e-News for Tax Professionals Issue 2012-49

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Issue Number:  2012-49

Inside This Issue

1. Proposed Regulations Issued on Net Investment Income Tax
2. Proposed Regulations Issued on Additional Medicare Tax
3. Phone Forum: Retirement Plans Can Make Loans, Hardship Distributions to Sandy Victims
4. OPR Webinar Now Online
5. Technical Guidance

A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.

The IRS and the Treasury Department have issued proposed regulations on the Net Investment Income Tax. Comments may be submitted electronically, by mail or hand delivered to the IRS.
For additional information on the Net Investment Income Tax, see our questions and answers.

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A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status.

The threshold amounts are:

• $250,000 for married taxpayers who file jointly,
• $125,000 for married taxpayers who file separately, and
• $200,000 for all other taxpayers.

An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.

The IRS and the Treasury Department have issued proposed regulations on the Additional Medicare Tax. Comments may be submitted electronically, by mail or hand delivered to the IRS.

For additional information on the Additional Medicare Tax, see our questions and answers.

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Sign up now for this Dec.11 Phone Forum. Announcement 2012-44 and the relief it provides for those affected by Hurricane Sandy will be addressed by Eric Slack, Acting Manager of Employee Plans Technical Guidance. The forum will focus on the announcement and the options available to employees, their families and plan sponsors. Mr. Slack will be answering a number of common questions resulting from the issued announcement. If you have a specific matter that you would like to be addressed, please let us know via email at ep.phoneforum@irs.gov on or before Dec. 7.

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The recent webinar, Circular 230 Overview: Key Provisions and Responsibilities for Tax Professionals, is now available on the IRS video portal.

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Rev. Proc. 2013-11

SECTION 1. PURPOSE

     This revenue procedure provides that certain losses are not taken into account in determining whether a transaction is a reportable transaction for purposes of the disclosure rules under § 1.6011-4(b)(5) of the Income Tax Regulations. However, these transactions may be reportable transactions for purposes of the disclosure rules under § 1.6011-4(b)(2), (b)(3), (b)(4), (b)(6), or (b)(7).

SECTION 2. BACKGROUND

     .01 Section 1.6011-4 requires a taxpayer that participates in a reportable transaction to disclose the transaction in accordance with the procedures provided in § 1.6011-4. Under § 1.6011-4(b), there are five categories of reportable transactions. One category of reportable transaction is a loss transaction. A loss transaction is defined in § 1.6011‑4(b)(5). Generally, a loss transaction is any transaction resulting in the taxpayer claiming a loss under § 165 of the Internal Revenue Code of (i) at least $10 million in a single taxable year or $20 million in any combination of taxable years for corporations or partnerships with only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; (ii) at least $2 million in any single taxable year or $4 million in any combination of taxable years for all other partnerships, individuals, S corporations, and trusts, whether or not any losses flow through to one or more partners, shareholders, or beneficiaries; or (iii) at least $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss is attributable to a § 988 transaction.

     .02 Section 1.6011-4(b)(8)(i) provides that a transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction, if the Commissioner makes a determination by published guidance that the transaction is not subject to the reporting requirements of § 1.6011-4.

SECTION 3. SCOPE

     This revenue procedure applies to taxpayers that may be required to disclose reportable transactions under § 1.6011-4, material advisors that may be required to disclose reportable transactions under § 6111, and material advisors that may be required to maintain lists under § 6112.

SECTION 4. APPLICATION

     .01 In general. Losses from the sale or exchange of an asset with a qualifying basis under section 4.02 of this revenue procedure or losses described in section 4.03 of this revenue procedure are not taken into account in determining whether a transaction is a reportable transaction under § 1.6011-4(b)(5).
     .02 Sale or exchange of an asset with a qualifying basis.
       (1) General rule. A loss under § 165 from the sale or exchange of an asset is not taken into account in determining whether a transaction is a loss transaction under § 1.6011-4(b)(5) if --
         (a) the basis of the asset (for purposes of determining the loss) is a qualifying basis;
         (b) the asset is not an interest in a passthrough entity (within the meaning of § 1260(c)(2), other than regular interests in a REMIC as defined in § 860G(a)(1));
         (c) the loss from the sale or exchange of the asset is not treated as ordinary under § 988, except in the case of a loss that is recognized by a bank described in § 581 or § 582(c)(2)(A)(i) (concerning foreign banks as limited by § 582(c)(2)(C));
         (d) the asset has not been separated from any portion of the income it generates; and
         (e) the asset is not, and has never been, part of a straddle within the meaning of § 1092(c), excluding a mixed straddle under § 1.1092(b)-4T.
       (2) Qualifying basis. For purposes of section 4 of this revenue procedure, a taxpayer's basis in an asset (less adjustments for any allowable depreciation, amortization, or casualty loss) is a qualifying basis if --
         (a) the basis of the asset is equal to, and is determined solely by reference to, the amount (including any option premium) paid in cash by the taxpayer for the asset and for any improvements to the asset;
         (b) the basis of the asset is determined under § 358 by reason of it being received in an exchange to which §§ 354, 355, or 361 applies, and the taxpayer's basis in the property exchanged in the transaction was described in this section 4.02(2);
         (c) the basis of the asset is determined under § 1014;
         (d) the basis of the asset is determined under § 1015, and the donor's basis in the asset was described in this section 4.02(2);
         (e) the basis of the asset is determined under § 1031(d), the taxpayer's basis in the property that was exchanged for the asset in the § 1031 transaction was described in this section 4.02(2), and any debt instrument issued or assumed by the taxpayer in connection with the § 1031 transaction is treated as a payment in cash under section 4.02(4) of this revenue procedure;
         (f) the basis of the asset is adjusted under § 961 or § 1.1502-32, and the taxpayer's basis in the asset immediately prior to the adjustment was described in this section 4.02(2); or
         (g) the basis of the asset is adjusted under § 1272(d)(2) or § 1278(b)(4), and the taxpayer's basis in the asset immediately prior to the adjustment was described in this section 4.02(2).
       (3) Section 83 income. For purposes of section 4.02(2)(a) of this revenue procedure, an amount included as compensation income under § 83 by the taxpayer will be treated as an amount paid in cash by the taxpayer for an asset if the amount is included in the taxpayer's basis in the asset.
       (4) Debt instruments. Except as provided below, an amount paid in cash will not be disregarded for purposes of section 4.02(2) of this revenue procedure merely because the taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer has issued a debt instrument to the person (or a related party as described in § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, assumed a debt instrument (or took an asset subject to a debt instrument) issued by the person (or a related party as described in § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, or issued a debt instrument in exchange for improvements to an asset, the taxpayer will be treated as having paid cash for the asset or the improvement only if the debt instrument is secured by the asset and all amounts due under the debt instrument have been paid in cash no later than the time of the sale or exchange of the asset (except in the case of stock or securities traded on an established securities market, the settlement date) for which the loss is claimed.
     .03 Other losses. The following losses under § 165 are not taken into account in determining whether a transaction is a loss transaction under § 1.6011-4(b)(5):
         (1) A loss from fire, storm, shipwreck, or other casualty, or from theft, as those terms are defined for purposes of § 165(c)(3);
         (2) A loss from a compulsory or involuntary conversion as described in § 1231(a)(3)(A)(ii) and (a)(4)(B);
         (3) A loss to which § 475(a) or § 1256(a) applies;
         (4) A loss arising from any mark-to-market treatment of an item under §§ 475(f), 1296(a), 1.446-4(e), 1.988-5(a)(6), or 1.1275-6(d)(2), and any loss from a sale or disposition of an item to which one of the foregoing provisions applied, provided that the taxpayer computes its loss by using a qualifying basis (as defined in section 4.02(2) of this revenue procedure) or a basis resulting from previously marking the item to market, or computes its loss by making appropriate adjustments for previously determined mark-to-market gain or loss;
         (5) A loss arising from a hedging transaction described in § 1221(b), if the taxpayer properly identifies the transaction as a hedging transaction, or from a mixed straddle account under § 1.1092(b)-4T;
         (6) A loss attributable to basis increases under § 860C(d)(1) during the period of the taxpayer's ownership;
         (7) A loss attributable to the abandonment of depreciable tangible property that was used by the taxpayer in a trade or business and that has a qualifying basis under section 4.02(2) of this revenue procedure;
         (8) A loss arising from the bulk sale of inventory if the basis of the inventory is determined under § 263A;
         (9) A loss that is equal to, and is determined solely by reference to, a payment of cash by the taxpayer (for example, a cash payment by a guarantor that results in a loss or a cash payment that is treated as a loss from the sale of a capital asset under § 1234A or § 1234B);
         (10) A loss from the sale to a person other than a related party (within the meaning of § 267(b) or § 707(b)) of property described in § 1221(a)(4) in a factoring transaction in the ordinary course of business; or
         (11) A loss arising from the disposition of an asset to the extent that the taxpayer's basis in the asset is determined under § 338(b).

