Part I. Rulings — Internal Revenue Bulletin 2008-22

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

Section 358.—Basis to Distributees

26 CFR 1.358–5: Special rules for assumption of li- abilities.

T.D. 9397

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Assumption of Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations relating to the assumption of liabilities under section 358(h) of the Internal Revenue Code (Code). Section 358(h) provides that, after application of section 358(d), the basis in stock received in a nonrecognition transaction shall be reduced to the fair market value of the stock by the amount of any liability assumed in the exchange. The Treasury Department and the IRS have determined that removing an exception to section 358(h) is necessary to prevent abuse. These regulations affect corporations and their shareholders.

DATES: Effective Date: These regulations are effective on May 9, 2008.

Applicability Date: For dates of applicability, see §§1.358–5(a) and (b).

FOR FURTHER INFORMATION CONTACT: Robert M. Rhyne (202) 622–7550 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR part 1 under section 358(h) of the Code. As part of the Consolidated Appropriations Act of 2001 (Public Law 106–554, 114 Stat. 2763), Congress enacted, on December 21, 2000, section 358(h), applicable to assumptions of liability after October 18, 1999, to address certain transactions in which property is transferred to a corporation in exchange for both stock and the corporation’s assumption of certain obligations of the transferor. In these transactions, transferors took the position that the obligations were not liabilities within the meaning of section 357(c) or that they were described in section 357(c)(3), and, therefore, the obligations did not reduce the basis of the stock received by transferor. These assumed obligations, however, did reduce the value of the stock. The transferors then sold the stock and claimed a loss. In this way, taxpayers attempted to duplicate a loss in corporate stock and to accelerate deductions that typically are allowed only on the economic performance of these types of obligations.

Section 358(h)(1) addresses these transactions by requiring that, after application of section 358(d), the basis in stock received in an exchange to which section 351, 354, 355, 356, or 361 applies be reduced (but not below the fair market value of the stock) by the amount of any liability assumed in the exchange. Section 358(h)(2) provides exceptions to section 358(h)(1) where: (A) the trade or business with which the liability is associated is transferred to the person assuming the liability as part of the exchange; or (B) substantially all of the assets with which the liability is associated are transferred to the person assuming the liability as part of the exchange (the “Asset Exception”). The Secretary, however, has the authority to limit these exceptions. Section 358(h)(3) provides that the term “liability” for pur

poses of section 358(h) includes any fixed or contingent obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Code.

On May 26, 2005, temporary regulations (T.D. 9207, 2005–1 C.B. 1344) were published in the Federal Register (70 FR 30334) making unavailable the exception of section 358(h)(2)(B), the Asset Exception. A notice of proposed rulemaking (REG–106736–00, 2005–1 C.B. 1376) cross-referencing those temporary regulations was published in the Federal Register (71 FR 30380) on the same day.

The IRS and the Treasury Department received no comments responding to the proposed and temporary regulations. No public hearing was requested or held. The IRS and the Treasury Department have determined that making the exception of section 358(h)(2)(B) unavailable is necessary to prevent abuse; therefore, this document contains final regulations adopting the provisions of the proposed regulations with no change and the corresponding temporary regulations are removed.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to 5 U.S.C. 553(d)(3) it has been determined that a delayed effective date is unnecessary because this rule finalizes, without change, currently effective temporary rules regarding the assumption of liabilities. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the only impact of the regulations is to require taxpayers to calculate the basis of stock received in certain transactions more accurately. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advo

2008–22 I.R.B. 1025 June 2, 2008

cacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Robert M. Rhyne of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * §1.358–5 also issued under 26 U.S.C. 358(h)(2). - - * Par. 2. Section 1.358–5 is added to read as follows:

§1.358–5 Special rules for assumption of liabilities .

(a) In general . Section 358(h)(2)(B) does not apply to an exchange occurring on or after May 9, 2008.

(b) Effective/Applicability date. For exchanges occurring on or after June 24, 2003, and before May 9, 2008, see §1.358–5T as contained in 26 CFR part 1 in effect on April 1, 2007.

§1.358–5T [Removed]

Par. 3. Section 1.358–5T is removed.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved April 28, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 8, 2008, 8:45 a.m., and published in the issue of the Federal Register for May 9, 2008, 73 F.R. 26321)

Section 368.—Definitions Relating to Corporate Reorganizations

26 CFR 1.368–2: Definition of terms.

T.D. 9396

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Corporate Reorganizations; Amendment to Transfers of Assets or Stock Following a Reorganization

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations that amend T.D. 9361, titled Transfers of Assets or Stock Following a Reorganization. These final regulations make certain clarifying amendments to the rules regarding the effect of certain transfers of assets or stock on the continuing qualification of transactions as reorganizations under section 368(a). These regulations affect corporations and their shareholders.

DATES: Effective Date: These regulations are effective on May 9, 2008.

Applicability Date: For dates of applicability, see §1.368–2(k)(3).

FOR FURTHER INFORMATION CONTACT: Mary W. Lyons, at (202) 622–7930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

As noted in the preamble to T.D. 9361, 2007–47 I.R.B. 1026 (72 FR 60556), §1.368–1(a) provides that a transaction must be evaluated under all relevant provisions of law, including the step transaction doctrine, in determining whether it qualifies as a reorganization under section 368(a). Section 1.368–2 provides guidance regarding whether a transaction satisfies the explicit statutory requirements

of a particular reorganization. Specifically, section 1.368–2(k) provides that a transaction otherwise qualifying as a reorganization will not be disqualified or recharacterized as a result of certain subsequent transfers of assets or stock described therein. The fact that a subsequent transfer of assets or stock is not described in §1.368–2(k) does not necessarily preclude reorganization qualification, but the overall transaction would then be subject to analysis under the step transaction doctrine.

Section 1.368–2(k), as in effect prior to these final regulations, generally permits one or more post-reorganization transfers (or successive transfers) of assets or stock, provided that the Continuity of Business Enterprise (COBE) requirement is satisfied and the transfer(s) qualify as “distributions” (as described in §1.368–2(k)(1)(i)) or “other transfers” (as described in §1.368–2(k)(1)(ii)). These final regulations amend those rules to clarify that a transfer to the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, is not described in paragraph (k)(1) to the extent it constitutes the receipt by such shareholders of consideration for their proprietary interests in the acquired corporation or the surviving corporation, as the case may be. Any such transfer to the former shareholders following a transaction otherwise qualifying as a reorganization under section 368(a) calls into question whether the underlying transaction satisfies the continuity of interest requirement in Treas. Reg. §1.368–1(e) as well as certain statutory limitations on permissible consideration (such as the “solely for voting stock” requirement in section 368(a)(1)(B) or (C)). Therefore, such transfers are outside the scope of the safe harbor protection afforded by these final regulations. Nevertheless, the safe harbor of Treas. Reg. §1.368–2(k) continues to apply to transfers to the former shareholders that do not constitute consideration for their proprietary interests in the acquired corporation or the surviving corporation, as the case may be, such as certain pro-rata dividend distributions by the acquiring corporation following a reorganization. Moreover, the amendment provides that the limitation on the scope of Treas. Reg. 1.368–2(k) does not apply

June 2, 2008 1026 2008–22 I.R.B.

not apply to a transfer by the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, of consideration initially received in the potential reorganization to the issuing corporation or a person related to the issuing corporation (see definition of “related person” in §1.368–1(e)).

