Part I. Rulings — Internal Revenue Bulletin 2007-11

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 101.—Certain Death Benefits

26 CFR 1.101–1: Exclusion from gross income of proceeds of life insurance contracts payable by rea- son of death. (Also § 671.)

Investor control and general public; taxation of variable contracts; insur- ance and annuities. This ruling treats the grantor of a grantor trust as the owner of a life insurance contract that is owned by the trust for purposes of determining whether a transfer of a contract (a) is a transfer for valuable consideration, and (b) if so, is a transfer to the insured within the meaning of section 101(a)(2)(B) of the Code.

Rev. Rul. 2007–13

ISSUE

Is the grantor who is treated for federal income tax purposes as the owner of a trust that owns a life insurance contract on the grantor’s life treated as the owner of the contract for purposes of determining whether a transfer of the contract (a) is a transfer for a valuable consideration within the meaning of § 101(a)(2) of the Internal Revenue Code, and (b) if so, is a transfer to the insured within the meaning of § 101(a)(2)(B)?

FACTS

Situation 1 . TR1 and TR2 are grantor trusts, both of which are treated as wholly owned by G under subpart E of Part I of subchapter J of the Internal Revenue Code. TR2 owns a life insurance contract upon the life of G . TR2 transfers the life insurance contract to TR1 in exchange for cash.

Situation 2 . The facts are the same as in Situation 1, except that TR2 is not a grantor trust.

LAW AND ANALYSIS

Section 61 defines gross income as all income from whatever source derived, including gains derived from dealings in property.

Section 101(a)(1) provides that, except as otherwise provided in §§ 101(a)(2), 101(d), and 101(f), gross income does not include amounts received under a life insurance contract if such amounts are received by reason of the death of the insured.

Section 101(a)(2) provides, generally, that if a life insurance contract, or any interest therein, is transferred for a valuable consideration, the exclusion from gross income provided by § 101(a)(1) shall not exceed an amount equal to the sum of the actual value of the consideration and the premiums and other amounts subsequently paid by the transferee.

The term “transfer for a valuable consideration” is defined for purposes of § 101(a)(2) in § 1.101–1(b)(4) of the Income Tax Regulations as any absolute transfer for value of a right to receive all or a part of the proceeds of a life insurance policy.

Section 101(a)(2)(B) provides that § 101(a)(2) does not apply to a transfer of a life insurance contract or any interest therein to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.

In Rev. Rul. 85–13, 1985–1 C.B. 184, a grantor acquired the corpus of a trust in exchange for the grantor’s unsecured promissory note. The ruling concludes that the grantor is considered to have borrowed the corpus of the trust and, as a result, is treated as the owner of the trust under § 675(3). Because the grantor is treated as the owner of the trust, the grantor is deemed the owner of the trust assets for federal income tax purposes. In addition, because the grantor is therefore considered to own the purported consideration both before and after the transaction, the exchange of a promissory note for the trust assets is not recognized as a sale for federal income tax purposes.

In Situation 1, because G is treated as the owner of both TR1 and TR2 for federal income tax purposes, G is treated as the owner of all the assets of both trusts, including both the life insurance contract and the cash received for it, both before and after the exchange. Accordingly, in Situation 1 there has been no transfer of the contract within the meaning of § 101(a)(2).

In Situation 2, because G is treated as the owner of all the assets of TR1 but not of TR2 for federal income tax purposes, G is treated as the owner of the cash (but not the life insurance contract) before the exchange, and as the owner of the life insurance contract (but not the cash) after the exchange. Accordingly, in Situation 2 there has been a transfer of the life insurance contract for a valuable consideration within the meaning of § 101(a)(2). Nevertheless, the transfer for value limitations of § 101(a)(2) do not apply, because the transfer to TR1 is treated as a transfer to G, the insured, within the meaning of § 101(a)(2)(B).

HOLDING

The grantor who is treated for federal income tax purposes as the owner of a trust that owns a life insurance contract on the grantor’s life is treated as the owner of the contract for purposes of applying the transfer for value limitations of § 101(a)(2). Accordingly, in Situation 1, the transfer of a life insurance contract between two grantor trusts that are treated as wholly owned by the same grantor is not a transfer for a valuable consideration within the meaning of § 101(a)(2); in Situation 2, the transfer of a life insurance contract to a grantor trust that is treated as wholly owned by the insured is a transfer to the insured within the meaning of § 101(a)(2)(B) and is therefore excepted from the transfer for value limitations under § 101(a)(2).

DRAFTING INFORMATION

The principal author of this revenue ruling is Chris Lieu of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, con

2007–11 I.R.B. 684 March 12, 2007

described in § 404(a)(1), (2), or (3), the compensation deductible under § 404 is deductible in the taxable year in which an amount attributable to the compensation is includible in the gross income of the employee participating in the plan. Furthermore, § 404(a)(5) provides that for purposes of § 404, any vacation pay that is treated as deferred compensation is deductible in the employer’s taxable year that it is paid to the employee.

