e-News for Tax Professionals Issue 2012-26
Internal Revenue Service (IRS) sent this bulletin at 06/29/2012 03:30 PM EDT
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Issue Number: 2012-26Inside This Issue
1. IRS to Help U. S. Citizens Overseas Including Dual Citizens and Those with Foreign Retirement Plans The Internal Revenue Service announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. 2. IRS Says Offshore Effort Tops $5 Billion, Announces New Details on the Voluntary Disclosure Program and Closing of Offshore Loophole The Internal Revenue Service announced that its offshore voluntary disclosure programs have exceeded the $5 billion mark and released new details regarding the voluntary disclosure program announced in January, including tightening the eligibility requirements. 3. National Taxpayer Advocate Identifies Challenges and Issues for Upcoming Year in Report to Congress National Taxpayer Advocate Nina E. Olson released a report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will focus on during the upcoming fiscal year. The report expresses particular concern about the taxpayer impact of expired and expiring tax provisions, the rise in tax fraud and tax-related identity theft, and attempts to limit the National Taxpayer Advocate’s formal input on issues that affect taxpayer rights and taxpayer burden via “Taxpayer Assistance Orders” and “Taxpayer Advocate Directives. 4. Do You Need to Take the Registered Tax Return Preparer Test? Take It in Las Vegas Did you know that you can take the Registered Tax Return Preparer Test at the Las Vegas IRS Nationwide Tax Forum? We also have test centers within 20 miles of all Tax Forum locations. Register for a Forum and then reserve your test slot. Stand out among your peers by becoming a Registered Tax Return Preparer this summer. 5. Day Care Webinar now on the IRS Video Portal The recent webinar for child care providers covers recordkeeping, business use of the home, and computing and reporting depreciation. 6. YouTube: IRS Information Available in Spanish Learn about all the Spanish-language products that the IRS has to offer in this new YouTube video. Watch this and other videos on the IRS YouTube Channel. 7. July 25 Webinar: Churches and Religious Organizations This free webinar explains federal tax rules of interest to churches and religious organizations. Watch this webinar to learn: • When it comes to taxes, what is a "church?" 8. Workshops for Small and Medium-Sized 501(c)(3) Organizations Sign up now for a workshop near you. These one-day workshops for small and medium-sized 501(c)(3) organizations are presented by experienced IRS Exempt Organizations’ specialists and explain what 501(c)(3) entities must do to keep their tax-exempt status and comply with tax obligations. 9. Technical Guidance Revenue Ruling-2012-19 Section 162(m)(4)(C)—Dividends and Dividend Equivalents on Restricted Stock and Restricted Stock Units ISSUE Whether dividends and dividend equivalents relating to restricted stock and restricted stock units (RSUs) that are performance-based compensation under § 162(m)(4)(C) of the Internal Revenue Code must separately satisfy the requirements under § 162(m)(4)(C) to be treated as performance-based compensation. FACTS Corporation X and Corporation Y are publicly held corporations within the meaning of § 162(m)(2). Both corporations maintain plans under which participating employees may be granted restricted common stock of the respective corporation or RSUs based upon the common stock of the respective corporation. The restricted stock and RSUs granted under the plans of Corporations X and Y vest upon the attainment of certain preestablished, objective performance goals and otherwise meet the requirements of § 1.162-27(e). Accordingly, the compensation received due to the vesting of the restricted stock and the vesting and payment of the RSUs is qualified performance-based compensation that is excluded from the applicable employee remuneration to which the deduction limitation under § 162(m) applies. Situation 1. Corporation X’s plan provides that dividends and dividend equivalents otherwise payable to an employee during the period from grant through vesting with respect to performance-based restricted stock and RSU awards granted to the employee are accumulated and become vested and payable only if the related performance goals with respect to the restricted stock and RSUs are satisfied. All other requirements of § 1.162-27(e) are met with respect to the grant of rights to dividends and dividend equivalents. Situation 2. Corporation Y’s plan provides for payment to an employee during the period from grant to vesting of dividends and dividend equivalents with respect to performance-based restricted stock and RSU awards granted to the employee at the same time dividends are paid on common stock of Corporation Y regardless of whether the performance goals established with respect to the restricted stock and RSUs are satisfied. LAW Section 