(i) Distributions. One or more distributions to shareholders (including distribution(s) that involve the assumption of liabilities) are described in this paragraph (k)(1)(i) if—

(A) The property distributed consists of—

( 1 ) Assets of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, or an interest in an entity received in exchange for such assets in a transfer described in paragraph (k)(1)(ii) of this section;

( 2 ) Stock of the acquired corporation provided that such distribution(s) of stock do not cause the acquired corporation to cease to be a member of the qualified group (as defined in §1.368–1(d)(4)(ii)); or

( 3 ) A combination thereof; and (B) The aggregate of such distributions does not consist of—

( 1 ) An amount of assets of the acquired corporation, the acquiring corporation (disregarding assets held prior to the potential reorganization), or the surviving corporation (disregarding assets of the merged corporation), as the case may be, that would result in a liquidation of such corporation for Federal income tax purposes; or

( 2 ) All of the stock of the acquired corporation that was acquired in the transaction.

(ii) Transfers Other Than Distributions . One or more other transfers are described in this paragraph (k)(1)(ii) if—

(A) The transfer(s) do not consist of one or more distributions to shareholders;

(B) The property transferred consists of—

( 1 ) Part or all of the assets of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be;

( 2 ) Part or all of the stock of the acquired corporation, the acquiring corporation, or the surviving corporation, as the

to transfers to a shareholder that also is the acquiring corporation in the reorganization. Thus, the regulations continue to provide safe harbor protection to certain “upstream” reorganizations followed by a transfer of acquired assets. See, for example, Rev. Rul. 69–617, 1969–2 C.B. 57.

In addition, these final regulations amend §1.368–2(k) to clarify that the safe harbor shall not apply to a transfer by the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, of consideration initially received in the potential reorganization to the issuing corporation or a person related to the issuing corporation (see definition of “related person” in §1.368–1(e)).

Further, these final regulations revise the title of paragraph (k)(1)(ii) and the requirement in paragraph (k)(1)(ii)(A). These amendments are intended to clarify that a distribution to shareholders is not a transfer described in paragraph (k)(1)(ii) regardless of whether or not it is described in paragraph (k)(1)(i). Additionally, these final regulations amend paragraph (k)(1)(ii)(C) to clarify that a transfer is not described in paragraph (k)(1)(ii) if the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, terminates its corporate existence for Federal income tax purposes in connection with the transfer.

Finally, conforming changes are made to the analysis in Examples 1, 6, 7, 8 and 9, and one clarifying change is made to the facts in Example 3 .

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their impact on small businesses.

Drafting Information

The principal author of these final regulations is Mary W. Lyons of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

Availability of IRS Documents

IRS revenue rulings, procedures, and notices cited in this preamble are made available by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–2(k) is revised to read as follows:

§1.368–2 Definition of terms .

- - - (k) Certain transfers of assets or stock in reorganizations —(1) General rule . A transaction otherwise qualifying as a reorganization under section 368(a) shall not be disqualified or recharacterized as a result of one or more subsequent transfers (or successive transfers) of assets or stock, provided that the requirements of §1.368–1(d) are satisfied and the transfer(s) are described in either paragraph (k)(1)(i) or (k)(1)(ii) of this section. However, this paragraph (k) shall not apply to a transfer to the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, to the extent it constitutes the receipt of consideration for a proprietary interest in the acquired corporation or the surviving corporation, as the case may be. Similarly, this paragraph (k) shall

2008–22 I.R.B. 1027 June 2, 2008

case may be, provided that such transfer(s) of stock do not cause such corporation to cease to be a member of the qualified group (as defined in §1.368–1(d)(4)(ii)); or

( 3 ) A combination thereof; and (C) The acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, does not terminate its corporate existence for Federal income tax purposes in connection with the transfer(s).

(2) Examples . The following examples illustrate the application of this paragraph (k). Except as otherwise noted, P is the issuing corporation, and T is an unrelated target corporation. All corporations have only one class of stock outstanding. T operates a bakery that supplies delectable pastries and cookies to local retail stores. The acquiring corporate group produces a variety of baked goods for nationwide distribution. Except as otherwise noted, P owns all of the stock of S–1 and 80 percent of the stock of S–4, S–1 owns 80 percent of the stock of S–2 and 50 percent of the stock of S–5, S–2 owns 80 percent of the stock of S–3, and S–4 owns the remaining 50 percent of the stock of S–5. The examples are as follows:

Example 1 . Transfers of acquired assets to mem- bers of the qualified group after a reorganization un- der section 368(a)(1)(C) . (i) Facts . Pursuant to a plan of reorganization, T transfers all of its assets to S–1 solely in exchange for P stock, which T distributes to its shareholders, and S–1’s assumption of T’s liabilities. In addition, pursuant to the plan, S–1 transfers all of the T assets to S–2, and S–2 transfers all of the T assets to S–3.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the successive transfers of all of the T assets to S–2 and from S–2 to S–3 because the transfers are not one or more distributions to shareholders, the transfers consist of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of §1.368–1(d).

Example 2 . Distribution of acquired assets to a member of the qualified group after a reorganization under section 368(a)(1)(C) . (i) Facts . Pursuant to a plan of reorganization, T transfers all of its assets to S–1 solely in exchange for P stock, which T distributes to its shareholders, and S–1’s assumption of T’s liabilities. In addition, pursuant to the plan, S–1 distributes half of the T assets to P, and P assumes half of the T liabilities.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the distribution of half of the T assets from S–1 to P, or

P’s assumption of half of the T liabilities from S–1, because the distribution consists of assets of the acquiring corporation, the distribution does not consist of an amount of S–1’s assets that would result in a liquidation of S–1 for Federal income tax purposes (disregarding S–1’s assets held prior to the acquisition of T), and the transaction satisfies the requirements of §1.368–1(d).

Example 3 . Indirect distribution of acquired as- sets to a member of the qualified group after a reor- ganization under section 368(a)(1)(C) . (i) Facts . The facts are the same as Example 2, except that, instead of S–1 distributing half of the T assets to P and having P assume half of the T liabilities, S–1 contributes half of the T assets to newly formed S–6, S–6 assumes half of the T liabilities, and S–1 distributes all of the S–6 stock to P.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the transfer of half of the T assets to S–6 and the distribution of the S–6 stock to P because the transfer of half of the T assets to S–6 is described in paragraph (k)(1)(ii) of this section, the distribution of the S–6 stock to P is an indirect distribution of assets of the acquiring corporation, the distribution does not consist of an amount of S–1’s assets that would result in a liquidation of S–1 for Federal income tax purposes (disregarding S–1’s assets held prior to the acquisition of T), and the transaction satisfies the requirements of §1.368–1(d).

Example 4 . Distribution of acquired stock to a controlled partnership after a reorganization under section 368(a)(1)(B) . (i) Facts . P owns 80 percent of the stock of S–1, and an 80-percent interest in PRS, a partnership. S–4 owns the remaining 20-percent interest in PRS. PRS owns the remaining 20 percent of the stock of S–1. Pursuant to a plan of reorganization, the T shareholders transfer all of their T stock to S–1 solely in exchange for P stock. In addition, pursuant to the plan, S–1 distributes 90 percent of the T stock to PRS in redemption of 5 percent of the stock of S–1 owned by PRS.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(B), is not disqualified by the distribution of 90 percent of the T stock from S–1 to PRS because the distribution consists of less than all of the stock of the acquired corporation that was acquired in the transaction, the distribution does not cause T to cease to be a member of the qualified group (as defined in §1.368–1(d)(4)(ii)), and the transaction satisfies the requirements of §1.368–1(d).

