Part IV. Items — Internal Revenue Bulletin 2009-42

Notice of Proposed Rulemaking

Damages Received on Account of Personal Physical Injuries or Physical Sickness

REG–127270–06

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The proposed regulations reflect amendments under the Small Business Job Protection Act of 1996. The proposed regulations also delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon “tort or tort type rights.” The proposed regulations affect taxpayers receiving damages on account of personal physical injuries or physical sickness and taxpayers paying these damages.

DATES: Written (paper or electronic) comments must be received by December 14, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127270–06), room 5203, Internal Revenue Service, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–127270–06), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG–127270–06).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Sheldon A. Iskow, (202) 622–4920 (not a toll-free number); concerning the submission

of comments and/or requests for a public hearing, Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov .

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to reflect amendments made to section 104(a)(2) of the Internal Revenue Code (Code) by section 1605(a) and (b) of the Small Business Job Protection Act of 1996, Public Law 104–188, (110 Stat. 1838 (the 1996 Act)), and to delete the “tort or tort type rights” test under §1.104–1(c) of the Income Tax Regulations.

As amended, section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. These proposed regulations conform the regulations to these statutory amendments and clarify the changes for taxpayers and practitioners.

The 1996 Act Amendments

Section 1605(a) of the 1996 Act amended section 104(a)(2) to provide expressly that punitive damages do not qualify for the income exclusion. The amendment was a response to divergent court opinions, some holding that punitive damages are received “on account of” a personal injury. See H.R. Conf. Rept. 104–737 (1996) at 301. The amendment is consistent with O’Gilvie v. United States, 519 U.S. 79 (1996), holding that punitive damages are not compensation for personal injuries and do not satisfy the “on account of” test under section 104(a)(2). Section 1605(a) also amended section 104(a)(2) to provide that the income exclusion generally is limited to amounts received on account of personal “physical” injuries or “physical” sickness. Section 1605(b) of the 1996 Act further amended section 104(a) to provide that, for purposes of section 104(a)(2), even though emotional distress is not considered a physical

injury or a physical sickness, damages not in excess of the amount paid for “medical care” (described in section 213(d)(1)(A) or (B)) for emotional distress are excluded from income.

The proposed regulations reflect these statutory amendments. The proposed regulations also provide that a taxpayer may exclude damages received for emotional distress “attributable” to a physical injury or physical sickness. See H.R. Conf. Rept. 104–737 (1996) at 301.

The Tort Type Rights Test

The proposed regulations also eliminate the requirement that “personal injuries or sickness” be “based upon tort or tort type rights.” That requirement in §1.104–1(c) was intended to ensure that only damages compensating for torts and similar personal injuries qualify for exclusion under section 104(a)(2). In United States v. Bur ke, 504 U.S. 229 (1992), the Supreme Court interpreted the tort type rights test as limiting the section 104(a)(2) exclusion to damages for personal injuries for which the full range of tort-type remedies is available. The Court held that section 104(a)(2) did not apply to an award of back pay under the pre-1991 version of Title VII of the 1964 Civil Rights Act because the damages awarded under the statute provided only a narrow remedy and thus did not compensate for a tort type injury. The Burke interpretation precluded section 104(a)(2) treatment for similar personal injuries redressed by “no-fault” statutes that do not provide traditional tort-type remedies. Many critics thought the Burke remedies test was too restrictive.

Later legislative and judicial developments eliminated the need to base the section 104(a)(2) exclusion on tort and remedies concepts. First, Commissioner v. Schleier, 515 U.S. 323 (1995), interpreted the statutory “on account of” test as excluding only damages directly linked to “personal” injuries or sickness. Second, the 1996 Act restricts the exclusion to damages for “personal physical” injuries or “physical sickness.”

Accordingly, under the proposed regulations, damages for physical injuries may qualify for the section 104(a)(2) exclusion even though the injury giving rise to the

2009–42 I.R.B. 534 October 19, 2009

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. In §1.104–1, paragraph (c) is revised to read as follows:

§1.104–1 Compensation for injuries or sickness .