162(a)(1) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. Section 162(m)(1) provides that in the case of any publicly held corporation, no deduction is allowed for applicable employee remuneration with respect to any covered employee to the extent that the amount of the remuneration for the taxable year exceeds $1,000,000. Section 162(m)(3) provides that the term “covered employee” means any employee of the taxpayer if (i) as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is an individual acting in such a capacity, or (ii) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 (Exchange Act) by reason of such employee being among the four highest compensated officers for the taxable year (other than the chief executive officer). See Notice 2007-49, 2007-1 C.B. 1429 (providing changes to the application of this provision based on changes in the Exchange Act compensation disclosure rules). Section 162(m)(4)(A) defines “applicable employee remuneration,” with respect to any covered employee for any taxable year, generally as the aggregate amount allowable as a deduction for the taxable year (determined without regard to § 162(m)) for remuneration for services performed by the employee (whether or not during the taxable year). Section 162(m)(4)(C) provides that applicable employee remuneration does not include any remuneration payable solely on account of the attainment of one or more performance goals, but only if (i) the performance goals are determined by a compensation committee of the board of directors of the taxpayer which is comprised solely of two or more outside directors, (ii) the material terms under which the remuneration is to be paid, including the performance goals, are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before payment of such remuneration, and (iii) before any payment of such remuneration, the compensation committee certifies that the performance goals and other material terms were in fact satisfied. Rules with respect to these requirements are set forth in §§ 1.162-27(e)(2) through (e)(5). Section 1.162-27(e)(2)(i) provides that qualified performance-based compensation must be paid solely on account of the attainment of one or more preestablished, objective performance goals. Section 1.162-27-(e)(2)(ii) provides that a preestablished performance goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the employee if the goal is attained. Section 1.162-27(e)(2)(iv) provides that the determination of whether compensation satisfies the requirements of § 1.162-27(e)(2) generally is made on a grant-by-grant basis. Section 1.162-27(e)(2)(iv) further provides that, except as provided in § 1.162-27(e)(2)(vi) (relating to stock options and stock appreciation rights), whether a grant of restricted stock or other stock-based compensation satisfies the performance goal requirements is determined without regard to whether dividends, dividend equivalents, or other similar distributions with respect to stock, on such stock-based compensation are payable prior to the attainment of the performance goal. Dividends, dividend equivalents, or other similar distributions with respect to stock that are treated as separate grants under § 1.162-27(e)(2)(iv) are not performance-based compensation unless they separately satisfy the performance goal requirements. Such performance goals may or may not be the same as the performance goals for the related stock-based co ANALYSIS Under § 1.162-27(e)(2)(iv), the dividends and dividend equivalents under Corporation X’s plan and under Corporation Y’s plan are grants of compensation that are separate and apart from the related restricted stock and RSU grants. Therefore, the grants of the dividends and dividend equivalents must separately satisfy the requirements of § 1.162-27(e) to be qualified performance-based compensation. Situation 1. Under Corporation X’s plan, participants’ rights to restricted stock and RSUs are subject to performance goals that meet the requirements of § 1.162-27(e) and are excluded from applicable remuneration for purposes of applying the § 162(m)(1) deduction limitation. Under the same plan, participants’ rights to dividends and dividend equivalents vest and become payable only if the same performance goals that apply to the related grants of restricted stock and RSUs are satisfied. Therefore, dividends and dividend equivalents under X’s plan are also excluded from applicable remuneration for purposes of applying the § 162(m)(1) deduction limitation. Situation 2. The dividends and dividend equivalents under Corporation Y’s plan fail to satisfy the requirements under § 162(m)(4)(C) and § 1.162-27(e) because the rights to these amounts do not vest and become payable solely on account of the attainment of preestablished performance goals. Thus, these amounts are not qualified performance-based compensation, regardless of whether the performance goals are met with respect to the related restricted stock and RSUs. HOLDINGS Situation 1. With respect to Corporation X, dividends and dividend equivalents paid under