Example 5 . Transfer of acquired stock to a non- controlled partnership . (i) Facts . Pursuant to a plan, the T shareholders transfer all of their T stock to S–1 solely in exchange for P stock. In addition, as part of the plan, T distributes half of its assets to S–1, S–1 assumes half of the T liabilities, and S–1 transfers the T stock to S–2. S–2 and U, an unrelated corporation, form a new partnership, PRS. Immediately thereafter, S–2 transfers all of the T stock to PRS in exchange for a 50 percent interest in PRS, and U transfers cash to PRS in exchange for a 50 percent interest in PRS.

because the distribution consists of assets of the acquired corporation, the distribution does not consist of an amount of T’s assets that would result in a liquidation of T for Federal income tax purposes, and the transaction satisfies the requirements of §1.368–1(d). Further, this paragraph (k) describes the transfer of the acquired stock from S–1 to S–2, but does not describe the transfer of the acquired stock from S–2 to PRS because such transfer causes T to cease to be a member of the qualified group (as defined in §1.368–1(d)(4)(ii)). Therefore, the characterization of this transaction must be determined under the relevant provisions of law, including the step transaction doctrine. See §1.368–1(a). The transaction fails to meet the control requirement of a reorganization described in section 368(a)(1)(B) because immediately after the acquisition of the T stock, the acquiring corporation does not have control of T.

Example 6 . Transfers of acquired assets to mem- bers of the qualified group after a reorganization un- der section 368(a)(1)(D) . (i) Facts . P owns all of the stock of T. Pursuant to a plan of reorganization, T transfers all of its assets to S–1 solely in exchange for S–1 stock, which T distributes to P, and S–1’s assumption of T’s liabilities. In addition, pursuant to the plan, S–1 transfers all of the T assets to S–2, and S–2 transfers all of the T assets to S–3.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(D), is not disqualified by the successive transfers of all the T assets from S–1 to S–2 and from S–2 to S–3 because the transfers are not one or more distributions to shareholders, the transfers consist of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of §1.368–1(d).

Example 7. Transfer of stock of the acquiring cor- poration to a member of the qualified group after a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D) . (i) Facts . Pursuant to a plan of reorganization, S–1 acquires all of the T assets in the merger of T into S–1. In the merger, the T shareholders receive solely P stock. Also, pursuant to the plan, P transfers all of the S–1 stock to S–4.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D), is not disqualified by the transfer of all of the S–1 stock to S–4 because the transfer is not a distribution to shareholders, the transfer consists of part or all of the stock of the acquiring corporation, the transfer does not cause S–1 to cease to be a member of the qualified group (as defined in §1.368–1(d)(4)(ii)), the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfer, and the transaction satisfies the requirements of §1.368–1(d).

Example 8 . Transfer of acquired assets to a partnership after a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D) . (i) Facts . Pursuant to a plan of reorganization, S–1 acquires all of the T assets in the merger of T into S–1. In the merger, the T shareholders receive solely P stock. In addition, pursuant to the plan, S–1 transfers all of the T assets to PRS, a partnership in which S–1 owns a 33 ¹ /3-percent interest. PRS continues T’s

June 2, 2008 1028 2008–22 I.R.B.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

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 June 2008.

Rev. Rul. 2008–28

This revenue ruling provides various prescribed rates for federal income tax purposes for June 2008 (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.

historic business. S–1 does not perform active and substantial management functions as a partner with respect to PRS’ business.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D), is not disqualified by the transfer of T assets from S–1 to PRS because the transfer is not a distribution to shareholders, the transfer consists of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of §1.368–1(d).

Example 9 . Sale of acquired assets to a member of the qualified group after a reorganization under section 368(a)(1)(C) . (i) Facts . Pursuant to a plan of reorganization, T transfers all of its assets to S–1 in exchange for P stock, which T distributes to its shareholders, and S–1’s assumption of T’s liabilities. In addition, pursuant to the plan, S–1 sells all of the T assets to S–5 for cash equal to the fair market value of those assets.

(ii) Analysis . Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the sale of all of the T assets from S–1 to S–5 because the transfer is not a distribution to shareholders, the transfer consists of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfer, and the transaction satisfies the requirements of §1.368–1(d).

(3) Effective/applicability dates . This paragraph (k) applies to transactions occurring on or after May 9, 2008, except that it does not apply to any transaction occurring pursuant to a written agreement which is binding before May 9, 2008, and at all times after that.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved May 2, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 8, 2008, 8:45 a.m., and published in the issue of the Federal Register for May 9, 2008, 73 F.R. 26322)

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 June 2008. See Rev. Rul. 2008-28, page 1029.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

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 June 2008. See Rev. Rul. 2008-28, page 1029.

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 June 2008. See Rev. Rul. 2008-28, page 1029.

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 June 2008. See Rev. Rul. 2008-28, page 1029.

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 June 2008. See Rev. Rul. 2008-28, page 1029.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

2008–22 I.R.B. 1029 June 2, 2008

REV. RUL. 2008–28 TABLE 1

Applicable Federal Rates (AFR) for June 2008

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 2.08% 2.07% 2.06% 2.06% 110% AFR 2.29% 2.28% 2.27% 2.27% 120% AFR 2.50% 2.48% 2.47% 2.47% 130% AFR 2.71% 2.69% 2.68% 2.68%

Mid-term

AFR 3.20% 3.17% 3.16% 3.15% 110% AFR 3.52% 3.49% 3.47% 3.46% 120% AFR 3.84% 3.80% 3.78% 3.77% 130% AFR 4.16% 4.12% 4.10% 4.09% 150% AFR 4.82% 4.76% 4.73% 4.71% 175% AFR 5.63% 5.55% 5.51% 5.49%

Long-term

AFR 4.46% 4.41% 4.39% 4.37% 110% AFR 4.91% 4.85% 4.82% 4.80% 120% AFR 5.36% 5.29% 5.26% 5.23% 130% AFR 5.81% 5.73% 5.69% 5.66%

REV. RUL. 2008–28 TABLE 2

Adjusted AFR for June 2008

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted 1.95% 1.94% 1.94% 1.93% AFR

Mid-term adjusted AFR 3.07% 3.05% 3.04% 3.03%

Long-term adjusted 4.57% 4.52% 4.49% 4.48% AFR

REV. RUL. 2008–28 TABLE 3

Rates Under Section 382 for June 2008

Adjusted federal long-term rate for the current month 4.57%

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.) 4.71%

REV. RUL. 2008–28 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for June 2008 Appropriate percentage for the 70% present value low-income housing credit 7.89%

Appropriate percentage for the 30% present value low-income housing credit 3.38%

June 2, 2008 1030 2008–22 I.R.B.

REV. RUL. 2008–28 TABLE 5

Rate Under Section 7520 for June 2008

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 3.8%

section 6503(j) in the Omnibus Budget Reconciliation Act of 1990 (Public Law 101–508, 104 Stat. 1388) (OBRA 1990). On July 21, 2006, the IRS published in the Federal Register a notice of proposed rulemaking (REG–153037–01, 2007–15 I.R.B. 942 [71 FR 41377]) that interprets the amendments to sections 7603 and 7609. Written comments from one commentator on several of the proposed sections were received. No request for a public hearing was received, nor was one held. The proposed regulations, as revised by this Treasury decision, are substantially adopted as final regulations.