Section 1.404(b)–1T Q&A 2 provides, in part, that for purposes of § 404(a), a plan, or method or arrangement, defers the receipt of compensation or benefits to the extent it is one under which an employee receives compensation or benefits more than a brief period of time after the end of the employer’s taxable year in which the services creating the right to such compensation or benefits are performed. A plan, or method or arrangement shall be presumed to be one deferring the receipt of compensation for more than a brief period of time after the end of an employer’s taxable year to the extent that compensation is received after the 15 ^th day of the 3 ^rd calendar month after the end of the employer’s taxable year in which the related services are rendered.

Section 461(a) provides that the amount of any deduction or credit must be taken for the taxable year that is the proper taxable year under the method of accounting used in computing taxable income.

Section § 1.461–1(a)(2)(i) provides that, under an accrual method of accounting, a liability is incurred, and is generally taken into account for federal income tax purposes, in the taxable year in which (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability (the “all events test”). See also § 1.446–1(c)(1)(ii)(A).

Section 1.461–4(d)(2)(i) provides that in general, if the liability of a taxpayer arises out of the providing of services to the taxpayer by another person, economic performance occurs as the services are provided. Section 1.461–4(d)(2)(iii) provides that with respect to employee benefits which arise out of the provision of services to the taxpayer, the economic performance requirement is satisfied to the extent that any amount is otherwise deductible under § 404. Section 1.461–4(g)(6) provides

tact Chris Lieu at (202) 622–3970 (not a toll-free call).

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 404.—Deduction for Contributions of an Employer to an Employees’ Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan

This revenue ruling provides guidance on when a taxpayer using an accrual method of accounting incurs a liability under section 461 for payroll taxes on deferred compensation. See Rev. Rul. 2007-12, page 685.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 461.—General Rule for Taxable Year of Deduction

26 CFR 1.461–1: General rule for taxable year of deduction. (Also § 404.)

Payroll taxes on deferred compensa- tion. This ruling provides guidance on when a taxpayer using an accrual method of accounting incurs a liability under section 461 of the Code for payroll taxes on deferred compensation. Rev. Rul. 69–587 revoked. Rev. Rul. 96–51 amplified.

Rev. Rul. 2007–12

ISSUE

If the all events test and recurring item exception of § 461 of the Internal Revenue Code are otherwise met, may an accrual method taxpayer treat its Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) tax liability as incurred in Year 1 if the compensation to which the tax liability relates is deferred compensation that is deductible under § 404 in Year 2?

FACTS

X, a corporation, uses an accrual method of accounting and files its federal income tax returns on a calendar year basis. As of the end of Year 1, X has a fixed liability to pay compensation for services provided by X’s employees during Year 1. As of the end of Year 1, all events have occurred to establish the fact of X’s liability for the taxes (“payroll taxes”) owed under §§ 3111 (the employer’s share of FICA taxes) and 3301 (FUTA taxes) related to the compensation, and the amount of the payroll tax liability can be determined with reasonable accuracy. X properly adopted the recurring item exception under § 1.461–5 of the Income Tax Regulations as a method of accounting with respect to the payroll taxes. X pays the payroll taxes either (1) in Year 1 or (2) before the earlier of September 15 of Year 2 or the date X files a timely (including extensions) federal income tax return for Year 1. Therefore, under § 461, the payroll taxes generally would be treated as incurred by X in Year 1. However, the compensation to which the payroll taxes relate is deferred compensation that is properly deductible under § 404 in Year 2.

LAW AND ANALYSIS

Section 404(a) provides, in relevant part, that if compensation is paid or accrued by an employer on account of any employee under a plan deferring the receipt of such compensation, and is otherwise deductible under Chapter 1, the compensation is deductible pursuant to the rules, and subject to the limitations, of § 404.

Section 404(a)(5) provides, in part, that if the plan of compensation is not

March 12, 2007 685 2007–11 I.R.B.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 932.—Coordination of United States and Virgin Islands Income Taxes

A notice provides interim rules concerning the statute of limitations on assessment for individuals claiming to be bona fide residents of the U.S. Virgin Islands. See Notice 2007-19, page 689.

generally that, if a taxpayer is liable to pay a tax, economic performance occurs as the tax is paid to the governmental authority that imposed it.

Section 1.461–5(b)(1) provides a recurring item exception to the general rule of economic performance. Under the recurring item exception, a liability is treated as incurred for a taxable year if: (i) at the end of the taxable year, all events have occurred that establish the fact of the liability and the amount can be determined with reasonable accuracy; (ii) economic performance occurs on or before the earlier of (a) the date that the taxpayer files a return (including extensions) for the taxable year, or (b) the 15th day of the 9th calendar month after the close of the taxable year; (iii) the liability is recurring in nature; and (iv) either the amount of the liability is not material or accrual of the liability in the taxable year results in better matching of the liability against the income to which it relates than would result from accrual of the liability in the taxable year in which economic performance occurs. Section 1.461–5(b)(5)(ii) provides that, in the case of a liability for taxes, the matching requirement of the recurring item exception is deemed satisfied.