SECTION 5. EFFECT ON OTHER DOCUMENTS

This document modifies and supersedes Rev. Proc. 2004-66, 2004-50 C.B. 966.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective December 6, 2012, the date this revenue procedure was released to the public. This revenue procedure, except for section 4.02(1)(c) as applied to losses recognized by certain banks with respect to section 988 transactions, applies to transactions that are entered into on or after January 1, 2003. Section 4.02(1)(c) as applied to losses recognized by certain banks with respect to section 988 transactions applies to losses recognized on or after December 6, 2012.

SECTION 7. DRAFTING INFORMATION

The principal authors of this revenue procedure are Charles D. Wien and Caroline E. Hay of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding disclosures under this revenue procedure contact Mr. Wien or Ms. Hay at (202) 622-3070 (not a toll free call). For further information regarding § 988 transactions under this revenue procedure contact Mark Erwin or Raymond Stahl at (202) 622-3870 (not a toll free call).

Notice 2012-75 

PURPOSE

     This notice proposes a revenue procedure that would describe general principles for the general welfare exclusion and provide safe harbors under which the Internal Revenue Service would presume that the individual need requirement of the general welfare exclusion is met for benefits provided under Indian tribal governmental programs described in sections 5.02 and 5.03 of the proposed revenue procedure, and would not assert that benefits provided under programs described in section 5.03 represent compensation for services. The proposed revenue procedure provides certainty that the value of the benefits described will be excluded from gross income under the general welfare exclusion, but does not limit the applicability to Indian tribes of existing guidance holding that certain benefits are excluded from gross income under the general welfare exclusion.

   Under the general welfare exclusion, the Service has consistently concluded that certain payments made to or on behalf of individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient’s gross income. Pursuant to Executive Order 13175, representatives of the Service and the Treasury Department consulted with tribal leaders and members of Indian tribes concerning the application of the general welfare exclusion to programs of Indian tribal governments. In Notice 2011-94, 2011-49 I.R.B. 834, the Service invited comments concerning the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members. The Service received over 85 comments from Indian tribal governments and other individuals and groups describing various Indian tribal government programs for tribal members and how the general welfare exclusion should apply to those programs.

     The proposed revenue procedure responds to the issues addressed in the written comments and discussed as part of the consultation process, including the requirement under the general welfare exclusion to establish individual need. Under the proposed revenue procedure, the Service would conclusively presume that the individual need requirement is met for each tribal member, spouse, or dependent receiving a benefit under the housing programs, educational programs, elder and disabled programs, other qualifying assistance programs, and cultural and religious programs described in sections 5.02 and 5.03 of the proposed revenue procedure. For tribal members receiving a benefit described in section 5.03, the Service also would conclusively presume that the benefit does not represent compensation for services.

     Pursuant to Executive Order 13175, the Service and Treasury Department are issuing this proposed revenue procedure to allow Indian tribes to review the guidance and provide comments prior to the issuance of final guidance.

Accordingly, the Service and Treasury Department request comments on the proposed revenue procedure. Comments may be submitted in writing on or before June 3, 2013. Comments should be submitted to Internal Revenue Service, CC:PA:LPD:PR (Notice 2012-75), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, or electronically to Notice.Comments@irscounsel.treas.gov. Please include “Notice 2012-75” in the subject line of any electronic communications. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice 2012-75), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC. All comments will be available for public inspection and copying.

     Although the revenue procedure is in proposed form, until additional guidance is published taxpayers may apply the proposed revenue procedure in taxable years for which the period of limitation on refund or credit under § 6511 has not expired.    