As described more fully in the preamble to the proposed regulations, these regulations provide guidance relating to the manner in which summonses may be served on third-party recordkeepers, the expanded class of third-party summonses to which the notice requirements and other procedures apply, the suspension of a taxpayer’s periods of limitations if that taxpayer petitions to quash a third-party summons or intervenes in a proceeding to enforce such a summons, and the suspension of a taxpayer’s periods of limitations if a summoned third party does not finally resolve its response to a summons within six months after service of a summons.

Comments on the Proposed Regulations and Explanation of Changes

§301.7609–1(a)(2)—In general

Proposed §301.7609–1(a)(2) provides that neither section 7609 nor the regulations “limit the IRS’s ability to obtain information, other than by summons, through formal or informal procedures authorized by sections 7601 and 7602.” The commentator suggested that this provision be prefaced with the phrase “[e]xcept as provided in Section 7609 or Treasury Regulations” and further explained that section 7609 does contain provisions, such as section 7609(d), that limit the IRS’s ability to obtain information when a summons has been served.

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 June 2008. See Rev. Rul. 2008-28, page 1029.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2008. See Rev. Rul. 2008-28, page 1029.

Section 7603.—Service of Summons

26 CFR 301.7603–2: Third-party recordkeeepers.

T.D. 9395

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Suspension of Statutes of Limitations in Third-Party and John Doe Summons Disputes and Expansion of Taxpayers’ Rights to Receive Notice and Seek Judicial Review of Third-Party Summonses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains final regulations relating to third-party and John Doe summonses. These final regulations reflect amendments to sections 7603 and 7609 of the Internal Revenue Code of 1986 made by the Internal Revenue Service Restructuring and Reform Act of 1998, the Omnibus Budget Reconciliation

Act of 1990, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Reform Act of 1986. These final regulations provide guidance relating to the manner by which summonses may be served on third-party recordkeepers, the expanded class of third-party summonses subject to notice requirements and other procedures, and the suspension of periods of limitations if a court proceeding is brought involving a challenge to a third-party summons, or if a third party’s response to a summons is not finally resolved within six months after service. These final regulations affect third parties who are served with a summons, taxpayers identified in a third-party summons, and other persons entitled to notice of a third-party summons.

DATES: Effective Date: These regulations are effective April 30, 2008.

Applicability Date: For the date of applicability, see §§301.7603–1(f); 301.7603–2(c); 301.7609–1(d); 301.7609–2(c); 301.7609–3(e); 301.7609–4(d); and 301.7609–5(f).

FOR FURTHER INFORMATION CONTACT: Elizabeth Rawlins at (202) 622–3630 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations amending the Procedure and Administration Regulations (26 CFR part 301) under sections 7603 and 7609 of the Internal Revenue Code of 1986 (Code). The final regulations reflect amendments to sections 7603 and 7609 made by the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105–206, 112 Stat. 685) (RRA 1998), the Technical and Miscellaneous Revenue Act of 1988 (Public Law 100–647, 102 Stat. 3343) (TAMRA 1988), and the Tax Reform Act of 1986 (Public Law 99–514, 100 Stat. 2085) (TRA 1986). The final regulations also reflect changes made to

2008–22 I.R.B. 1031 June 2, 2008

The commentator suggested that proposed §301.7609–3(a) would infringe on the rights of those summoned persons who receive a vague or overbroad summons. This provision, however, does not preclude a summoned person from raising such a defense in a summons enforcement proceeding. Accordingly, the IRS and Treasury have concluded that these suggestions provide no basis for adopting changes in the final regulations.

§301.7609–4(c)—Presumption no notice of proceeding to quash has been mailed

Section 7609(b) provides that any person entitled to notice of a summons may bring a proceeding to quash by filing a petition in district court and mailing notice of the petition to both the IRS and the summoned person within 20 days of the day the notice was given. Proposed §301.7609–4(b)(3) provides that if a person fails to give proper and timely notice of the petition to quash, then that person has failed to institute a proceeding to quash and the district court lacks jurisdiction to hear the proceeding. Proposed §301.7609–4(c) provides that “it is presumed that the notification [of the petition to quash] was not timely mailed if the copy of the petition was not delivered to the summoned person or to the person and office designated to receive the notice on behalf of the IRS within three days after the close of the 20-day period allowed for instituting a proceeding to quash.”

The commentator suggested that proposed §301.7609–4(c) should be clarified to provide that the presumption of untimeliness would no longer apply “if a copy of the petition is subsequently received and it is determined that it was mailed prior to the close of the 20-day period.” Proposed §301.7609–4(c) is identical, however, in all salient respects to a provision in the prior regulations that the IRS has administered since 1986 without controversy. In cases where the IRS has not received a copy of a petition to quash within three days after the close of the 20-day period, but it is later determined that a copy of the petition was timely mailed within the 20-day period, the IRS has halted the examination of summoned witnesses and records upon receiving a timely filed petition to quash, consistent with IRM provisions providing that, if a proceeding to

This suggestion has not been adopted in the final regulations. Proposed §301.7609–1(a)(2) is consistent with the language of section 7609(j), which provides: “Nothing in this section shall be construed to limit the [IRS’s] ability to obtain information, other than by summons, through formal or informal procedures authorized by sections 7601 and 7602.” Section 7609(j) and proposed §301.7609–1(a)(2) are directed to situations in which the IRS has not issued a summons, but is instead seeking information through informal procedures authorized by sections 7601 and 7602. In these situations, section 7609 and the regulations do not apply.

§301.7609–2(a)(1)—Persons entitled to notice

Section 7609(a)(1) provides that notice of a third party summons shall be given to “any person (other than the person summoned) who is identified in the summons.” Proposed §301.7609–2(a)(1) provides: “The only persons so identified are the person with respect to whose liability the summons is issued and any other person identified in the description of summoned records or testimony. For example, if the IRS issues a summons to a bank with respect to the liability of C that requires the production of account records of A and B, both of whom are named in the summons, the IRS must notify A, B, and C of the summons.”

The commentator suggested that the statutory phrase “any person ... identified in the summons” should be interpreted more broadly to encompass persons to whom the summoned records relate who belong to a specifically identifiable class, but who are not identified by name in the summons. The commentator offered examples of persons described generically by phrases, such as “children” or “closely-held corporations in which the taxpayer is a shareholder.”

This suggestion has not been adopted in the final regulations. The requirement that an identified person be named in the summons is consistent with longstanding regulations under section 7609. Nothing in the statutory amendments to section 7609 since these regulations were promulgated suggests that Congress intended to change the meaning of this concept.

The commentator also suggested that the example in the proposed regulations could be read to mean that a person named in a summons is only entitled to notice if that person’s records are sought from the third party. This reading is incorrect. The regulations do not condition the right to notice on a finding that the identified person’s records are sought. Instead, “any ... person identified in the description of summoned records or testimony” is entitled to notice, as is the taxpayer with respect to whose liability the summons is issued.

§301.7609–3(a)—Duty of the summoned party

Proposed §301.7609–3(a) provides: “Upon receipt of a summons, the summoned party must begin to assemble the summoned records. The summoned party must be prepared to produce the summoned records on the date on which the summons states that they are to be examined, regardless of the institution or anticipated institution of a proceeding to quash or the summoned party’s intervention in a proceeding to quash, as allowed under section 7609(b)(2)(C).”