X’s plan are qualified-performance based compensation and therefore are excluded from applicable employee remuneration for purposes of applying the $1,000,000 limitation on deductibility under § 162(m)(1). Situation 2. With respect to Corporation Y, dividends and dividend equivalents paid under Y’s plan are not qualified-performance based compensation and therefore are included in applicable employee remuneration for purposes of applying the $1,000,000 limitation on deductibility under § 162(m)(1). DRAFTING INFORMATION This revenue ruling was prepared by Dara Alderman of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue ruling, contact Ms. Alderman at (202) 622-6030 (not a toll-free call). Notice-2012-44 Qualified Energy Conservation Bonds PURPOSE This Notice provides guidance concerning qualified energy conservation bonds under § 54D of the Internal Revenue Code (Qualified Energy Conservation Bonds). This Notice addresses questions regarding qualified conservation purposes eligible for financing with these bonds, particularly (1) how to measure reductions of energy consumption in publicly-owned buildings by at least 20 percent under § 54D(f)(1)(A)(i) and (2) what constitutes a “green community program” under § 54D(f)(1)(A)(ii). BACKGROUND Section 301(a) of Title III of Division B, the Energy Improvement and Extension Act of 2008, Pub. L. 110-343, 122 Stat. 1365 (2008) (the "2008 Energy Act"), added new § 54D, which contains program provisions specific to Qualified Energy Conservation Bonds effective for obligations issued after October 3, 2008. Section 54D(a) provides that the term Qualified Energy Conservation Bond means any bond issued as part of an issue if: (1) 100 percent of the available project proceeds of such issue are to be used for one or more “qualified conservation purposes;” (2) the bond is issued by a State or local government; and (3) the issuer designates such bond for purposes of § 54D. Section 54D(f) defines the term “qualified conservation purpose” to include, among other purposes, capital expenditures incurred for purposes of (i) reducing energy consumption in publicly-owned buildings by at least 20 percent, or (ii) implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs). Section 54D(d) originally authorized a national bond volume cap of $800 million for Qualified Energy Conservation Bonds, and § 54D(e) generally provides rules for how this volume cap is to be allocated among the States. Section 1112 of Division B of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) ("ARRA"), amended § 54D in several respects. ARRA increased the national bond volume cap for Qualified Energy Conservation Bonds from $800 million to $3.2 billion. ARRA also amended the provision on “green community programs” to what is in the statute today to clarify that these programs may include the use of loans, grants, or other repayment mechanisms to implement such programs. In addition, ARRA added § 54D(e)(4), which provides generally that bonds issued to provide loans, grants, or other repayment mechanisms for capital expenditures to implement green community programs are not treated as private activity bonds for purposes of the restriction under § 54D(e)(3) against using more than 30 percent of the bond volume cap for private activity bonds. In Notice 2009-29, 2009-1 C.B. 849 (April 6, 2009), the Treasury Department and the IRS allocated the national bond volume cap for Qualified Energy Conservation Bonds to States, the District of Columbia, and possessions of the United States in proportion to population. Notice 2009-29 also provided interim guidance on certain general program requirements under § 54D. Section 179D also provides tax benefits for reductions in energy consumption in government-owned buildings. Because of the difference in the rules and standards for determining the deduction for energy-efficient commercial buildings under § 179D as compared to the rules and standards for determining whether bonds are Qualified Energy Conservation Bonds under § 54D, this Notice, including the rules for measuring the reduction of energy consumption in publicly-owned buildings, does not apply for purposes of § 179D. For guidance on § 179D, see Notice 2006-52, 2006-1 C.B. 1175, Notice 2008-40, 2008-1 C.B. 725, and Notice 2012-26, 2012-17 I.R.B. 847. LEGISLATIVE HISTORY The legislative history of the 2008 Energy Act includes the House of Representatives version of the 2008 Energy Act in a bill entitled the “Renewable Energy and Job Creation Act of 2008,” H.R. 6049, 110th Cong. (2008) (H.R. 6049). The text of the House Bill is identical, in pertinent part, to the text of the statute that was enacted. House of Representatives Report No. 110-658 accompanied H.R. 6049 and indicates that the House intended the Qualified Energy Conservation Bond rules to be interpreted broadly to give State and local governments wide discretion on methods to conserve energy that may be financed with Qualified Energy Conservation Bonds. The House Report states the following