22 I.R.B. 1060

2011-44Modified and Superseded byRev. Proc. 2014-11, 2014-3 I.R.B. 411

2011-49Modified byRev. Proc. 2014-6, 2014-1 I.R.B. 198

2012-14Modified byRev. Proc. 2014-17, 2014-12 I.R.B. 661

2012-19Modified byRev. Proc. 2014-16, 2014-9 I.R.B. 606

Revenue Procedures—Continued:

2012-19Superseded byRev. Proc. 2014-16, 2014-9 I.R.B. 606

2012-20Modified byRev. Proc. 2014-17, 2014-12 I.R.B. 661

2012-20Superseded byRev. Proc. 2014-17, 2014-12 I.R.B. 661

2013-1Superseded byRev. Proc. 2014-1, 2014-1 I.R.B. 1

2013-2Superseded byRev. Proc. 2014-2, 2014-1 I.R.B. 90

2013-3Superseded byRev. Proc. 2014-3, 2014-1 I.R.B. 111

2013-4Superseded byRev. Proc. 2014-4, 2014-1 I.R.B. 125

2013-5Superseded byRev. Proc. 2014-5, 2014-1 I.R.B. 169

2013-6Superseded byRev. Proc. 2014-6, 2014-1 I.R.B. 198

2013-7Superseded byRev. Proc. 2014-7, 2014-1 I.R.B. 238

2013-8Superseded byRev. Proc. 2014-8, 2014-1 I.R.B. 242

2013-9Superseded byRev. Proc. 2014-9, 2014-2 I.R.B. 281

2013-10Superseded byRev. Proc. 2014-10, 2014-2 I.R.B. 293

2013-22Modified byRev. Proc. 2014-28, 2014-16 I.R.B. 944

2013-24Obsoleted byRev. Proc. 2014-23, 2014-12 I.R.B. 685

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013–27 through 2013–52 is in Internal Revenue Bulletin 2013–52, dated December 23,2013.

Bulletin No. 2014–22 May 27, 2014iii

Revenue Procedures—Continued:

2013-27Obsoleted byRev. Proc. 2014-23, 2014-12 I.R.B. 685

2013-28Obsoleted byRev. Proc. 2014-31, 2014-20 I.R.B. 1009

2013-32Superseded in part byRev. Proc. 2014-1,, and 2014-1 I.R.B. 1

Rev. Proc. 2014-3, 2014-1 I.R.B. 111

2014-1Amplified byRev. Proc. 2014-18, 2014-7 I.R.B. 513

2014-1 I.R.B. 111Amplified byRev. Proc. 2014-24, 2014-13 I.R.B. 879

2014-3Amplified byRev. Proc. 2014-18, 2014-7 I.R.B. 513

2014-3 I.R.B 111Amplified byRev. Proc. 2014-24, 2014-13 I.R.B. 879

2014-4Modified byRev. Proc. 2014-19, 2014-10 I.R.B. 619

Proposed Regulations:

209054-87A portion withdrawn byREG-113350-13 2014-3 I.R.B. 440

Revenue Rulings:

2005-48 (2005-2 CB 259)Obsoleted byT.D. 9659 2014-12 I.R.B. 653

2013-17Amplified byNotice 2014-19, 2014-17 I.R.B. 979

2013-17Amplified byNotice 2014-25, 2014-17 I.R.B. 981

Treasury Decision:

9644Correction byAnn. 2014-18, 2014-17 I.R.B. 983

9644Correction byAnn. 2014-19, 2014-17 I.R.B. 984

May 27, 2014 Bulletin No. 2014–22iv

INDEXInternal Revenue Bulletins 2014–1 through2014–22

The abbreviation and number in parenthesis following the indexentry refer to the specific item; numbers in roman and italic typefollowing the parentheses refer to the Internal Revenue Bulletin inwhich the item may be found and the page number on which itappears.