The commentator suggested that proposed §301.7609–3(a) is overbroad because the statutory provision on which it is based, section 7609(i)(1), is preceded by the heading: “Recordkeeper Must Assemble Records and Be Prepared To Produce Records.” The commentator concluded that section 7609(i)(1) can apply only to third-party recordkeepers. This conclusion is not supported by the statutory amendment to section 7609(i)(1) under RRA 98, which replaced the prior reference to “third-party recordkeeper” with the term summoned party . Thus, section 7609(i)(1) applies to all recipients of third-party summonses (other than certain excepted summonses under section 7609(c)(2)). The commentator also suggested that proposed §301.7609–3(a) is overbroad because the requirements of section 7609(i)(1) do not apply if a proceeding to quash is brought. Section 7609(i)(1), however, does not require the summoned party to produce the documents when a petition to quash has been filed but merely requires the summoned party to “assemble” and “be prepared to produce” them.

June 2, 2008 1032 2008–22 I.R.B.

This suggestion has not been adopted because compliance can only be determined after the records are examined. The regulations provide that the determination of whether there has been full compliance will be made within a reasonable time, given the volume and complexity of the records produced, after the later of the giving of all testimony or the production of all records requested by the summons or required by any order enforcing any part of the summons. In addition, as stated in the preamble to the proposed regulations, the IRS intends to publish additional administrative procedures regarding the compliance determination in the Internal Revenue Manual. An aspect of these procedures will involve the creation of procedures by which taxpayers can inquire about the suspension of their periods of limitations under section 7609(e)(2).

§§301.7603–1(f); 301.7603–2(c); 301.7609–1(d); 301.7609–2(c); 301.7609–3(e); 301.7609–4(d); and 301.7609–5(f)—Effective/applicability date

The commentator suggested making these regulations applicable only to summonses issued after the date on which they are published. This suggestion was not adopted because these regulations are interpretative of statutory provisions that have existed as law for several years.

Special Analyses

It has been determined that this final regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose a collection of information under the Paperwork Reduction Act (44 U.S.C. section 3501), the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations. Pursuant to section 7805(f) of the Code, the regulations, when published previously in the Notice of Proposed Rulemaking, were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

quash is begun, no examination of summoned records is allowed until the court so orders.

§301.7609–5(e)(2)(i)—Intervention in an enforcement proceeding

Section 7609(e)(1) provides for the suspension of the statute of limitations with respect to a third-party summons “for the period during which a proceeding, and appeals therein, with respect to the enforcement of such summons is pending.” Proposed §301.7609(e)(2)(i) provides: “If, following issuance of an order to enforce a third-party summons, a collateral proceeding is brought challenging whether production made by the summoned party fully satisfied the court order and whether sanctions should be imposed against the summoned party for a failure to satisfy that order, the periods of limitations remain suspended until all appeals of the collateral proceeding are disposed of, or until the expiration of the period during which an appeal may be taken or a request for further review of the collateral proceeding may be made. Any collateral proceeding to the original proceeding shall be considered to be a continuation of the original proceeding.”

The commentator suggested that including collateral proceedings and related appeals periods within the suspension period under section 7609(e)(1) goes beyond the statutory language and the IRS’s authority to promulgate regulations. The statutory phrase “a proceeding, and appeals therein, with respect to the enforcement of such summons” connotes a category of court actions that are related to, but not limited to, a summons enforcement suit. Thus, section 7609(e)(1) is properly interpreted to encompass collateral proceedings and related appeals.

§301.7609–5(e)(3)—Final resolution of the summoned third party’s response to a summons

Section 7609(e)(2)(B) suspends a taxpayer’s periods of limitations on assessment and criminal prosecution “in the absence of the resolution of the summoned party’s response to the summons” for a period beginning six months after service of the summons and ending on

the date of “final resolution.” Proposed §301.7609–5(e)(3) provides that “final resolution” occurs when the summons or any summons enforcement order is fully complied with and all appeals are disposed of or the period for appeal or further review has expired. The proposed regulation further provides that the determination of whether there has been full compliance will be made within a reasonable time, given the volume and complexity of the records produced, after the later of the giving of all testimony or the production of all records requested by the summons. The proposed regulation additionally provides that the suspension shall continue if, following an enforcement order, collateral proceedings are brought challenging whether the summoned party fully satisfied the court order. The suspension will continue until the summons or the enforcement order is fully complied with and the decision in the collateral proceeding becomes final, which occurs when all appeals are disposed of or when the period for appeal or further review has expired.

The commentator suggested that proposed §301.7609–5(e)(3) be revised to reflect that the suspension under section 7609(e)(2) does not apply to a taxpayer who brings a proceeding to quash or who intervenes in an enforcement suit. This suggestion has not been adopted as the statutory structure already provides for the applicability of alternative suspension periods. This suggestion has also not been adopted as nothing prevents the suspension under section 7609(e)(2) from applying after the expiration of the suspension under section 7609(e)(1).

The commentator also suggested that the provisions concerning collateral proceedings be removed. This recommendation has not been adopted. The suspension will only terminate upon final resolution of the summoned person’s response to the summons, and collateral proceedings, such as contempt proceedings, may be necessary to obtain a summoned third party’s compliance with an enforcement order.

The commentator further suggested that the “operative fact” in determining whether final resolution has occurred should be the date of the summoned person’s “actual compliance” with the summons, not “the Service’s determination as to whether and when this has occurred.”

2008–22 I.R.B. 1033 June 2, 2008

tain an extension of credit. Thus, a person who extends credit by requiring customers to sign sales slips without requiring the use of, or reference to, a physical object issued by that person is not a third-party recordkeeper under section 7603(b)(2)(C).

(iii) Debit cards . A debit card is not a credit card or similar device because a debit card is not tendered to obtain an extension of credit.

(4) Enrolled agent . A person is an enrolled agent under section 7603(b)(2)(I) for purposes of determining whether that person is a third-party recordkeeper if the person is enrolled as an agent authorized to practice before the Internal Revenue Service pursuant to Circular 230, 31 CFR Part 10. (5) Owner or developer of certain com- puter code and data . An owner or developer of computer software source code under section 7603(b)(2)(J) is a third-party recordkeeper when summoned to produce a computer software source code (as defined in section 7612(d)(2)), or an executable code and associated data described in section 7612(b)(1)(A)(ii), even if that person did not make or keep records of another person’s business transactions or affairs.

(b) When third-party recordkeeper sta- tus arises —(1) In general . Except as provided in paragraph (a)(5) of this section, a person listed in section 7603(b)(2) is a third-party recordkeeper for purposes of section 7609(c)(2)(E) and §301.7603–1 only if the summons served on that person seeks records (or testimony regarding such records) of a third party’s business transactions or affairs and such recordkeeper made or kept the records in the capacity of a third-party recordkeeper. For instance, an accountant is not a third-party recordkeeper (by reason of being an accountant) with respect to the accountant’s records of a sale of property by the accountant to another person. Similarly, a credit card issuer is not a third-party recordkeeper (by reason of being a person extending credit through the use of credit cards or similar devices) with respect to—

(i) Records relating to non-credit card transactions, such as a cash sale by the issuer to a holder of the issuer’s credit card; or

(ii) Records relating to transactions involving the use of another issuer’s credit card.

Drafting Information

The principal author of these regulations is Elizabeth Rawlins of the Office of the Associate Chief Counsel, Procedure and Administration, Internal Revenue Service.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7603–1 is revised to read as follows:

§301.7603–1 Service of summons .