reasons for enacting the Qualified Energy Conservation Bond provision: The Committee believes that it is important to encourage energy conservation. The Committee believes that State and local governments often are in the best position to assess community needs and recognizes there are a number of approaches to energy conservation that State and local governments may wish to encourage. For example, the Committee recognizes that State and local governments may wish to encourage the development of combined heat and power systems, facilities that use thermal energy produced from renewable resources, smart electrical grids, the use of solar panels, mass transit, bicycle paths, or residential property that reduces peak-use of energy. In addition to these approaches, the Committee believes that State and local governments will develop numerous other approaches to energy conservation. Furthermore, the Committee recognizes that there is great potential for energy conservation in urban areas and the Committee believes that local officials should have the flexibility to develop their own approaches to energy conservation. Therefore, the Committee believes that it is appropriate to empower State and local governments by providing them with access to subsidized financing to help promote energy-efficient policies tailored to the needs of local communities. H. R. Rep. No. 110-658, at 94 (2008). The legislative history of ARRA gives further indication of the broad discretion Congress intended to give State and local governments issuing Qualified Energy Conservation Bonds. The Conference Report, H. R. Rep. No. 111-16 (2009), provides: The provision expands the present-law qualified energy conservation bond program. . . . Also, the provision clarifies that capital expenditures to implement green community programs includes grants, loans and other repayment mechanisms to implement such programs. For example, this expansion will enable States to issue these tax credit bonds to finance retrofits of existing private buildings through loans and/or grants to individual homeowners or businesses, or through other repayment mechanisms. Other repayment mechanisms can include periodic fees assessed on a government bill or utility bill that approximates the energy savings of energy efficiency or conservation retrofits. Retrofits can include heating, cooling, lighting, water-saving, storm water-reducing, or other efficiency measures. H. R. Rep. No. 111-16, at 627 (2009). QUESTIONS AND ANSWERS Numerous questions have arisen relating to Qualified Energy Conservation Bonds, particularly how to measure whether there have been reductions of energy consumption in publicly-owned buildings by at least 20 percent under § 54D(f)(1)(A)(i) and what constitutes a “green community program” under § 54D(f)(1)(A)(ii). Set forth below are questions and answers regarding certain of these interpretative issues. Issuers may rely upon these answers until further guidance, if any, is provided. CAPITAL EXPENDITURES FOR CERTAIN QUALIFIED CONSERVATION PURPOSES Q.-1. What are “capital expenditures” for purposes of § 54D(f)(1)(A), which provides in relevant part that qualified energy conservation purposes include, among other purposes, capital expenditures incurred for purposes of (i) reducing energy consumption in publicly-owned buildings by at least 20 percent, or (ii) implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs)? A-1. For purposes of the capital expenditures requirement in § 54D(f)(1)(A), the definition of a “capital expenditure” applicable to State and local governments for tax-exempt bond purposes in § 1.150-1(b) of the Income Tax Regulations applies. This definition provides that a “capital expenditure” means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under § 1.150-2(c)) under general Federal income tax principles. The determination of whether a particular expenditure is a capital expenditure is made when the expenditure is paid or incurred and future changes in law do not affect this determination. 20% REDUCTION IN ENERGY CONSUMPTION IN PUBLICLY-OWNED BUILDINGS Q-2. What does the term “publicly-owned buildings” mean under § 54D(f)(1)(A)(i)? A-2. The term “publicly-owned buildings” under § 54D(f)(1)(A)(i) means a building or buildings that are owned by a State or local government (as defined in § 1.103-1) or any instrumentality thereof for Federal tax purposes. If the “measurement unit” (as defined in Q&A 4 below) used to measure reductions in energy consumption is a unit other than a building or buildings, such as a building system component, the building or buildings encompassing the measurement unit must be a publicly-owned building or buildings. Q-3. What standard applies to determine that available project proceeds are to be used to finance capital expenditures for the purpose of reducing energy consumption in publicly-owned buildings by at least 20 percent under § 54D(f)(1)(A)(i) (the “20 percent test”)? A-3. In general, a reasonable expectations standard (as defined for tax-exempt