PROPOSED REVENUE PROCEDURE

SECTION 1. PURPOSE

This revenue procedure describes general principles for the general welfare exclusion and provides safe harbors under which the Internal Revenue Service will presume that the individual need requirement of the general welfare exclusion is met for benefits provided under Indian tribal governmental programs described in sections 5.02 and 5.03 of this revenue procedure, and will not assert that benefits provided under programs described in section 5.03 of this revenue procedure represent compensation for services. Consequently, under this revenue procedure, the Service will not assert that members of an Indian tribe or their spouses or dependents must include the value of their benefits described in section 5.02 or 5.03 of this revenue procedure in gross income under § 61 of the Internal Revenue Code or that the benefits are subject to the information reporting requirements of § 6041.

SECTION 2. BACKGROUND

.01 Gross income. Under § 61(a), except as otherwise provided in subtitle A, gross income means all income from whatever source derived. Under § 61, Congress intends to tax all gains or undeniable accessions to wealth, clearly realized, over which taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), 1955-1 C.B. 207.

   Section 1.61-1(a) of the Income Tax Regulations provides that gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, or other property or in-kind benefits, as well as in cash.

   Indians are citizens subject to the payment of income taxes. Squire v. Capoeman, 351 U.S. 1, 6 (1956), 1956-1 C.B. 605, 607.    

     .02 General welfare exclusion. Payments made to or on behalf of individuals or other persons under governmental programs are included within the broad definition of gross income under § 61 unless an exclusion applies. See Notice 2003-18, 2003-1 C.B. 699; Rev. Rul. 79-356, 1979-2 C.B. 28. The Service has consistently concluded, however, that certain payments made to or on behalf of individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient’s gross income (general welfare exclusion). See, for example, Rev. Rul. 98-19, 1998-1 C.B. 840 (relocation payment authorized by the Housing and Community Development Act and made by a local jurisdiction to an individual moving from a flood-damaged residence to another residence is not includible in the individual’s gross income); Rev. Rul. 74-205, 1974-1 C.B. 20 (replacement housing payments to aid individuals displaced from their homes in acquiring decent, safe, and sanitary dwellings of modest standards are not includible in gross income).

To qualify under the general welfare exclusion, the payments must (1) be made pursuant to a governmental program, (2) be for the promotion of the general welfare (that is, based on need), and (3) not represent compensation for services. Rev. Rul. 2005-46, 2005-2 C.B. 120; Rev. Rul. 82-106, 1982-1 C.B. 16; Rev. Rul. 75-246, 1975-1 C.B. 24. Thus, the general welfare exclusion applies if “the grant [is] received under a program requiring the individual recipient to establish need. [Internal citations omitted.] Grants received under social welfare programs that [do] not require recipients to establish individual need” do not qualify under the general welfare exclusion. Bailey v. Commissioner, 88 T.C. 1293, 1300 (1987), acq., 1989-2 C.B. 1.

     Whether a payment qualifies under the general welfare exclusion is determined under the federal income tax laws (including provisions not in the Internal Revenue Code), not under the laws of state, local, sovereign tribal, or foreign governments, or other federal laws. Thus, an incentive payment that a United States citizen received from the City of Berlin, Germany under a program to encourage spending and consumption was not excludable from the recipient’s gross income simply because it was a program of a sovereign government when the program did not meet the requirements of the general welfare exclusion under U.S. tax law. Foley v. Commissioner, 87 T.C. 605 (1986).

If the activity engaged in is basically the performance of services, the payments are compensation for services rendered and are includible in the gross income of the recipient under § 61. Thus, Rev. Rul. 74-413, 1974-2 C.B. 333, concludes that payments to participants in a state program that provided short-term employment in disaster relief activities for unemployed individuals, but not any training or retraining to help the participants obtain better employment opportunities, are compensation includible in gross income under § 61.

     In the context of job training programs, however, the Service has held that payments that primarily provide job-training skills to unemployed and underemployed individuals to enhance their employability are not compensation for services and, therefore, are excluded from the gross income of recipients under the general welfare exclusion. For example, Rev. Rul. 68-38, 1968-1 C.B. 446, concludes that payments to participants in a program sponsored by an Indian tribal council to train underemployed and unemployed residents of the Indian reservation in construction skills to enhance employability are excluded from the participants’ gross income under the general welfare exclusion because the basic purpose of the program is training.

     Payments under training programs that include reasonable and limited allowances for meals, travel, transportation, subsistence, emergency, and other purposes also are excluded from gross income under the general welfare exclusion. Rev. Rul. 75-246 (Situation 1). Allowances on the basis of need to cover certain expenses incident to the training (such as payments for auto insurance or to make the trainee’s presence possible, or expenditures for work clothing, without which the trainee could not engage in the work training experience) also are excluded from gross income under the general welfare exclusion. Rev. Rul. 75-246 (Situation 3).

     Benefits qualify under the general welfare exclusion only if they are not lavish or extravagant. For example, replacement housing payments to help displaced individuals and families acquire dwellings of modest standards qualify for exclusion from gross income under the general welfare exclusion. Rev. Rul. 74-205. Assistance to help disaster victims meet necessary expenses or serious needs in the categories of medical or dental, housing, personal property, transportation, and funeral expenses qualifies for exclusion from gross income under the general welfare exclusion, but assistance for nonessential, luxurious, or decorative items does not qualify. Rev. Rul. 76-144, 1976-1 C.B. 17. Payments to compensate individuals for unreimbursed reasonable and necessary personal, living, and family expenses they incur due to a disaster or emergency situation also are excluded from gross income under the general welfare exclusion. Notice 2002-76, 2002-2 C.B. 917 (Q&As 1 and 2).    

     In general, payments to businesses do not qualify under the general welfare exclusion because the payments are not based on individual or family need. See Rev. Rul. 2005-46; Notice 2003-18. Rev. Rul. 77-77, 1977-1 C.B. 11, however, provides that nonreimbursable grants made under the Indian Financing Act of 1974 to Indians to expand profit-making Indian-owned economic enterprises on or near reservations are excludable from gross income under the general welfare exclusion.

     .03 Application of the general welfare exclusion to programs of Indian tribal governments. Indian tribal governments have a unique legal status. They have inherent sovereignty and a government-to-government relationship with the United States. Indian tribes have developed a broad range of programs to address their unique social, cultural, and economic issues. In developing these programs, Indian tribes give significant consideration to the needs of the entire community. The general welfare exclusion applies to payments by Indian tribal governments no less favorably than it applies to payments by federal, state, local, or foreign governments.