(a) In general —(1) Hand delivery or delivery to place of abode . Except as otherwise provided in paragraph (a)(2) of this section, a summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 shall be served by an attested copy delivered in hand to the person to whom it is directed, or left at such person’s last and usual place of abode.

(2) Summonses issued to third-party recordkeepers . A summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 for the production of records (or testimony about such records) by a third-party recordkeeper, as described in section 7603(b)(2) and §301.7603–2, may also be served by certified or registered mail to the third-party recordkeeper’s last known address, as defined in §301.6212–2. If service to a third-party recordkeeper is made by certified or registered mail, the date of service is the date on which the summons is mailed.

(b) Persons who may serve a summons . The officers and employees of the Internal Revenue Service whom the Commissioner has designated to carry out the authority described in §301.7602–1(b) to issue a summons are authorized to serve a summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602.

(c) Effect of certificate of service . The certificate of service signed by the person serving the summons shall be evidence of the facts it states on the hearing of an application for the enforcement of the summons.

(d) Sufficiency of description of sum- moned records . When a summons requires the production of records, it shall be sufficient if such records are described with reasonable certainty.

(e) Records . For purposes of this section and §301.7603–2, the term records includes books, papers, or other data.

(f) Effective/applicability date . This section is applicable on April 30, 2008.

Par. 3. Section 301.7603–2 is added to read as follows:

§301.7603–2 Third-party recordkeepers .

(a) Definitions —(1) Accountant . A person is an accountant under section 7603(b)(2)(F) for purposes of determining whether that person is a third-party recordkeeper if, on the date the records described in the summons were created, the person was registered, licensed, or certified as an accountant under the authority of any state, commonwealth, territory, or possession of the United States, or of the District of Columbia.

(2) Attorney . A person is an attorney under section 7603(b)(2)(E) for purposes of determining whether that person is a third-party recordkeeper if, on the date the records described in the summons were created, the person was registered, licensed, or certified as an attorney under the authority of any state, commonwealth , territory, or possession of the United States, or of the District of Columbia.

(3) Credit cards —(i) Person extend- ing credit through credit cards . The term person extending credit through the use of credit cards or similar devices under section 7603(b)(2)(C) generally includes any person who issues a credit card. The term does not include a seller of goods or services who honors credit cards issued by other parties but who does not extend credit through the use of credit cards or similar devices.

(ii) Devices similar to credit cards . An object is a device similar to a credit card under section 7603(b)(2)(C) only if it is physical in nature, such as a charge plate or similar device that may be tendered to ob

June 2, 2008 1034 2008–22 I.R.B.

(1) Summons served on the taxpayer . The IRS is not required to provide notice of a summons served on the person with respect to whose liability the summons was issued, or any officer or employee of such person.

(2) Existence of records . The IRS is not required to provide notice in the case of a summons issued to determine whether or not records of the business transactions or affairs of a person identified in the summons have been made or kept.

(3) Numbered account or similar ar- rangement . The IRS is not required to provide notice in the case of a summons issued solely to determine the identity of a person having a numbered account or similar arrangement with a bank or other institution. An account is a numbered account or similar arrangement within the meaning of this paragraph if it is an account through which a person may authorize transactions solely through the use of a number, symbol, code name, or other device not involving the disclosure of the person’s identity. The term person having a numbered ac- count or similar arrangement includes the person who opened the account and any person authorized to access the account or to receive records or statements concerning it.

(4) Summonses in aid of the collection of liabilities —(i) In general . The IRS is not required to provide notice in the case of a summons issued in aid of the collection of liabilities. A summons is in aid of the collection of liabilities within the meaning of this paragraph if it is issued in connection with the collection of—

(A) An assessment or judgment against the person with respect to whose liability the summons is issued; or

(B) The liability determined at law or in equity of any transferee or fiduciary of a person described in subparagraph (b)(4)(i)(A) of this section.

(ii) Examples . The rules of paragraph (b)(4) of this section are illustrated by the following examples:

Example 1 . A third-party summons is issued to a bank to determine the amount held in an account in the name of A, against whom unpaid income taxes have been assessed. Notice of the summons is not required to be given to A or any other persons identified in the summons because the summons is issued in connection with the collection of taxes that have been assessed.

Example 2 . A third-party summons is issued to determine whether assessments should be made

(2) Examples . The rules of paragraph (b)(1) of this section are illustrated by the following examples:

Example 1 . V issues a credit card (the V card) that is honored by R, a retailer. When using the V card, C, a customer, signs a sales slip in triplicate. C, R, and V each retain one copy. Only the copy held by V is held by a third-party recordkeeper under section 7603(b)(2), even though R may issue its own credit card.

Example 2 . R, a retailer, issues its own credit card (the R card) to C, a customer. When C makes a credit purchase from R using the R card, C signs a sales slip in duplicate. C and R each retain one copy. Because R keeps the copy in its capacity as credit card issuer, as well as in its capacity as a retailer, it is a third-party recordkeeper under section 7603(b)(2) with respect to its copy of the sales slip.

Par. 4. Sections 301.7609–1 through 301.7609–5 are revised to read as follows:

§301.7609–1 Special procedures for third-party summonses .

(a) In general —(1) Section 7609 requires the Internal Revenue Service (IRS) to follow special procedures when summoning a third party’s testimony, records, or computer software source code. Except as provided in §301.7609–2(b), the IRS must provide notice of a third-party summons to any person identified in the summons, other than the person summoned. A person entitled to notice of a third-party summons may intervene in any proceeding brought to enforce the summons or may bring a proceeding to quash the summons, regardless of whether they receive notice of the summons from the IRS pursuant to section 7609(a) and §301.7609–2.

(2) Neither section 7609 nor the regulations hereunder limit the IRS’s ability to obtain information, other than by summons, through formal or informal procedures authorized by sections 7601 and 7602. (b) Cross references . See §301.7609–2 for rules relating to persons who must be notified of a third-party summons and exceptions to the notification requirements. See §301.7609–3 for rules relating to the rights and duties of summoned parties. See §301.7609–4 for rules relating to actions to quash a summons or to intervene in a summons enforcement proceeding. See §301.7609–5 for rules relating to the suspension of periods of limitations.

term records includes books, papers, or other data.

(d) Effective/applicability date . This section is applicable on April 30, 2008.

§301.7609–2 Notification of persons identified in third-party summonses .

(a) In general —(1) Persons enti- tled to notice . Except as provided in §301.7609–2(b), the Internal Revenue Service (IRS) shall give notice of a third-party summons to any person, other than the person summoned, who is identified in the summons. The only persons so identified are the person with respect to whose liability the summons is issued and any other person identified in the description of summoned records or testimony. For example, if the IRS issues a summons to a bank with respect to the liability of C that requires the production of account records of A and B, both of whom are named in the summons, the IRS must notify A, B and C of the summons.

(2) Time for providing notice . If notice is required by this paragraph, such notice must be given within three days of the date on which the summons is served on the third party, but no later than 23 days prior to the date fixed in the summons as the date on which the examination of the summoned person or records is scheduled.

(3) Methods for serving notice . Notice may be served by hand delivery to any person entitled to notice or by leaving notice at such person’s last and usual place of abode. Notice also may be served by certified or registered mail to the person’s last known address, as defined in §301.6212–2. If service to a person entitled to notice is made by certified or registered mail, the date of service is the date on which the notice is mailed.

(4) Content of the notice . Notice required to be given to any person entitled to notice must be accompanied by a copy of the summons that has been served and must include an explanation of the right to bring a proceeding to quash the summons. The copy of the summons accompanying the notice is not required to contain the attestation that appears pursuant to section 7603 on the copy of the summons served on the summoned person.