bond purposes under § 1.148-1(b)) applies for purposes of determining reductions in energy consumption under the 20 percent test. In particular, an issuer may determine that its available project proceeds are to be used in a manner that meets the 20 percent test if, as of the issue date of the issue of Qualified Energy Conservation Bonds, the issuer has reasonable expectations (as defined in § 1.148-1(b)) that the capital expenditures to be financed with the bond proceeds will result in a 20 percent or greater reduction in energy consumption for the selected building, buildings, or building system component(s) comprising the measurement unit for the selected measurement time period, and using a common energy unit. See Q & A 4 (regarding measurement units), Q & A 5 (regarding measurement methods), Q & A 6 (regarding measurement time periods), Q & A 7 (regarding reliance on certifications of independent experts), Q & A 8 (regarding certain available tools for measuring energy reductions), and Q & A 9 (regarding common energy units) below. Q-4. What is the unit for which the issuer measures reductions in energy consumption for purposes of satisfying the 20 percent test? A-4. For purposes of the 20 percent test, the issuer may measure the reduction in energy consumption using one of the following measurement units: (i) a single publicly-owned building, (ii) multiple publicly-owned buildings; (iii) one or more building system components of one or more publicly-owned buildings, or (iv) a combination of (i) or (ii) and (iii) above (the “measurement unit”), provided that measurement unit includes the publicly-owned building or buildings, or building system component or components, with respect to which the capital expenditures financed with Qualified Energy Conservation Bond proceeds are incurred. For this purpose, a building system includes a system that serves one of the following functions: heating, ventilation, and air conditioning (“HVAC”); hot water system; lighting; building envelope (e.g., windows, roof, walls, insulation); or electricity “plug load” (e.g., items plugged into electric outlets, such as computers and refrigerators). Q-5. What methods may be used to measure energy savings attributable to capital expenditures with respect to a measurement unit for purposes of the 20 percent test? A-5. A reasonable and consistently applied method must be used to measure energy savings attributable to capital expenditures with respect to a measurement unit for purposes of the 20 percent test. Q-6. What time periods may an issuer use to measure reductions in energy consumption to meet the 20 percent test? A-6. For purposes of the 20 percent test, the issuer may consider actual and expected energy consumption in the measurement unit during any reasonable and consistent time periods of not less than one year (the measurement time periods), with one such period ending immediately before, and one such period beginning immediately after, all capital expenditures to be financed by the Qualified Energy Conservation Bond proceeds in the measurement unit are to be incurred, using a consistent method of measuring energy use. For example, if the issuer selects measurement time periods of two years, the issuer must determine its energy consumption in the measurement unit during the two years immediately before the capital expenditures are to be incurred and compare it to the energy consumption in the measurement unit during the two years immediately after the capital expenditures are to be incurred (energy consumption during the construction period is not considered), using the same method for measuring energy consumption, to determine if it meets the 20 percent test. Q-7. May an issuer rely on a certification of an independent expert to establish its reasonable expectations to meet the 20 percent test? A-7. An issuer may rely on an independent expert to establish that it reasonably expects to meet the 20 percent test, if, no earlier than 60 days before the issue date of the issue, an independent, licensed professional engineer or other independent expert certifies under penalty of perjury that the capital expenditures to be incurred with respect to the measurement unit are reasonably expected to result in the reduction of energy consumption by 20 percent or greater in the measurement unit during the measurement time period. An issuer may rely on this certification only if the actual capital expenditures from the bond proceeds are substantially the same as the expected capital expenditures of such proceeds on which the certification was based. Q-8. What tools are available to estimate the energy savings attributable to capital expenditures for purposes of establishing that the issuer had reasonable expectations as of the issue date of the issue that the capital expenditures will result in reduction of energy consumption in publicly–owned buildings by at least 20 percent? A-8. An issuer or an independent expert on whom an issuer relies may obtain energy savings estimates