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

ADMINISTRATIVEAverage area purchase price safe-harbors guidance for 2014

(RP 31) 20, 1009Consolidated returns; failure to properly include subsidiary

(RP 24) 13, 879Extension of time to file estate tax return to elect portability of a

deceased spousal unused exclusion amount under section2010(c)(5)(A). (RP 18) 7, 513

Method change procedures for dispositions of tangible deprecia-ble property (RP 17) 12, 661

Maximum Vehicle Values for which the special valuation rulesof regulations section 1.61–21(d) and (e) may be used (Notice11) 13, 880

Minimum essential coverage, information reporting (TD 9660)13, 842

Regulations:26 CFR 1.6055–1 added. 26 CFR 1.6055–2 added. 26 CFR

1.6081–8 amended. 26 CFR 301.6011–2 amended. 26CFR 301.6721–1 amended. 26 CFR 1.6011–8 amended.26 CFR 301.6722–1 amended; minimum essential cover-age, information reporting 13, 842

Per Capita Payments from Proceeds of Settlements of IndianTribal Trust Cases (Notice 22) 16, 940

Virtual Currency (Notice 21) 16, 938

EMPLOYEE PLANSDefinition of a substantial risk of forfeiture (TD 9659) 12, 653Domestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Excepted benefits (REG–143172–13) 2, 383Final rules to implement the 90-day waiting period limitation

(TD 9656) 11, 626

EMPLOYEE PLANS—Cont.Letter rulings:

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

Counsel and Division counsel (TE/GE) (RP 3) 1, 111Exemption application determination letter rulings under

sections 501 and 521 (RP 9) 1, 281And general information letters; procedures (RP 4) 1, 125User fees, request for letter rulings (RP 8) 1, 242

Letter rulings and general information letters (RP 4) 1, 125Letter rulings or determination letters (RP 1) 1, 1Proposed rules to clarify length of reasonable and bona fide

employment-based orientation period, consistent with the 90-day waiting period limitation (REG–122706–12) 11, 647

Qualification, determination letters (RP 6) 1, 198Qualified plans:

Application of the Windsor Decision and Rev. Rul. 2013–17(Notice 19) 17, 979

Discrimination (Notice 5) 2, 276Opinion letters (Ann 4) 7, 523Opinion letters (Ann 16) 17, 983Determination Letters (RP 19) 10, 619

Qualified retirement plans covered compensation, permitted dis-parity (RR 3) 2, 259

Qualified retirement plansRollovers (RR 9) 17, 975

Regulations:26 CFR 54.9815–2708, amended; REG–122706–12) 11, 647

Removal of the Qualified Payment Card Agent Program (REG–163195–05) 15, 930

Request for Information Regarding Provider Non-Discrimination(REG–108641–14) 15, 928

Rulings and determination letters, user fees (RP 8) 1, 242Technical advice memorandum or TAM (RP 2) 1, 90Technical advice procedures (RP 5) 1, 169Full funding limitations, weighted average interest rates, segment

rates for:January 2014 (Notice 8) 5, 452

Weighted average interest ratesSegment rates for February 2014 (Notice 13) 10, 616Segment rates for March 2014 (Notice 16) 14, 920Segment rates for March 2014 (Notice 27) 18, 987

EMPLOYMENT TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Employment tax liability of agents authorized under section 3504

(TD 9649) 2, 265Employment tax obligations of a third party that enters into a

service agreement with an employer to take on the employer’semployment tax responsibilities (TD 9662) 16, 933

Bulletin No. 2014–22 May 27, 2014v

EMPLOYMENT TAX—Cont.Regulations:

26 CFR 31–3504–2, added; employment tax obligations of athird party that enters into a service agreement with anemployer to take on the employer’s employment tax re-sponsibilities (TD 9662) 16, 933

Letter rulings or determination letters (RP 1) 1, 1Regulations:

26 CFR 1.83–3 is revised; definition of a substantial risk offorfeiture (TD 9659) 12, 653

26 CFR 54.9815–2708, amended; REG–122706–12) 11, 64726 CFR 54,9801–1, thru–6, amended; 26 CFR 54.9802–1,

amended; 26 CFR 54.9815–2708, added; 26 CFR54.9831–1, amended (TD 9656) 12, 626

Technical Advice Memorandum (TAM) (RP 2) 1, 90Virtual Currency (Notice 21) 16, 938

ESTATE TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Extension of time to file estate tax return to elect portability of a

deceased spousal unused exclusion amount under section2010(c)(5)(A) (RP 18) 7, 513

Letter rulings or determination letters (RP 1) 1, 1Technical Advice Memorandum (TAM) (RP 2) 1, 90

EXCISE TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Final rules to implement the 90-day waiting period limitation

(TD 9656) 11, 626Information reporting by applicable large employers on health

insurance coverage offered under employer-sponsored plans(TD 9661) 13, 855

Regulations:301.6056–1, –2, added; Information reporting by applicable

large employers on health insurance coverage offered un-der employer-sponsored plans (TD 9661) 13, 855

Interim guidance regarding supporting organizations (Notice 4) 2, 274Letter rulings or determination letters (RP 1) 1, 1Notice for ACA Section 9010 Health Insurance Providers Fee

and expatriate plans (Notice 24) 16, 942Proposed rules to clarify length of reasonable and bona fide

employment-based orientation period, consistent with the 90-day waiting period limitation (REG–122706–12) 11, 647

Regulations:26 CFR 54.9815–2708, amended; REG–122706–12) 11, 64726 CFR 54,9801–1, thru –6, amended; 26 CFR 54.9802–1,

amended; 26 CFR 54.9815–2708, added; 26 CFR54.9831–1, amended (TD 9656) 12, 626

Technical Advice Memorandum (TAM) (RP 2) 1, 90

EXEMPT ORGANIZATIONSDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111

EXEMPT ORGANIZATIONS—Cont.Form 990 Revenue Procedure update to revoke Revenue Proce-

dure 79–6 (RP 22) 11, 646Interim guidance regarding supporting organizations (Notice 4)

2, 274Letter rulings:

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

Counsel and Division counsel (TE/GE) (RP 3) 1, 111Exemption application determination letter rulings under

sections 501 and 521 (RP 9) 1, 281And general information letters; procedures (RP 4) 1, 125User fees, request for letter rulings (RP 8) 1, 242

Letter rulings (RP 10) 2, 293; (RP 9) 2, 281Letter rulings or determination letters (RP 1) 1, 1Proposed procedures for charitable hospitals to correct and dis-

close failures to meet section 501(r) (Notice 3) 3, 408Reliance on proposed regulations for tax-exempt hospitals

(Notice 2) 3, 407Rulings and determination letters, user fees (RP 8) 1, 242Technical Advice Memorandum (TAM) (RP 2) 1, 90Technical advice procedures (RP 5) 1, 169

INCOME TAXAccounting method change, sales-base royalties and vendor al-

lowances (RP 33) 22, 1060Acquiring Corporation for Purposes of Section 381 (REG–

131239–13) 22, 1064Adequate disclosure revenue procedure (RP 15) 5, 456Advance Pricing and Mutual Agreement Program (Ann 14) 16,

948Allocation of section 47 credits by a partnership to its partners

(RP 12) 3, 415Allocation of section 752 recourse liabilities among related par-

ties (REG–136984–12) 2, 378Amount of the life insurance reserves taken into account under

§ 807 of the Internal Revenue Code for variable contracts(RR 7) 9, 539

Areas in which rulings will not be issued; Associate ChiefCounsel (International) (RP 7) 1, 238