(b) Exceptions . The IRS is not required to provide notice to persons identified in the following third-party summonses:

2008–22 I.R.B. 1035 June 2, 2008

response to the summons has not been finally resolved;

(v) The periods of limitations under section 6501 (relating to assessment and collection) and section 6531 (relating to criminal prosecution), have been suspended; and

(vi) The date on which suspension of the periods of limitations under sections 6501 and 6531 began. (3) Time and manner of notification . The notification must be made in writing and may be delivered in person, by mail sent to the address last known by the summoned party , or by use of any electronic means of transmission. Notification should be made as soon as possible after the suspension of the periods of limitations begins. Failure by a summoned party to give notice of the suspension of periods of limitations as required by section 7609(i)(4) does not prevent the suspension of the periods of limitations under section 7609(e)(2). (e) Effective/applicability date . This section is applicable on April 30, 2008.

§301.7609–4 Right to intervene; right to institute a proceeding to quash .

(a) Intervention in proceeding with re- spect to enforcement of a summons . Under section 7609(b)(1), a person entitled to notice of a summons under section 7609(a) and §301.7609–2 is entitled to intervene in any proceeding brought under section 7604 with respect to the enforcement of that summons.

(b) Right to institute a proceeding to quash —(1) In general . Under section 7609(b), a person entitled to notice of a summons under section 7609(a) and §301.7609–2 may institute a proceeding to quash the summons in the United States district court for the district in which the summoned person resides or is found.

(2) Requirements for a proceeding to quash . To institute a proceeding to quash a summons, a person entitled to notice of the summons must, not later than the 20th day following the day the notice of the summons was served on or mailed to such person—

(i) File a petition to quash a summons in the name of the person entitled to notice of the summons in the proper district court;

(ii) Notify the Internal Revenue Service (IRS) by sending a copy of that petition to

against A, who is potentially liable for a trust fund recovery penalty under section 6672 with respect to the assessed but unpaid withholding tax liability of employer E. The summons is captioned: In the matter of A. Notice of the summons must be provided to A and to any other persons identified in the summons because the summons was issued with respect to A’s potential, unassessed liability under section 6672.

(5) Summonses issued by a criminal in- vestigator . The IRS is not required to provide notice in the case of a summons issued by a criminal investigator to a person other than a third-party recordkeeper, as defined in section 7603(b). For purposes of section 7609(c)(2)(E), a summons issued by a criminal investigator is any summons issued as part of a criminal investigation by an IRS officer or employee having authority to conduct a criminal investigation and to issue a summons.

(6) John Doe summons . The IRS is not required to provide notice in the case of a John Doe summons issued under section 7609(f). (7) Summons issued pursuant to a court order to prevent spoliation of evidence . The IRS is not required to provide notice in the case of a summons for which a court determines there is reasonable cause to believe the giving of notice may lead to attempts to conceal, destroy, or alter records relevant to the examination, to prevent communication of information from other persons through intimidation, bribery, or collusion, or to flee to avoid prosecution, testifying, or production of records.

§301.7609–3 Duty of and protection for the summoned party .

(a) Duty of the summoned party . Upon receipt of a summons, the summoned party must begin to assemble the summoned records. The summoned party must be prepared to produce the summoned records on the date on which the summons states that they are to be examined, regardless of the institution or anticipated institution of a proceeding to quash or the summoned party’s intervention in a proceeding to quash, as allowed under section 7609(b)(2)(C). (b) Disclosing summoned party not li- able —(1) In general . A summoned party, or an agent or employee thereof, who makes a disclosure of records or gives testimony as required by a summons in

good faith reliance on the certificate of the Secretary (as defined in paragraph (b)(2) of this section) or an order of a court requiring production of records or giving of testimony, will not be liable for any claim arising from such disclosure brought by any customer, any party with respect to whose tax liability the summons was issued, or any other person.

(2) Certificate of the Secretary . The Secretary may issue to the summoned party a certificate if the person with respect to whose liability the summons was issued expressly consents to the examination of the records summoned and the taking of testimony. The Secretary also may issue to the summoned party a certificate stating that—

(i) The 20-day period within which a person entitled to notice of the summons may institute a proceeding to quash the summons has expired; and

(ii) No proceeding has been instituted within that period.

(c) Reimbursement of costs . Summoned third parties may be entitled to reimbursement of their costs of assembling and preparing to produce summoned records, to the extent allowed by section 7610 and §301.7610–1. (d) Notification of suspension of pe- riods of limitations in connection with a John Doe summons —(1) Requirement of notification . If any periods of limitations are suspended under section 7609(e)(2) and §301.7609–5(d) with respect to a John Doe summons described in section 7609(f), the summoned party is required under section 7609(i)(4) to provide notice of such suspension to all persons with respect to whose liability the summons was issued.

(2) Content of notification . A summoned party required to notify a person of the suspension of the periods of limitations shall provide the following information to such person—

(i) A John Doe summons was served on the summoned party seeking records that may be relevant to the person’s tax liability;

(ii) The date on which the summons was served;

(iii) The tax period(s) to which the summons relates;

(iv) Six months has passed since service of the summons and the summoned party’s

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(2) Action to institute a proceeding to quash a summons . A person entitled to notice takes any action to institute a proceeding to quash if he or she files a petition to quash the summons in any district court, regardless of whether the timely filing requirements of section 7609(b)(2)(A) or the notice requirements of section 7609(b)(2)(B) are satisfied. For example, a person entitled to notice takes an action to institute a proceeding to quash a summons for purposes of this section if that person files a petition to quash the summons in district court and notifies the summoned person by sending a copy of the petition by registered or certified mail, but fails to mail a copy of that notice to the appropriate Internal Revenue Service (IRS) person and office.

(d) Summoned party’s failure to finally resolve the response to a summons after six months from service —(1) In general . If a third party’s response to a summons for which the IRS was required to provide notice to persons identified in the summons, or to a John Doe summons described in section 7609(f), is not finally resolved within six months after the date of service of the summons, the periods of limitations are suspended under sections 6501 and 6531, for the person with respect to whose liability the summons was issued and for any person whose identity is sought to be obtained by a John Doe summons, for the tax period or periods that are the subject of the summons. The suspension shall begin on the date which is six months after the service of the summons and shall end on the date on which there is a final resolution of the summoned party’s response to the summons.

(2) Example . The rules of paragraph (d)(1) of this section are illustrated by the following example:

A John Doe summons is issued on April 1, 2004, to the promoter of a tax shelter and seeks the names of all participants in the shelter in order to investigate the participants’ income tax liabilities for 2001 and 2002. The district court approves service of the summons on April 30, 2004, and the summons is served on the promoter on May 3, 2004. The promoter does not provide the names of the participants. The periods of limitations for the participants’ income tax liabilities and criminal prosecution for 2001 and 2002 are suspended under section 7609(e)(2) beginning on November 3, 2004, the date which is six months after the date the John Doe summons was served until the date on which the promoter’s response to the summons is finally resolved.

quash by registered or certified mail to the IRS employee and office designated in the notice of summons to receive the copy; and

(iii) Notify the summoned person by sending by registered or certified mail a copy of the petition to quash to the summoned person.