through an ASHRAE level 3 audit or through building energy use simulation techniques and estimating software, including the DOE (Department of Energy) 2 based Quick Energy Simulation Tool (eQUEST) or other qualified computer software for calculating commercial building energy and power cost savings that meet federal tax incentive requirements as listed by Department of Energy’s Building Technology Program at: http://apps1.eere.energy.gov/buildings/tools_directory/. Further, an issuer or independent expert may rely on other tools to estimate energy savings, using reasonable and consistently applied methods. An issuer is not required to subsequently measure the energy savings, but is encouraged to employ energy management and monitoring practices, such as use of the ENERGY STAR Portfolio Manager software to establish energy baselines and track whole building energy performance. See http://www.energystar.gov/index.cfm?c=evaluate_performance.bus_portfoliomanager. Q-9. How does the issuer determine the reduction of energy consumed in the chosen measurement unit if more than one energy source affects the measurement unit and the energy reduction is computed with respect to different types of energy sources, such as electricity and natural gas? A-9. If more than one energy source affects the measurement unit and thus is taken into account in computing the reduction in energy consumption, the amount of the consumed energy from each source before and after incurring the capital expenditures must be converted into a common energy unit such as, for example, a MMBtu (one million British thermal Units). In this circumstance, for purposes of the 20 percent test, the percentage reduction in energy consumption is based on the percentage reduction for the aggregate of the energy sources, using the common energy unit. Q-10. What is a “green community program” under § 54D(f)(1)(A)(ii) for which capital expenditures may be incurred as one of the qualified conservation purposes eligible for financing with Qualified Energy Conservation Bonds? A-10. In general, the term “green community program” means a program that meets the following two requirements: (1) Program Purpose. The purpose of a green community program is to promote one or more of the purposes of energy conservation, energy efficiency, or environmental conservation initiatives relating to energy consumption, broadly construed. Eligible program purposes include, among others, promotion of energy savings through retrofitting initiatives for heating, cooling, lighting, water-saving, storm-water reducing, or other efficiency measures; distributed generation initiatives; or transportation initiatives that conserve energy and/or support alternative fuel infrastructure (which may include, for example, improvements to public bicycle paths or mass transit systems). (2) General Public Use or Broad Public Availability. A green community program must: (i) involve property that is available for general public use (using standards similar to standards for distinguishing general public use from private business use under § 1.141-3(c)); or (ii) involve a loan (or other repayment mechanism) or grant program that is broadly available to members of the general public, including individuals or businesses. A green community program need not affect the entire geographical area or all the residents and businesses within the jurisdiction of the State or local governmental unit that implements the program, provided that the program broadly benefits the general public, residents, or businesses in the affected area of the State or local governmental unit. Examples of programs that are available for general public use include programs to make improvements to public infrastructure that enhances proximity and connectivity between community assets and public transit in order to reduce motor vehicle use and promote energy conservation. An example of a loan or grant program that is broadly available to the general public would be a program for residential housing or private building energy efficiency initiatives that provides grants or loans that are broadly available for homeowners or businesses. Q-11. What is an example of a green community program? A-11. The following example illustrates the implementation of a green community program with proceeds of Qualified Energy Conservation Bonds. City, a large local government, plans a program to finance capital expenditures to replace existing public street lights located throughout the City with more energy-efficient lights within a 3-year period. City recognizes the program as a green community program and designates the bonds to finance the program as Qualified Energy Conservation Bonds under § 54D(a)(3). Specifically, City plans to use the bond proceeds to replace existing high-pressure luminaries with light emitting diode luminaries that consume substantially less electricity. City’s independent experts estimate that the new streetlights will have a useful life of approximately 15 years. As of the issue date of the bonds, City expects that the program will result in substantial energy savings. City’s program qualifies as a green community program that meets § 54D(f)(1)(A)(ii) for the following reasons: 1. The program furthers a qualified conservation purpose because it promotes energy conservation. The program calls for the replacement of existing street lights with more efficient street lights. 