Average area purchase price safe-harbors guidance for 2014(RP 31) 20, 1009

Basis in assets of tax exempt trusts (REG–154890–03) 6, 504Bond premium carryforward (TD 9653) 6, 460Cafeteria plans, FSA reimbursements, and HSA contribution

limits for same-sex spouses (Notice 1) 2, 2702014 Census Count (Notice 12) 9, 606Contribution of built-in lost property to a partnership; mandatory

basis adjustments in the event of a substantial built-in loss orsubstantial basis reduction; modification of basis allocationrules (REG–144468–05) 6, 474

Current refunding of Recovery Zone facility bonds (Notice 9) 5,455

Declaratory judgement suits (Ann 5) 6, 507; (Ann 6) 6, 507;(Ann 7) 6, 508; (Ann 8) 6, 508; (Ann 9) 6, 508; (Ann 10) 6,508; (Ann 12) 6, 509

May 27, 2014 Bulletin No. 2014–22vi

INCOME TAX—Cont.Definition of a substantial risk of forfeiture (TD 9659) 12, 653Definitions applicable to U.S. persons owning interests in passive

foreign investment companies (REG–113350–13) 3, 440Depreciation deduction, limitations on certain automobiles

(RP 21) 11, 641Determination of housing cost eligible exclusion or deduction for

2014 (Notice 29) 18, 991Determination of ownership in a passive foreign investment

company; annual filing requirements for shareholders of pas-sive foreign investment companies; filing requirements forconstructive owners in certain foreign corporations (REG–140974–11) 3, 438; (TD 9650) 3, 394correction (Ann 22) 22, 1066

Determining stock ownership for purposes of whether an entity isa surrogate foreign corporation (TD 9654) 6, 461; (REG–121534–12) 6, 473

Discharge of indebtedness secured by real property (RP 20) 9,614

Disciplinary actions involving attorneys, certified public accoun-tants, enrolled agents, and enrolled actuaries (Ann 13) 10, 620

Disciplinary actions involving attorneys, certified public accoun-tants, enrolled agents, and enrolled actuaries (Ann 20) 20,1027

Domestic areas in which the Service will not issue letter rulingsor determination letters (RP 3) 1, 111

Equity-linked instruments and dividend equivalents (Notice 14)13, 881

FATCA financial institution registration update (Ann 1) 2, 393FATCA IGA and registration update (Ann 17) 18, 1001Final FFI agreement for participating FFI and reporting Model 2

FFI (RP 13) 3, 419Foreign Earned Income Exclusion (RP 25) 15, 927Further guidance on FATCA implementation and related with-

holding provisions (Notice 33) 21, 10332014 – 2015 Guidance Priority List- Solicitation Notice (Notice 18)

15, 926Guidance regarding reinstatement following auto revocation of

tax-exempt status under section 6033(j) (RP 11) 3, 411Income tax treatment of per capita payments made from funds

held in trust by the Secretary of the Interior (Notice 17) 13, 8812015 Inflation adjusted amounts for Health Savings Accounts

(HSAs) (RP 30) 20, 1009Inflation Adjustment Factors (Notice 2014–36) 22, 1058Information reporting by foreign financial institutions and with-

holding on payments to foreign financial institutions and otherforeign entities (REG–130967–13) 13, 884

Regulation:26 CFR 1.1471–0, amended; 26 CFR 1.1471–1, amended; 26

CFR 1.147–2, amended; 26 CFR 1.1471–3, amended; 26CFR 1.1471–4, amended; 26 CFR 1.1471–5, amended; 26CFR 1.1471–6, amended; 26 CFR 1.1472–1, amended; 26CFR 1.1473–1, amended; 26 CFR 1474–1, amended; 26CFR 1.1474–6, amended. (Reg–130967–13) 13, 884

Information reporting by foreign financial institutions and with-holding on payments to foreign financial institutions and otherforeign entities (TD 9657) 13, 687

INCOME-TAX—Cont.Regulations:

26 CFR 1.1471–0, amended; 26 CFR 1.1471–1, amended; 26CFR 1.147–2, amended; 26 CFR 1.1471–3, amended; 26CFR 1.1471–4, amended; 26 CFR 1.1471–5, amended; 26CFR 1.1471–6, amended; 26 CFR 1.1472–1, amended; 26CFR 1.1473–1, amended; 26 CFR 1474–1, amended; 26CFR 1.1474–6, amended. (TD 9657) 13, 687

Interest:Investment:

Federal short-term, mid-term, and long-term rates for:January 2014 (RR 1) 2, 263February 2014 (RR 6) 7, 510March 2014 (RR 8) 11, 624April 2014 (RR 12) 15, 923May 2014 (RR 13) 19, 1003

Intra-group gross receipts (REG–159420–04) 2, 374Insurance tax, insurance companies, interest rate tables (RR 4) 5,

449Letter rulings or determination letters (RP 1) 1, 1Low-Income Housing Credit (Notice 15) 12, 661Maximum Vehicle Values for which the special valuation rules

of regulations section 1.61–21(d) and (e) may be used (Notice11) 13, 880

Method change procedures for dispositions of tangible deprecia-ble property (RP 17) 12, 661

Minimum essential coverage, information reporting (TD 9660)13, 842

Regulations:26 CFR 1.6055–1 added. 26 CFR 1.6055–2 added. 26 CFR

1.6081–8 amended. 26 CFR 301.6011–2 amended. 26CFR 301.6721–1 amended. 26 CFR 1.6011–8 amended.26 CFR 301.6722–1 amended. (TD 9660) 13, 842

26 CFR 1.72–15, amended, 26 CFR 1.105–4, removed, 26CFR 1.105–6, removed, 26 CFR 1.106–1, amended, 26CFR 1.401–1, amended, 26 CFR 1.402(c)–2, amended;Tax Treatment of Qualified Retirement Plan Payment ofAccident or Health Insurance Premiums (TD 9665) 221050

Net investment income tax; TD 9644 Correction (Ann 2014–18)17, 983

Net investment income tax; TD 9644 Correction (Ann 2014–19)17, 984

Postponement of deadline for § 165(i) election for losses attrib-utable to September 2013 major flooding in Colorado (Notice)(Notice 20) 16, 937

Regulations:26 CFR 1.36B–0 amended26 CFR 1.36B–5 amended

Premium tax credit (TD 9663) 22, 1038Principal residence, treatment of National Mortgage Settlement

payments (RR 2) 2, 255Qualified census tracts (RP 14) 2, 295Refundable Credit For Coverage Under a Qualified Health Plan,

Definition and Rules Relating to Applicable Taxpayer (Notice 23)16, 942

Regarding disguised sales, generally (REG–119305–11) 8, 524

Bulletin No. 2014–22 May 27, 2014vii

INCOME TAX—Cont.Regulations:

26 CFR 1.83–3 is revised; definition of a substantial risk offorfeiture (TD 9659) 12, 653

26 CFR 1.263A–0, thru –3, amended; 1.471–3 amended;sales-base royalties and vendor allowances (TD 9652) 12,655

Removal of the Qualified Payment Card Agent Program (REG–163195–05) 15, 930

Regulations:26 CFR 301.6724–1(c)(6), amended; 26 CFR 31.3406(g)-

1(f), 26 CFR 301.6724–1(e)(1)(vi)(H), and 26 CFR301.6724–1(f)(5)(vii), removed;removal of the qualifiedpayment ard agent program (REG–163195–05) 15, 930

26 CFR 1.6045–1T: Returns of information of brokers and barterexchanges (temporary), correction to TD 9658 (Ann 21) 20,1030

Revocations, exempt organization (Ann 11) 6, 508Sales-bases royalties and vendor allowances (TD 9652) 12, 6552013 Section 45K Inflation Adjustment Factor – Nonconven-

tional Fuel source Credit (Notice 25) 17, 981Section 67 Limitations on Estates or Trusts (REG–128224–06)