     Payments by Indian tribal governments qualify for the general welfare exclusion if the payments are (1) made pursuant to a governmental program of the tribe; (2) for the promotion of general welfare (that is, based on individual or family need, and, uniquely in the case of programs of Indian tribal governments, to help establish Indian-owned businesses on or near a reservation); and (3) not compensation for services. Rev. Rul. 2005-46; Notice 2003-18; Rev. Rul. 77-77; Rev. Rul. 75-246; Rev. Rul. 82-106. Payments under Indian tribal governmental programs meeting these requirements qualify for the general welfare exclusion whether the revenues that the Indian tribal government uses to fund the programs derive from levies, taxes, service fees, or revenues from tribally-owned businesses. For example, general welfare programs may be funded from casino revenues.  However, per capita payments to tribal members of tribal gaming revenues that are subject to the Indian Gaming Regulatory Act are gross income under § 61, are subject to the information reporting and withholding requirements of §§ 6041 and 3402(r), and are not excludable from gross income under the general welfare exclusion or this revenue procedure. See 25 U.S.C. §§ 2701-2721 and 25 C.F.R. Part 290.

     .04 Benefits excluded generally from § 61. This revenue procedure does not address benefits under Indian tribal governmental programs that do not fall within the definition of gross income under § 61. For example, an Indian tribal government may provide benefits in the form of public libraries or recreational facilities, which are available for the general public use of members of the tribe. Like other taxpayers, members of Indian tribes and their dependents do not include the value of these benefits in income regardless of whether the requirements of the general welfare exclusion are met because these benefits are not gross income under § 61. In addition, this revenue procedure does not address payments under programs of Indian tribal governments that qualify for an exclusion from gross income under a specific provision of the Internal Revenue Code or other federal statute. For example, § 139D provides that gross income does not include the value of any qualified Indian health care benefit. A qualified Indian health care benefit includes amounts that an Indian tribe (as defined in § 45A(c)(6)) provides for the medical care (as used in § 213) of a member of the tribe or the member’s spouse or dependents. Thus, a payment that an Indian tribe makes to an Indian medicine man to use traditional practices for the purpose of treating a tribal member’s disease may be excludable from the tribal member’s gross income under § 139D. See Tso v. Commissioner, T.C.M. 1980-399.

SECTION 3. SCOPE    

This revenue procedure applies to Indian tribal governments and members of Indian tribes, their spouses, and dependents.

SECTION 4. DEFINITIONS

     The following definitions apply for purposes of this revenue procedure.

     .01 Indian tribal government. The term “Indian tribal government” has the same meaning as in § 7701(a)(40) but for purposes of this revenue procedure includes agencies or instrumentalities of the Indian tribal government.

     .02 Indian tribe. The term “Indian tribe” has the same meaning as in § 45A(c)(6).

     .03 Member of an Indian tribe. The term “member of an Indian tribe” has the same meaning as in 25 C.F.R. § 290.2.

     .04 Reservation. The term “reservation” has the same meaning as in § 168(j).

SECTION 5. APPLICATION

     .01 Application of general welfare exclusion to Indian tribal government programs. If section 5.01(1) or 5.01(2) of this revenue procedure applies, the Service will not assert that members of an Indian tribe or their spouses or dependents must include the value of the applicable benefits in gross income under § 61 or that the benefits are subject to the information reporting requirements of § 6041.

         (1) If an Indian tribal government provides a benefit (whether in cash or in kind) meeting the criteria specified in section 5.02(1) of this revenue procedure and described in section 5.02(2) of this revenue procedure, the Service will conclusively presume that individual need is met for each tribal member, spouse, or dependent of a tribal member receiving the benefit.

         (2) If an Indian tribal government provides a benefit meeting the criteria specified in section 5.03, the Service will conclusively presume that individual need is met for each tribal member, spouse, or dependent receiving the benefit and that the benefit does not represent compensation for services.     

     .02 Benefits provided by a tribe for which individual need is presumed. Section 5.01(1) of this revenue procedure applies to benefits meeting the general criteria of section 5.02(1) of this revenue procedure and described in section 5.02(2) of this revenue procedure.

         (1) General criteria. To qualify for exclusion under this revenue procedure, a benefit described in section 5.02(2) of this revenue procedure must meet the following requirements--

               (a) The benefit is provided pursuant to a specific Indian tribal government program;

               (b) The program has written guidelines that specify how individuals may qualify for the benefit;        

               (c) The benefit is available to any tribal member who satisfies the program guidelines;            

               (d) The distribution of benefits from the program does not discriminate in favor of members of the governing body of the tribe;

               (e) The benefit is not compensation for services; and

               (f) The benefit is not lavish or extravagant.  

         (2) Specific benefits. Benefits provided under the following programs are benefits described in this section 5.02(2).

              (a) Housing programs. Programs relating to principal residences that--

                   (i) Assist in making mortgage or rent payments for residences on or near a reservation;

                   (ii) Enhance habitability of housing, such as by remedying water, sewage, sanitation service, or heating or cooling issues;

                   (iii) Provide basic housing repairs or rehabilitation; and

               (iv) Assist in paying utility bills and charges (such as water, electricity, and gas).

               (b) Educational programs. Programs to--

               (i) Provide students (including post-secondary students) transportation to and from school, tutors, and supplies (including clothing, backpacks, laptop computers, musical instruments, and sports equipment) for use in their studies;

                   (ii) Provide tuition payments for students (including allowances for room and board for the student, spouse, and dependents) to attend an accredited college or university, educational seminars, vocational education, technical education, adult education, continuing education, and alternative education; and            

                   (iii) Provide job counseling and programs for which the primary objective is job placement or training, including allowances for--

                       (A) Expenses for interviewing or training away from home (such as travel, auto expenses, lodging, and food);

                       (B) Tutoring; and

                       (C) Necessary clothing for a job interview or training (for example, an interview suit or a uniform required during a period of training).

               (c) Elder and disabled programs. Programs for individuals who have attained age 55 or are disabled that provide--

                   (i) Meals through home-delivered meals programs or at a community center;

                   (ii) Home care such as assistance with preparing meals or doing chores, or day care outside the home;              

                  (iii) Local transportation assistance;

                   (iv) Travel expenses for doctor appointments or other medical care;              

                   (v) Transportation costs and admission fees to attend educational, social, or cultural programs offered by the tribe or another tribe; and              

               (vi) Improvements to adapt housing to special needs (such as grab bars and ramps).