2. The program involves public streetlights that are available for general public use. 3. The proceeds of the bond will be used for capital expenditures within the meaning of § 1.150-1(b) to replace the street lights. FURTHER INFORMATION For further information regarding this notice, contact Zoran Stojanovic at (202) 622-3980 (not a toll-free call). APPENDIX A Qualified Energy Conservation Bonds Statement of Expected Savings and Signatures Name: __________________________ I certify that the expected percentage of energy savings from the capital expenditures financed with Qualified Energy Conservation Bonds for the measurement unit and measurement time specified by the issuer is at least 20 percent. Under penalties of perjury, I declare that I have examined this certification, including supporting documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete. Professional Engineer License # and State: ________________________________ Notice 2012-45 Treatment of Income from Certain Government Bonds for Purposes of the Passive Foreign Investment Company Rules SECTION 1. PURPOSE This notice provides guidance regarding the treatment of certain government bonds for purposes of determining whether a foreign corporation is a passive foreign investment company (PFIC). SECTION 2. BACKGROUND Section 1297(a) provides that a PFIC is any foreign corporation if 75 percent or more of its gross income for the taxable year is passive income or the average percentage of assets held by the corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent. Section 1297(b)(1) provides that passive income means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c), subject to the exceptions of section 1297(b)(2). Under section 1297(b)(2)(A), the term “passive income” does not include any income derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States or, to the extent provided in regulations, by any other corporation (active banking exception). In Notice 89-81, 1989-2 C.B. 399, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) described rules that would expand the active banking exception to certain foreign corporations not licensed to do business as a bank in the United States, and identified the types of banking activities that produce income excluded from passive income under the active banking exception. In 1995, the IRS and the Treasury Department issued proposed regulations on the active banking exception. Prop. Reg. §1.1296-4. SECTION 3. QUALIFYING FOREIGN GOVERNMENT BONDS HELD BY ACTIVE BANKS Recent economic conditions have resulted in a shift in the assets held by some non-U.S. financial institutions. As a result of these conditions, certain financial institutions are holding government bonds at higher than historical levels. These increased levels have raised an issue concerning the treatment of these financial institutions, and specifically the treatment of government bonds, under the PFIC rules. (i) would not be a PFIC for such taxable year as a result of the application of the active banking exception if the treatment of Qualifying Government Bonds described in this Section 3 applied (and taking into account, if applicable, section 1297(c)); (ii) was not in any prior taxable year beginning in the preceding five calendar years a PFIC, in each case as a result of the application of the active banking exception (taking into account, if applicable, the treatment of Qualifying Government Bonds described in this Section 3 for taxable years set forth in Section 4 of this notice and section 1297(c)); and (iii) is, and was in each taxable year beginning in the preceding five calendar years, a publicly traded corporation. For purposes of this notice, a corporation will be treated as a publicly traded corporation if (1) one or more classes of stock is regularly traded on a qualified exchange or other market (within the meaning of §1.1296-2), or (2) at least 50 percent of the aggregate vote and value of the shares in the corporation is owned directly or indirectly by another corporation described in clause (1) of this subparagraph. SECTION 4. EFFECTIVE/APPLICABILITY DATE This notice shall apply to taxable years of foreign corporations beginning in 2011, 2012, and 2013. SECTION 5. DRAFTING INFORMATION The principal author of this notice is Kristine Crabtree of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in its development. For further information regarding this notice, contact Ms. Crabtree at (202) 622-3840 (not a toll-free call). Thank you for subscribing to e-News for Tax Professionals an IRS e-mail service. 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