(3) Failure to give timely notice . If a person entitled to notice of the summons fails to give proper and timely notice to either the summoned person or the IRS in the manner described in this paragraph, that person has failed to institute a proceeding to quash and the district court lacks jurisdiction to hear the proceeding. For example, if the person entitled to notice mails a copy of the petition to the summoned person, but fails to mail a copy of the petition to the designated IRS employee and office, the person entitled to notice has failed to institute a proceeding to quash. Similarly, if the person entitled to notice mails a copy of such petition to the summoned person but, instead of sending a copy of the petition by registered or certified mail to the designated IRS employee and office, the person entitled to notice provides the designated IRS employee and office the petition by some other means, the person entitled to notice has failed to institute a proceeding to quash.

(4) Failure to institute a proceeding to quash . If a person entitled to notice fails to institute a proceeding to quash within 20 days following the day the notice of the summons was served on or mailed to such person, the IRS may examine the summoned records and take summoned testimony following the 23rd day after notice of the summons was served on or mailed to the person entitled to notice.

(c) Presumption no notice has been mailed . Section 7609(b)(2)(B) permits a person entitled to notice to institute a proceeding to quash by filing a petition in district court and notifying both the IRS and the summoned person. Unless the person entitled to notice has notified both the IRS and the summoned person in the appropriate manner, the person entitled to notice has failed to institute a proceeding to quash. For the purpose of permitting the IRS to examine the summoned witnesses and records, it is presumed that the notification was not timely mailed if the copy of the petition was not delivered to the summoned person or to the person and office designated to receive the notice on

behalf of the IRS within three days after the close of the 20-day period allowed for instituting a proceeding to quash.

(d) Effective/applicability date . This section is applicable on April 30, 2008.

§301.7609–5 Suspension of periods of limitations .

(a) In general . Except in the case of a summons that is a designated or related summons described in section 6503(j), the following rules relating to the suspension of certain periods of limitations apply to all third-party summonses subject to the notice requirements of section 7609(a) and to all John Doe summonses subject to the requirements of section 7609(f).

(b) Intervention in an action to enforce the summons —(1) In general . If a person entitled to notice of a summons under section 7609(a) and §301.7609–2 with respect to whose liability the summons was issued, or such person’s agent, nominee, or other person acting under the direction or control of the person entitled to notice, takes any action to intervene in a proceeding with respect to enforcement of such summons brought pursuant to section 7604, that person’s periods of limitations under sections 6501 (relating to assessment and collection) and 6531 (relating to criminal prosecutions) for the tax period or periods that are the subject of the summons are suspended for the period during which such proceeding is pending.

(2) Action to intervene . A person entitled to notice takes any action to intervene in a proceeding to enforce a summons within the meaning of §301.7609–4(a) on the date when a motion to intervene is filed with the court.

(c) Institution of a proceeding to quash a summons —(1) In general . If a person entitled to notice of a summons under section 7609(a) and §301.7609–2 with respect to whose liability the summons was issued, or such person’s agent, nominee, or other person acting under the direction or control of the such person, takes any action described in §301.7609–4(b) to institute a proceeding to quash such summons, that person’s periods of limitations under sections 6501 and 6531 for the tax period or periods that are the subject of the summons are suspended for the period during which such proceeding is pending.

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(e) Definitions —(1) Agent, nominee, etc . A person is the agent, nominee, or other person of a person entitled to notice under section 7609(a) and §301.7609–2, and is acting under the direction or control of the person entitled to notice for purposes of section 7609(e)(1), if the person entitled to notice has the ability in fact or at law to cause the agent, nominee or other person, to take the actions permitted under section 7609(b).

(2) Period during which a proceeding is pending —(i) Intervention in an en- forcement proceeding . The period during which the periods of limitations under sections 6501 and 6531 are suspended under section 7609(e)(1) begins on the date any person described in paragraph (b) of this section intervenes in an action to enforce the summons. The periods of limitations remain suspended until all appeals are disposed of, or until the expiration of the period during which an appeal may be taken or a request for further review may be made. The periods of limitations remain suspended for the period during which a proceeding is pending, regardless of compliance (or partial compliance) with the summons during that period. If, following issuance of an order to enforce a third-party summons, a collateral proceeding is brought challenging whether production made by the summoned party fully satisfied the court order and whether sanctions should be imposed against the summoned party for a failure to satisfy that order, the periods of limitations remain suspended until all appeals of the collateral proceeding are disposed of, or until the expiration of the period during which an appeal may be taken or a request for further review of the collateral proceeding may be made. Any collateral proceeding to the original proceeding shall be considered to be a continuation of the original proceeding.

(ii) Proceeding to quash a summons . The period during which the periods of limitations under sections 6501 and 6531 are suspended under section 7609(e)(1) begins on the date any person described in

paragraph (c) of this section files a petition to quash the summons in district court. The periods of limitations remain suspended until all appeals are disposed of, or until expiration of the period in which an appeal may be taken or a request for further review may be made. The periods of limitations remain suspended for the period during which a proceeding is pending, regardless of compliance (or partial compliance) with the summons during that period.

(iii) Examples . The rules of paragraph (e)(2) are illustrated by the following examples:

Example 1 . A revenue agent issues a summons to A, an accountant for B, requiring production of records relating to B’s income tax liabilities for 2002. The summons is served on A on March 1, 2004. B files a petition to quash the summons in district court on March 15, 2004. The district court dismisses B’s petition on July 1, 2004. B fails to appeal this decision by filing a notice of appeal within 60 days from the date of the district court’s order of dismissal. The revenue agent notifies A that B did not appeal the district court’s order. A turns over all of the records requested in the summons. The periods of limitations applicable to B for 2002 under sections 6501 and 6531 are suspended under section 7609(e)(1) from March 15, 2004, the date B filed a petition to quash, until August 30, 2004, the last day on which B could have filed a notice of appeal.

Example 2 . A revenue agent issues a summons to A, an accountant for B, requiring production of records relating to B’s income tax liabilities for 2003. The summons is served on A on June 1, 2005. B files an untimely petition to quash the summons in district court on June 29, 2005. The district court dismisses B’s petition on July 29, 2005. B does not file an appeal of the district court’s order. The periods of limitations applicable to B for 2003 under sections 6501 and 6531 are suspended under section 7609(e)(1) from June 29, 2005, the date B filed an untimely petition to quash, until September 27, 2005, the last day on which B could have filed a notice of appeal.

(3) Final resolution of the summoned third party’s response to a summons . For purposes of section 7609(e)(2)(B), final resolution with respect to a summoned party’s response to a third-party summons occurs when the summons or any order enforcing any part of the summons is fully complied with and all appeals or requests for further review are disposed of, the period in which an appeal may be taken

has expired or the period in which a request for further review may be made has expired. The determination of whether there has been full compliance will be made within a reasonable time, given the volume and complexity of the records produced, after the later of the giving of all testimony or the production of all records requested by the summons or required by any order enforcing any part of the summons. If, following an enforcement order, collateral proceedings are brought challenging whether the production made by the summoned party fully satisfied the court order and whether sanctions should be imposed against the summoned party for a failing to do so, the suspension of the periods of limitations shall continue until the summons or any order enforcing any part of the summons is fully complied with and the decision in the collateral proceeding becomes final. A decision in a collateral proceeding becomes final when all appeals are disposed of, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.

(f) Effective/applicability date . This section is applicable on April 30, 2008.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved April 17, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on April 29, 2008, 8:45 a.m., and published in the issue of the Federal Register for April 30, 2008, 73 F.R. 23342)

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 June 2008. See Rev. Rul. 2008-28, page 1029.

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