               (d) Other qualifying assistance programs. Programs to--

                   (i) Pay bus, taxi, or public transportation fares from the Indian reservation to public facilities (such as medical facilities and grocery stores);              

                   (ii) Pay for the cost of transportation and temporary meals and lodging of a tribal member, spouse, or dependent while the tribal member, spouse, or dependent is receiving medical care away from home;                                            

                   (iii) Provide assistance to individuals in exigent circumstances (such as victims of abuse), including the costs of food, clothing, shelter, transportation, auto repair bills, and similar expenses;

                   (iv) Pay costs for temporary relocation and shelter for individuals displaced from their homes (for example, when a home is destroyed by a fire or natural disaster);              

                   (v) Provide emergency assistance in the form of bus fare, a hotel room, or meals for an individual who is stranded off the Indian reservation; and

                  (vi) Provide or reimburse the cost of nonprescription drugs.

               (e) Cultural and religious programs. Programs to--

                   (i) Pay or reimburse travel expenses (transportation, food, and lodging) to attend an Indian tribe’s cultural, social, or community activities such as pow-wows, ceremonies, and traditional dances;              

                   (ii) Pay or reimburse travel expenses (transportation, food, and lodging) to visit other Indian reservations or sites that are culturally and historically significant for the tribe;              

               (iii) Pay or reimburse the costs of receiving instruction about an Indian tribe’s culture, history, and traditions (for example, traditional language, music, and dances); and              

               (iv) Pay or reimburse funeral and burial expenses and expenses of hosting or attending wakes, funerals, burials, or similar bereavement events.  

.03 Benefits provided by a tribe that are presumed not to be compensation for services. Except as provided in this section 5.03, section 5.01 of this revenue procedure does not apply to benefits that are compensation for services. However, section 5.01(2) of this revenue procedure applies to benefits provided under an Indian tribal governmental program that are items of cultural significance (not lavish or extravagant) or nominal cash honoraria provided to medicine men or women, shamans, or similar religious or spiritual officials to recognize their participation in cultural, religious, and social events (for example, pow-wows, rite of passage ceremonies, or funerals, wakes, burials, or other bereavement events). The Service will conclusively presume that individual need is met for the tribal officials receiving these benefits and that the benefits do not represent compensation for services.    

DRAFTING INFORMATION

     The principal author of this notice is Sheldon Iskow of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, please contact Mr. Iskow at (202) 622-4920 (not a toll-free call).

N-2012-77

Part III - Administrative, Procedural, and Miscellaneous Interim Guidance and Request for Comments; Medical Device Excise Tax; Manufacturers Excise Taxes; Constructive Sale Price; Deposit PenaltiesNotice  

Section 1. PURPOSE 

This notice provides interim guidance relating to the excise tax on medical devices imposed by § 4191 (the “medical device excise tax”) of the Internal Revenue Code (the “Code”). Specifically, this notice provides interim guidance for determining price under § 4216(b). This notice also provides interim guidance relating to donated taxable medical devices, the licensing of taxable medical devices, and the tax treatment of medical convenience kits. In addition, this notice provides transition relief to medical device manufacturers from the failure to deposit penalties imposed by § 6656. Finally, this notice requests comments from taxpayers about the rules described in this notice. 

Section 2. BACKGROUND 

Section 4191, enacted by section 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), imposes an excise tax on the sale of certain medical devices. The excise tax imposed by § 4191 is 2.3% of the price for which the taxable medical device is sold. The medical device excise tax is codified in chapter 32, subtitle D of the Code (“chapter 32”), which pertains to excise taxes imposed on the sale or use of taxable articles by manufacturers, producers, and importers (commonly referred to as “manufacturers excise taxes”). See § 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations (the “regulations”) (which defines the term “manufacturer” to include a “producer” and an “importer”). As a result, the existing chapter 32 rules, including the regulations issued thereunder, apply to the medical device excise tax. 

On December 7, 2012, the Internal Revenue Service (IRS) and the Treasury Department issued TD 9604, containing final regulations under § 4191. The final regulations do not address certain issues that the IRS and the Treasury Department continue to study. These issues include the determination of price under § 4216(b); the tax treatment of medical software licenses; the taxability of donated medical devices; and the taxability of medical convenience kits. 

The IRS and the Treasury Department may issue additional published guidance on these issues in the future. The IRS and the Treasury Department recognize, however, that manufacturers need rules on these issues that will apply on an interim basis. Sections 3 through 5 of this notice prescribe those interim rules. 

In addition, several comments on the proposed regulations requested transition relief from the deposit penalty under § 6656. In response to those comments, this notice waives penalties under § 6656 for the first three calendar quarters of 2013. Section 6 of this notice delineates the scope of this deposit penalty relief. 

Unless otherwise stated, existing definitions provided in chapter 32, and the regulations issued thereunder, apply to this notice. 

Section 3. CONSTRUCTIVE SALE PRICE 

(a) Overview of Constructive Sale Price. Section 4216 provides rules for determining “price” for purposes of chapter 32. Those rules treat the price for which a manufacturer sells a taxable article to an independent wholesale distributor, subject to certain adjustments, as the applicable price for purposes of imposing the tax. In general, when a manufacturer sells a taxable article to a purchaser other than an independent wholesale distributor, § 4216(b) and the regulations thereunder prescribe rules for constructing a sale price that approximates the price an independent wholesale distributor would pay to the manufacturer for an identical article. In such situations, tax is imposed on the constructive sale price as determined under § 4216(b). 

The IRS and the Treasury Department recognize that the medical device industry encompasses a diverse group of manufacturers that produce a broad range of articles. The IRS and the Treasury Department also recognize that many manufacturers in the medical device industry do not sell to independent wholesale distributors, and they may employ more than one distribution chain according to industry practice related to a particular article. Further, the IRS and the Treasury Department recognize that current published guidance relating to the constructive sale price rules does not address some of the types of distribution chains regularly employed in the medical device industry. In addition, Rev. Rul. 80-273, 1980-2 C.B. 315, which provides a mechanism for computing the constructive sale price where the articles are sold at retail by manufacturers who do not sell like articles to wholesale distributors, does not by its terms apply to § 4191. 

(b) Interim Rules. This section provides interim rules for how taxpayers may apply the constructive sale price rules to certain model distribution chains employed by some manufacturers in the medical device industry. The IRS and the Treasury Department identified the distribution chains addressed in these interim rules through written comments on the proposed regulations on taxable medical devices and informal taxpayer inquiries. 