22, 1046Regualtions:

26 CFR 1.67–4, added; 1.67-4T, removed (TD 9664) 22,1045

Shared responsibility for employers regarding health coverage(TD 9655) 9, 541

Shared responsibility payment for not maintaining minimumessential coverage (REG–141036–13) 7, 516

Standard Industry Fare Level (SIFL) (RR 10) 14, 906Tangible property regulations method change guidance (RP 16)

9, 606Tax Treatment of Qualified Retirement Plan Payment of Acci-

dent or Health Insurance Premiums (TD 9665) 22, 1050Technical Advice Memorandum (TAM) (RP 2) 1, 90Transition relief for the tax credit for employee health insurance

expenses of certain small employers (Notice 6) 2, 279Transition relief under section 5000A for certain individuals

without minimum essential coverage (Notice 10) 9, 605Treatment of Income from certain government bonds held by

certain active banks for purposes of the passive foreign invest-ment company (PFIC) rules (Notice 31) 20, 1006

Treatment of Property Used To Acquire Parent Stock or Secu-rities in Certain Triangular Reorganizations Involving ForeignCorporations (Notice 32) 20, 1006

Treatment of U.S. persons that own stock of passive foreigninvestment companies through certain organizations and ac-counts that are tax exempt (Notice 28) 18, 990

Underpayment and overpayments, quarter beginning: April 1,2014 (RR 11) 14, 906

Virtual Currency (Notice 21) 16, 938Withholding of tax on certain U.S. source income paid to foreign

persons and revision of information reporting and backupwithholding regulations (REG–134361–12) 13, 895

INCOME TAX—Cont.Proposed Regulations:

26 CFR 1.871–14, amended; 26 CFR 1.1441–1, amended; 26CFR 1.1441–3, amended; 26 CFR 1.1441–5, amended; 26CFR 1.441–6, amended; 26 CFR 1.1441.7, amended; 26CFR 1.1461–1, amended; 26 CFR 1.1461–2, amended; 26CFR 1.6041–1, amended; 26 CFR 1.6041–4, amended; 26CFR 1.6042–2, amended; 26 CFR 1.6042–3, amended; 26CFR 1.6045–1, amended; 26 CFR 1.6049–4, amended; 26CFR 1.6049–5, amended; 26 CFR 31.3406(g)–1, amend-ed; 26 CFR 31.3406(h)–2, amended; 26 CFR 301.6402–3,amended; Withholding of tax on certain U.S. source in-come paid to foreign persons and revision of informationreporting and backup withholding regulations (REG–134361–12) 13, 895

Withholding of tax on certain U.S. source income paid to foreignpersons and revision of information reporting and backupwithholding regulations (TD 9658) 13, 748

Regulations:26 CFR 1.871–14, amended; 26 CFR 1.1441–1, amended; 26

CFR 1.1441–3, amended; 26 CFR 1.1441–5, amended; 26CFR 1.441–6, amended; 26 CFR 1.1441.7, amended; 26CFR 1.1461–1, amended; 26 CFR 1.1461–2, amended; 26CFR 1.6041–1, amended; 26 CFR 1.6041–4, amended; 26CFR 1.6042–2, amended; 26 CFR 1.6042–3, amended; 26CFR 1.6045–1, amended; 26 CFR 1.6049–4, amended; 26CFR 1.6049–5, amended; 26 CFR 31.3406(g)–1, amend-ed; 26 CFR 31.3406(h)–2, amended; 26 CFR 301.6402–3,amended; Withholding of tax on certain U.S. source in-come paid to foreign persons and revision of informationreporting and backup withholding regulations, correctionto (TD 9658) 13, 748

SELF-EMPLOYMENT TAXVirtual Currency (Notice 21) 16, 938

SPECIAL ANNOUNCEMENTAdvance Pricing and Mutual Agreement Program (Ann 14) 16,

948

May 27, 2014 Bulletin No. 2014–22viii

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