- - - (c) Damages received on account of personal physical injuries or physi- cal sickness —(1) In general . Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress. For purposes of this paragraph (c), the term damages means an amount received (other than workers’ compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.

(2) Cause of action and remedies . The section 104(a)(2) exclusion may apply to damages recovered for a physical personal injury or sickness under a statute, even if that statute does not provide for a broad range of remedies. The injury need not be defined as a tort under state or common law.

(3) Effective/applicability date . This paragraph (c) applies to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after the date these regulations are published as final regulations in the Fed- eral Register . Taxpayers also may apply these proposed regulations to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after August 20, 1996. If applying these proposed regulations to

damages is not defined as a tort under state or common law. Nor does the section 104(a)(2) exclusion depend on the scope of remedies available under state or common law. In effect, the regulations reverse the result in Burke by allowing the exclusion for damages awarded under no-fault statutes.

Proposed Effective/Applicability Date

These regulations are proposed to apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after the date these regulations are published as final regulations in the Federal Regis- ter . However, taxpayers may apply these proposed regulations to amounts paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after August 20, 1996. If applying the proposed regulations to damages received after August 20, 1996, results in an overpayment of tax, the taxpayer may file a claim for refund within the period of limitations under section 6511.

Notwithstanding the date these regulations are proposed to become effective, the 1996 Act amendments to section 104(a)(2), including the amendment restricting the exclusion to amounts received on account of personal physical injuries or physical sickness, are effective for amounts received after August 20, 1996, except for any amount received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995. Since the 1996 Act amendments, courts have applied the statutory effective date in holding that amounts received on account of nonphysical injuries are not excludable. Hennessey v. Commissioner, T.C. Memo 2009–132; Green v. Commissioner, T.C. Memo 2007–39. These regulations propose to conform existing regulations to amended section 104(a)(2). To the extent that existing regulations conflict with amended section 104(a)(2), the statute controls. See Murphy v. Internal Revenue Service, 493 F.3d 170, 176 n* (D.C. Cir. 2007).

Special Analyses

It has been determined that this notice of proposed rulemaking 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 the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (either a signed paper original with eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department specifically request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Sheldon A. Iskow of the Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

October 19, 2009 535 2009–42 I.R.B.

Excise Tax Activities) .” The temporary regulations also make conforming changes to the tax liability rule for disregarded entities in §301.7701–2(c)(2)(iii) and the treatment of entity rule for disregarded entities with respect to employment taxes in §301.7701–2(c)(2)(iv)(B). The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also 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. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department specifically request comments on the clarity of the proposed rules and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested by any person who timely submits comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Michael H. Beker, Office of the

damages received after August 20, 1996, results in an overpayment of tax, the taxpayer may file a claim for refund before the period of limitations under section 6511 expires. Notwithstanding the date these regulations are proposed to become effective, the statutory amendments to section 104(a) under section 1605 of the Small Business Job Protection Act of 1996, Public Law 104–188, (110 Stat. 1838), are effective for amounts received after August 20, 1996, except for any amount received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995.

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

(Filed by the Office of the Federal Register on September 14, 2009, 8:45 a.m., and published in the issue of the Federal Register for September 15, 2009, 74 F.R. 47152)

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Disregarded Entities and Excise Taxes

REG–116614–08

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In the this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9462) clarifying that a singleowner eligible entity that is disregarded as an entity separate from its owner for any purpose, but regarded as a separate entity for certain excise tax purposes, is treated as a corporation for tax administration purposes related to those excise taxes. Those regulations also make conforming changes to the tax liability rule for disregarded entities and the treatment of entity rule for disregarded entities with respect to employment taxes. The regulations affect disregarded entities in general and, in particular, disregarded entities that pay or pay over

certain federal excise taxes or that are required to be registered by the IRS. The text of those temporary regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by December 14, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–116614–08), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–116614–08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–116614–08).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Michael H. Beker, (202) 622–3070; concerning the submissions of comments and requests for a public hearing, Richard Hurst, (202) 622–2949 (TDD telephone) (not toll-free numbers) and his e-mail address is Richard.A.Hurst@irscounsel.treas.gov .