If a taxpayer uses one of the distribution chains described in this section, the taxpayer may apply the rules provided in this section to determine its medical device excise tax liability. A taxpayer does not need to make any additional or special filing, or notation on any filing, to apply these rules. If a taxpayer does not apply the rules provided in this notice, and does not use the actual sale price of the article to calculate its medical device excise tax liability, then the taxpayer bears the burden of demonstrating that it used the fair market price of the article to calculate its tax liability. This approach is consistent with the general rule under which a manufacturer may rebut the constructive sale price if the manufacturer demonstrates that it sold the article at a fair market price. Rev. Rul. 89-47, 1989-1 C.B. 295. Taxpayers may apply the rules provided in this section until the IRS and the Treasury Department issue further guidance. 

For purposes of these rules, a “related party” means that one of the parties is controlled (in law or fact) by the other, or there is common control of the parties (regardless of whether such control is actually exercised to influence the sale price). See § 48.4216(b)-2(e)(1). Further, for purposes of these rules, a “reseller” means a sales company, a leasing company, a distributor, or a retailer. Finally, the application of constructive sale price rules to calculate the tax base does not shift the liability for excise tax from the manufacturer to any other person.   

The interim rules are as follows: 

(1) Sales at retail; no regular sales to independent wholesale distributors. 

(A) Description. In this distribution chain, the manufacturer sells taxable articles directly to unrelated end-users. The manufacturer does not regularly sell its taxable articles to independent wholesale distributors. 

(B) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(A), is 75% of the actual selling price after taking into account the adjustments provided by § 4216(a). No further adjustments under § 4216 are allowed. See Rev. Rul. 80-273, 1980-2 C.B. 315. 

(2) Sales to unrelated retailers; no regular sales to independent wholesale distributors. 

(A) Description. In this distribution chain, the manufacturer sells taxable articles to unrelated retailers. The manufacturer does not regularly sell its taxable articles to independent wholesale distributors. 

(B) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain is 90% of the lowest price for which the articles are sold to unrelated retailers. This computation is made without adjustment for any exclusion (except for the tax imposed on such article) or readjustment under § 6416(b)(1)(a) and (e). See Rev. Rul. 82-211, 1982-2 C.B. 296.

(3) Sales to related retailer; no regular sales to independent wholesale distributors. 

(A) Description. In this distribution chain, the manufacturer sells taxable articles to a related retailer. The related retailer sells the articles at retail to unrelated end-users. The manufacturer and related retailer do not regularly sell the articles to independent wholesale distributors. 

(B) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(C), is 75% of the product of 95% and the actual selling price (that is, the price at which the article is sold to a person that is not a member of the group of companies that are related to the manufacturer). The 5% discount is an allowance for the exclusions from the selling price otherwise allowed under § 4216(a). See Rev. Rul. 82-211. The additional 25% discount adjusts the selling price to approximate the selling price to an independent wholesale distributor. See Rev. Rul. 80-273. No further adjustments under § 4216 are allowed.  

(4) Sales to related reseller that leases and sells at retail. 

(A) Description. In this distribution chain, the manufacturer sells taxable articles to a related reseller. The related reseller sells the articles at retail to unrelated end-users, and also leases articles to unrelated end-users. 

(B) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(C), is 75% of the product of 95% and the actual selling price (that is, the price at which the article is sold to a person that is not a member of the group of companies that are related to the manufacturer). The 5% discount is an allowance for the exclusions from the selling price otherwise allowed under § 4216(a). See Rev. Rul. 82-211. The additional 25% discount adjusts the selling price to approximate the selling price to an independent wholesale distributor. See Rev. Rul. 80-273. No further adjustments under § 4216 are allowed.

(5) Sales to related reseller that only leases at retail; no regular sales to independent wholesale distributors. 

(A) Description. In this distribution chain, the manufacturer sells taxable articles to a related reseller. The related reseller leases the articles to unrelated end-users, but does not sell articles at retail. The manufacturer and related reseller do not regularly sell the articles to independent wholesale distributors. 

(B) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the price for this distribution chain is the actual selling price to the related reseller, provided that the selling price to the related reseller reasonably approximates the fair market price of the article within the meaning of § 4216. 

(c) Applicability to other taxes imposed by chapter 32 of the Code. Until the IRS and the Treasury Department issue further guidance, all manufacturers subject to the taxes imposed by chapter 32 of the Code may apply the rules provided in this section to determine the constructive sale price of taxable articles under Chapter 32 to the extent that any statute or other published guidance do not already provide rules addressing a particular fact pattern or situation. 

Section 4: SPECIAL CHAPTER 32 RULES APPLICABLE TO THE MEDICAL DEVICE EXCISE TAX 

(a) Sale to Hospital or Doctor’s Office Treated as Sale at Retail for Purposes of Determining Price 

(1) Overview. Section 48.4216(b)-1(c)(1) of the regulations defines “sale at retail” as the sale of an article to a purchaser who intends to use the article, or to lease it to another person, rather than resell it. Section 48.4216(b)-1(c)(2) defines “retailer” as a person engaged in the business of selling articles at retail. Therefore, a sale to a retailer is a sale of an article to a person engaged in the business of selling articles at retail. Medical institutions and offices, such as hospitals and doctor’s offices, purchase taxable articles that are used to treat patients. Sometimes an article is completely consumed on the premises of a medical institution or office and other times the articles leave the medical institution or office with the patient. Under the definitions described above, it is unclear whether a sale of an article to a medical institution or office is a sale at retail or a sale to a retailer. 

(2) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the IRS will treat the sale of a taxable article to a medical institution or office as a “sale at retail.”   

(b) Licenses 

(1) Overview. In response to the proposed regulations, one commenter requested clarification on whether the licensing of software that is a taxable medical device is a taxable event for purposes of § 4191. That commenter requested that the IRS and the Treasury department treat the licensing of software as a lease. 

Under existing chapter 32 rules, the manufacturers excise tax generally attaches upon the sale or use of a taxable article by the manufacturer. See § 48.0-2(b). Section 4217(a) provides that the lease of a taxable article by the manufacturer is considered a sale. Neither the existing chapter 32 rules nor the final regulations address the issue of whether the licensing of a taxable article, such as software that is a taxable medical device, is a taxable event. 

(2) Interim Rule. Until the IRS and the Treasury Department issue further guidance, the IRS will treat a license of a taxable medical device as a lease of that taxable medical device as of the date both parties entered into the license agreement. Accordingly, the rules under §§ 4216(c) and 4217, and §§ 48.4216(c)-1(a), 48.4216(c)-1(e), 48.4217-1, and 48.4217‑2 apply. 