Rev. Rul. 69–587, 1969–2 C.B. 108, concludes that, under the all events test of § 461, an accrual method employer generally may not deduct payroll taxes payable with respect to bonuses and vacation pay accrued but unpaid at year-end until the taxable year in which the bonuses and vacation pay are paid.

Rev. Rul. 96–51, 1996–2 C.B. 36, concludes that, under the all events test, an accrual method employer may deduct in Year 1 its otherwise deductible payroll taxes imposed on year-end wages properly accrued in Year 1 but paid in Year 2, provided the employer satisfies the requirements of the recurring item exception in § 1.461–5 with respect to those taxes. However, Rev. Rul. 96–51 does not address the application of § 404 because the year-end wages were paid before the 15 ^th day of the 3 ^rd calendar month after the end of Year 1.

In general, § 404 applies to compensation paid or accrued by an employer on account of any employee under a plan deferring the receipt of such compensation. An employer’s liability for payroll taxes does not represent compensation paid or accrued by an employer on account of any

employee. Therefore, § 404 does not control the deductibility of an employer’s liability for payroll taxes, even if the payroll tax liability relates to a deferred compensation liability subject to the deduction rules of § 404. Accordingly, § 404 does not alter the timing of the accrual of X’s payroll tax liability under § 461.

HOLDING

If the all events test and recurring item exception of § 461 are otherwise met, an accrual basis taxpayer may treat its payroll tax liability as incurred in Year 1, regardless of whether the compensation to which the liability relates is deferred compensation that is deductible under § 404 in Year 2.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 96–51 is amplified. Rev. Rul. 69–587 is revoked.

APPLICATION

A change in treatment of payroll tax liabilities associated with deferred compensation to comply with this revenue ruling is a change in method of accounting within the meaning of §§ 446 and 481 and the regulations issued thereunder. Accordingly, a taxpayer that wants to change its treatment of payroll taxes associated with deferred compensation to comply with this revenue ruling must obtain the consent of the Commissioner under § 446(e) and § 1.446–1(e)(2)(i).

DRAFTING INFORMATION

The principal author of this revenue ruling is Martin L. Osborne of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Osborne at (202) 622–7900 (not a toll-free call).

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

2007–11 I.R.B. 686 March 12, 2007

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

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

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for March 2007.

Rev. Rul. 2007–15

This revenue ruling provides various prescribed rates for federal income tax purposes for March 2007 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Applicable Federal Rates (AFR) for March 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 5.06% 5.00% 4.97% 4.95% 110% AFR 5.58% 5.50% 5.46% 5.44% 120% AFR 6.09% 6.00% 5.96% 5.93% 130% AFR 6.61% 6.50% 6.45% 6.41%

Mid-term

AFR 4.86% 4.80% 4.77% 4.75% 110% AFR 5.35% 5.28% 5.25% 5.22% 120% AFR 5.84% 5.76% 5.72% 5.69% 130% AFR 6.34% 6.24% 6.19% 6.16% 150% AFR 7.33% 7.20% 7.14% 7.09% 175% AFR 8.58% 8.40% 8.31% 8.26%

Long-term

AFR 5.01% 4.95% 4.92% 4.90% 110% AFR 5.52% 5.45% 5.41% 5.39% 120% AFR 6.03% 5.94% 5.90% 5.87% 130% AFR 6.54% 6.44% 6.39% 6.36%

REV. RUL. 2007–15 TABLE 2

Adjusted AFR for March 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted 3.58% 3.55% 3.53% 3.52% AFR

Mid-term adjusted AFR 3.71% 3.68% 3.66% 3.65%

Long-term adjusted 4.18% 4.14% 4.12% 4.10% AFR

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REV. RUL. 2007–15 TABLE 3

Rates Under Section 382 for March 2007

Adjusted federal long-term rate for the current month 4.18%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.18%

REV. RUL. 2007–15 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for March 2007 Appropriate percentage for the 70% present value low-income housing credit 8.15%

Appropriate percentage for the 30% present value low-income housing credit 3.49%

REV. RUL. 2007–15 TABLE 5

Rate Under Section 7520 for March 2007

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 5.8%

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 6501.—Limitations on Assessment and Collection

A notice provides interim rules concerning the statute of limitations on assessment for individuals claiming to be bona fide residents of the U.S. Virgin Islands. See Notice 2007-19, page 689.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2007. See Rev. Rul. 2007-15, page 687.

Section 7654.—Coordina- tion of United States and Certain Possession Indi- vidual Income Taxes

A notice provides interim rules concerning the statute of limitations on assessment for individuals claiming to be bona fide residents of the U.S. Virgin Islands. See Notice 2007-19, page 689.

2007–11 I.R.B. 688 March 12, 2007