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend 26 CFR part 301. The temporary regulations clarify that a single-owner eligible entity that is disregarded as an entity separate from its owner for any purpose, but regarded as a separate entity for certain excise tax purposes, is treated as a corporation for tax administrative purposes related to those excise taxes (that is, excise taxes reported on Form 720, “ Quarterly Federal Excise Tax Return ;” Form 730, “ Monthly Tax Return for Wagers ;” Form 2290, “ Heavy Highway Vehicle Use Tax Return ;” and Form 11–C, “ Occupation Tax and Regis- tration Return for Wagering ;” excise tax refunds or payments claimed on Form 8849, “ Claim for Refund of Excise Taxes ;” and excise tax registrations on Form 637, “ Application for Registration (For Certain

2009–42 I.R.B. 536 October 19, 2009

Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be 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 301.7701–2 is amended by:

Revising paragraphs (c)(2)(iii) and (c)(2)(iv)(B).
Redesignating paragraph (c)(2)(v)(B) as paragraph (c)(2)(v)(C) and adding new paragraph (c)(2)(v)(B).
In newly-designated paragraph (c)(2)(v)(C), Example (iv) is added.
Revising paragraphs (e)(2), (e)(5) and (e)(6).

The additions and revisions read as follows:

§301.7701–2 Business entities; definitions.

- - - (c) - - (2) - - (iii) [The text of this proposed amendment to §301.7701–2(c)(2)(iii) is the same as the text of §301.7701–2T(c)(2)(iii) pub

lished elsewhere in this issue of the Bulletin].

(iv) - - (B) [The text of this proposed amendment to §301.7701–2(c)(2)(iv)(B) is the same as the text of §301.7701–2T(c)(2)(iv)(B) published elsewhere in this issue of the Bulletin].

- - - (v) - - (B) [The text of this proposed amendment to §301.7701–2(c)(2)(v)(B) is the same as the text of §301.7701–2T(c)(2)(v)(B) published elsewhere in this issue of the Bulletin].

(C) * * * (iv) [The text of this proposed amendment to §301.7701–2(c)(2)(v)(C) Example (iv) is the same as the text of §301.7701–2T(c)(2)(v)(C) Example (iv) published elsewhere in this issue of the Bulletin].

- - - (e) - - (2) [The text of this proposed amendment to §301.7701–2(e)(2) is the same as the text of §301.7701–2T(e)(2) published elsewhere in this issue of the Bulletin].
- - - (5) [The text of this proposed amendment to §301.7701–2(e)(5) is the same as the text of §301.7701–2T(e)(5) published elsewhere in this issue of the Bulletin].

(6) [The text of this proposed amendment to §301.7701–2(e)(6) is the same as the text of §301.7701–2T(e)(6) published elsewhere in this issue of the Bulletin].

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

(Filed by the Office of the Federal Register on September 10, 2009, 11:15 a.m., and published in the issue of the Federal Register for September 14, 2009, 74 F.R. 46957)

Corrections to Rev. Rul. 2009–22 and Rev. Rul. 2009–29

Announcement 2009–74

This document contains corrections to both the August AFR ( Rev. Rul. 2009–22 ) and the September AFR ( Rev. Rul. 2009–29 ) which contained an inaccurate date in the Note in Table 4.

The Note in Table 4 in the August AFR (Rev. Rul. 2009–22) incorrectly read:

“Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after August 30, 2008, and before December 31, 2013, shall not be less than 9%”. The Note in Table 4 in the September AFR (Rev. Rul. 2009–29) incorrectly read:

“Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after September 30, 2008, and before December 31, 2013, shall not be less than 9%.” The Note in Table 4 should have read (in both revenue procedures):

“Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008 and before December 31, 2013 shall not be less than 9%.”