(c) Excise Tax Treatment of Donations of Taxable Medical Devices to Organizations Described in § 170(c) 

(1) Overview. The existing chapter 32 rules do not specifically address whether a donation of a taxable article constitutes a taxable use under § 4218. The IRS and the Treasury Department will continue to study this issue. 

(2) Interim Rules. Until the IRS and the Treasury Department issue further guidance, taxpayers may rely on the following rules relating to the donation of medical devices: 

(A) Non-taxable use. The donation of a taxable medical device by the manufacturer of the device to an eligible donee will not constitute a taxable use as defined in § 4218 of the Code. However, if at the time of donation, the manufacturer has reason to believe that the donation is not being made to an eligible donee or that the article donated will be resold by the eligible donee, the manufacturer is not relieved from the liability for the tax imposed by § 4191. 

(B) Eligible donee. For purposes of this safe harbor, an eligible donee is an entity described in §170(c) of the Code. 

(C) Subsequent sales of donated articles. The rules of § 4219 (related to the application of tax in case of sales by other than the manufacturer) apply to an eligible donee that receives a donated taxable medical device and subsequently sells the taxable medical device. 

Section 5. CONVENIENCE KITS 

(a)   Overview. Under § 4191, a "taxable medical device" is a device defined in § 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) that is intended for humans. Under § 48.4191-2(a) of the regulations, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR Part 807, pursuant to FDA requirements. Finished taxable medical devices are sometimes packaged together into kits for the convenience of a healthcare provider in the performance of a medical procedure. Convenience kits that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR Part 807 are “taxable medical devices” under the regulations unless they fall within an exemption under § 4191(b) or § 48.4191-2(b) of the regulations.  

The IRS and the Treasury Department have received numerous written and informal comments suggesting that the sale of convenience kits by the kit producer should not be subject to tax under § 4191. The IRS and the Treasury Department are studying the taxability of convenience kits and intend to issue additional guidance in the future.    

(b)   Definition of a “Convenience Kit.” For purposes of this notice, a "convenience kit" is a set of two or more devices within the meaning of section 201(h) of the FFDCA that is enclosed in a single package, such as a bag, tray, or box, for the convenience of a health care professional or the end user. A convenience kit may contain a combination of devices within the meaning of section 201(h) of the FFDCA and other articles. 

(c) Interim Rule for Domestically-Produced Convenience Kits. Until the IRS and the Treasury Department issue further guidance, no tax will be imposed upon the sale of a domestically-produced convenience kit that is a "taxable medical device" under § 4191 of the Code and § 48.4191-2(b) of the regulations. During this interim period, the sale of a taxable medical device that goes into a domestically-produced convenience kit will be subject to tax upon its sale by the manufacturer or importer, pursuant to the normal rules of § 4191 and the regulations thereunder; however, the sale of the convenience kit by the kit producer will not be subject to tax. 

(d) Interim Rule for Imported Convenience Kits. Until the IRS and the Treasury Department issue further guidance, tax is imposed under § 4191 on the sale by an importer of a convenience kit that is a taxable medical device under § 4191 of the Code and § 48.4191-2(b), but only on that portion of the importer’s sale price of the convenience kit that is properly allocable to the individual taxable medical devices included in the convenience kit.  

(1) Allocation. When an importer sells a convenience kit that is a taxable medical device, and also sells all of the individual taxable medical devices and nontaxable articles that are included in the convenience kit, the taxable portion of the sale price of such convenience kit may be determined by applying to the importer’s sale price of the convenience kit the ratio that the importer’s separate sale price of the taxable medical devices in the convenience kit bears to the sum of the sale prices of both the taxable medical devices and nontaxable articles in the convenience kit.  

When an importer sells a convenience kit that is a taxable medical device, but does not sell all of the individual taxable medical devices and nontaxable articles that are included in the convenience kit, the taxable portion of the sale price of such convenience kit may be determined by applying to the importer’s sale price of the convenience kit the ratio that the cost to the importer of the taxable medical devices in the convenience kit bears to the sum of the cost to the importer of both the taxable medical devices and nontaxable articles in the convenience kit. The importer may determine the cost of the taxable medical devices and the nontaxable articles in the convenience kit by any reasonable method. Thus, if the cost of the taxable medical devices represents half of the total cost to the importer of the convenience kit, the tax applies to half of the price charged by the importer upon the sale of the convenience kit.  

(2) Alternative to Allocation. In lieu of allocation, the importer of a convenience kit that is a taxable medical device may pay tax on the entire price for which the importer sells the convenience kit.  

Section 6: DEPOSIT PENALTY RELIEF 

(a) Overview. Section 6302 of the Code authorizes the IRS to establish the mode and time for collecting certain taxes, including the taxes imposed by chapter 32. Section 40.6302(c)-1(a) of the Excise Tax Procedural Regulations requires manufacturers that are liable for excise taxes to make semimonthly deposits of tax during the period in which the tax liability is incurred.   

The deposit for a tax imposed by chapter 32 for each semimonthly period must not be less than 95% of the amount of net tax liability incurred during the semimonthly period unless the safe harbor in § 40.6302(c)-1(b)(2)(ii) applies. Under the safe harbor, any person that filed a Form 720, Quarterly Federal Excise Tax Return, reporting a tax imposed by chapter 32 for the second preceding calendar quarter is considered to have met the semimonthly deposit requirement for the current quarter if: (i) the deposit for each semimonthly period in the current calendar quarter is not less than 1/6 of the net tax liability reported for the look back quarter: (ii) each deposit is made on time; (iii) the amount of any underpayment is paid by the due date of the return; and (iv) the person’s liability does not include any tax that was not imposed during the look back quarter. Section 40.6302(c)-1(b)(2)(v) provides that if a person fails to make deposits as required, the IRS may withdraw the person’s right to use the safe harbor rules of § 40.6302(c)-1(b)(2)(ii). 

Section 6656 imposes a penalty in the case of any failure by any person to make timely deposits as required by § 6302. A taxpayer may avoid penalties under § 6656 for failure to make deposits of taxes if the taxpayer makes an affirmative showing that such failure is due to reasonable cause and not due to willful neglect. See § 6656 and the corresponding regulations. 

The IRS and the Treasury Department recognize that many medical device manufacturers will still be preparing their systems to comply with the medical device excise tax when the tax goes into effect on January 1, 2013, including the requirement to make semimonthly deposits. The first deposit of the medical device excise tax, covering the first 15 days of January, is due by January 29, 2013. In consideration of the short time frame between the effective date of the tax and the due date of the first deposit, and in the interest of sound tax administration, the IRS and the Treasury Department have decided to provide temporary relief from the § 6656 penalty for the first three calendar quarters of 2013. The normal rules under § 6656 and the corresponding regulations will apply with respect to deposits due during the fourth calendar quarter of 2013 and thereafter. 

In addition to the temporary penalty relief, the normal safe harbor rules of § 40.6302(c)-1(b)(2)(ii) apply. Beginning in the third quarter of 2013, medical device manufacturers may use the safe harbor rules of § 40.6302(c)-1(b)(2)(ii) for semimonthly deposits due during that quarter. For purposes of the safe harbor, the first calendar quarter of 2013 is the look back quarter for deposits due during the third calendar quarter. 

(b) Interim Rule. During the first three calendar quarters of 2013, the IRS will not impose the penalty provided in § 6656 on a taxpayer that is liable for the medical device excise tax that fails to make timely deposits of the medical device excise tax as required by §§ 40.6302(c)-1 and 40.6302(c)-2 (relating to special deposits required in September), provided that the taxpayer demonstrates a good faith attempt to comply with requirements of §§ 40.6302(c)-1 and 40.6302(c)-2 and that the failure was not due to willful neglect.   

Thereafter, a taxpayer may avoid penalties if it makes an affirmative showing that the failure to deposit is due to reasonable cause and not due to willful neglect. In addition, during the third and fourth calendar quarters of 2013, the IRS will not exercise its authority under § 40.6302(c)-1(b)(2)(v) to withdraw the taxpayer’s right to use the deposit safe harbor rules of § 40.6302(c)-1(b)(2)(ii). 

Section 7. REQUEST FOR COMMENTS 

The IRS and the Treasury Department invite comments on the interim rules set forth in this notice. In particular, the IRS and the Treasury Department request comments on whether there are distribution chains not described in section 3 of this notice that are commonly employed by the medical device industry. In addition, the IRS and the Treasury Department recognize that different segments of the industry use different distribution chains for different devices and that determination of the price at which a manufacturer would sell its devices to an independent wholesale distributor may vary across those segments. The IRS and the Treasury Department request comments on how the constructive sale price rules might address this segmentation, including comments on what is a reasonable percentage of the applicable sale price for determining the constructive sale price for each segment or product. After reviewing the comments submitted in response to this request and other information collected by the IRS, the IRS and the Treasury Department will determine an appropriate percentage allowance for the industry as a whole or, alternatively, for particular segments of the industry. The IRS and the Treasury Department will announce any such adjustments in published guidance. Further, the IRS and the Treasury Department request comments regarding alternative methods for determining price for the distribution chain described in paragraph (b)(5) of section 3 of this notice (sales to related resellers that lease, but do not sell, taxable medical devices).   

            The deadline for submission of comments is March 29, 2013. All materials submitted will be available for public inspection and copying. Written comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2012-77), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2012-77), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Comments may be transmitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include "Notice 2012-77" in the subject line of any electronic communications.   

Section 8. EFFECTIVE DATE 

            This notice is effective on and after January 1, 2013. 

Section 9. DRAFTING INFORMATION 

The principal author of this notice is Michael H. Beker of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, please contact Mr. Beker at (202) 622-3130 (not a toll-free number). 

Notice 2012-78 

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007. These rates reflect certain changes implemented by the Moving Ahead for Progress in the 21st Century Act, Public Law 112-141 (MAP-21).  MAP-21 provides that for purposes of § 430(h)(2), the segment rates are limited by the applicable maximum percentage or the applicable minimum percentage based on the average of segment rates over a 25 year period.   

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i) provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. 

Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004-34 continues to apply in determining that rate.  See Notice 2006-75, 2006-2 C.B. 366.  

The composite corporate bond rate for November 2012 is 3.91 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.  

 The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

YIELD CURVE AND SEGMENT RATES 

Generally, except for certain plans under sections 104 and 105 of the Pension Protection Act of 2006, § 430 of the Code specifies the minimum funding requirements that apply to single employer plans pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins. However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.    

            Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Pursuant to Notice 2007-81, the monthly corporate bond yield curve derived from November 2012 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of November 2012 are, respectively, 0.97, 3.50, and 4.60. The three 24-month average corporate bond segment rates applicable for December 2012, without adjustment by the applicable percentage of the 25-year average segment rates, are as follows:  

24-Month Segment Rates Without Adjustment by 25-Year Average Segment Rates 

For plan years beginning in 2012, the 24-month average segment rates determined under § 430(h)(2)(C)(iv) must be not less than 90% nor greater than 110% of the 25-year average segment rates. Pursuant to Notice 2012-55, I.R.B. 2012-36, the first, second, and third 25-year segment rates applicable for plan years beginning in 2012 are 6.15, 7.61, and 8.35, respectively. Therefore, for plan years beginning in 2012, the three adjusted 24-month average corporate bond segment rates applicable for December 2012, taking into account the applicable percentage of the 25-year average segment rates, are as follows:  

Adjusted 24-Month Average Segment Rates,

Using Applicable Percentage of 25-Year Average Segment Rates 

The 25-year average segment rates for the period ending September 30, 2012 have not been determined yet. The Service will issue additional guidance on the December 2012 adjusted 24-month average segment rates applicable for plan years beginning in 2013 when those 25-year average segment rates are determined.  

30-YEAR TREASURY SECURITIES INTEREST RATES 

Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual rate of interest on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.  

The rate of interest on 30-year Treasury securities for November 2012 is 2.80 percent. The Service has determined this rate as the average of the yield on the 30-year Treasury bond maturing in August 2042 determined each day through November 7, 2012, and the yield on the 30-year Treasury bond maturing in November 2042 determined each day for the balance of the month.  

Generally for plan years beginning after 2007, § 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in section 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The following rates were determined for plan years beginning in the month shown below.  

MINIMUM PRESENT VALUE SEGMENT RATES

In general, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. For plan years beginning in 2008 through 2011, the applicable interest rates are the monthly spot segment rates blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value transitional segment rates determined for November 2012, taking into account the November 2012 30-year Treasury rate of 2.80 stated above, are as follows:  

DRAFTING INFORMATION 

The principal author of this notice is Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. Mr. Montanaro may be e-mailed at RetirementPlanQuestions@irs.gov.    

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