Part I. Rulings — Internal Revenue Bulletin 2011-48

Section 274.—Disallowance of Certain Entertainment, Etc., Expenses

26 CFR 1.274–1: Disallowance of certain entertain- ment, etc., expenses.

Geographical areas included in North American area. This ruling contains an updated list of all geographical areas included in the North American area for purposes of section 274 of the Code. Rev. Rul. 2007–28 superseded.

Rev. Rul. 2011–26

ISSUE

Section 274(h) of the Internal Revenue Code (the “Code”) limits deductions for expenses incurred in connection with a convention, seminar, or similar meeting (collectively, a “convention”) held outside the “North American area.” This revenue ruling contains an updated list of all geographical areas currently included in the North American area for purposes of section 274(h).

LAW AND ANALYSIS

Section 274(h) disallows deductions under section 162 for expenses allocable to attendance of an individual at a convention held outside the North American area unless the taxpayer demonstrates that the location of the convention satisfies specified standards of reasonableness.

A geographical area may be included in the North American area for purposes of section 274(h) under one of the four provisions described below.

Section 274(h)(3)(A)

Section 274(h)(3)(A) defines the term “North American area” as the United States, its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico. Under section 7701(a)(9), the United States consists of the fifty states and the District of Columbia. The Internal Revenue Service treats the following as the possessions of the United States for this purpose: American Samoa, Baker Island,

the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra Atoll, the United States Virgin Islands, Wake Island, and other United States islands, cays, and reefs not part of the fifty states or the District of Columbia. The jurisdictions that formerly constituted the Trust Territory of the Pacific Islands - the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau — are now covered by the compacts with the United States described below.

The Compact of Free Association Act of 1985

The Compact of Free Association Act of 1985, Pub. L. No. 99–239, 99 Stat. 1770 (1986), went into effect on October 21, 1986, with respect to the Republic of the Marshall Islands, and on November 3, 1986, with respect to the Federated States of Micronesia. Section 405 of Title IV of the Compact provides that, for purposes of section 274(h)(3)(A) of the Code, the Republic of the Marshall Islands and the Federated States of Micronesia are included in the North American area.

The Compact of Free Association Between the United States and the Republic of Palau

The Compact of Free Association between the United States and the Republic of Palau, Pub. L. No. 99–658, 100 Stat. 3672 (1986), went into effect on October 1, 1994. Section 225(d) of Title II of the Compact with Palau provides that, for purposes of section 274(h)(3)(A) of the Code, Palau is included in the North American area.

Section 274(h)(6)

Section 274(h)(6)(A) provides that the term “North American area” includes any “beneficiary country” if, as of the time a convention begins: (i) there is in effect an agreement described in section

274(h)(6)(C) providing for the exchange of information between the United States and the beneficiary country; and (ii) there is not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United States.

Section 274(h)(6)(B) defines the term “beneficiary country” as a beneficiary country as defined in section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act, Pub. L. No. 98–67, 97 Stat. 384 (1983), and Bermuda. Under section 274(h)(6)(C)(i), to constitute an agreement that provides for the exchange of information between the United States and a beneficiary country, an agreement generally must provide for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to carry out and enforce the tax laws of the United States and the beneficiary country (whether criminal or civil proceedings), including information which may otherwise be subject to nondisclosure provisions of the local law of the beneficiary country such as provisions respecting bank secrecy and bearer shares.

Where an exchange of information agreement between a beneficiary country and the United States does not qualify as an agreement described in section 274(h)(6)(C)(i) or is not in effect within the meaning of section 274(h)(6)(A)(i), the beneficiary country is not included as part of the North American area under section 274(h)(6) for purposes of determining whether deductions are allowed for expenses incurred in connection with a convention.

Rev. Rul. 2007–28, 2007–1 C.B. 1039, identified each of the following jurisdictions as a beneficiary country for which there was in effect an agreement with the United States as described in section 274(h)(6)(C)(i) and for which there was not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United States: Antigua and Barbuda, Aruba, Bahamas,

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ingly, these three beneficiary countries are not included as part of the North American area under section 274(h)(6). In the case of Saint Lucia, certain transition relief has been provided, as reflected in the Holding below.

HOLDING

For purposes of determining whether deductions are allowed for expenses incurred in connection with a convention, the following areas are included in the North American area as of the effective date of section 274(h) except as otherwise indicated:

Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Netherlands Antilles, and Trinidad and Tobago.

Since publication of Rev. Rul. 2007–28, the “Agreement Between the Government of the United States of America and the Republic of Panama for Tax Cooperation and the Exchange of Information with Respect to Taxes” entered into force on April 18, 2011. See Treas. News Release at http://www.treasury.gov/press-center/ press-releases/Pages/tg1144.aspx (April 18, 2011). This new agreement qualifies as an agreement described in

section 274(h)(6)(C)(i). Panama is a beneficiary country, and no finding is in effect by the Secretary of the Treasury that the tax laws of Panama discriminate against conventions held in the United States. Therefore, Panama is included within the North American area under section 274(h)(6) as of April 18, 2011.

Three other beneficiary countries — the Cayman Islands, the British Virgin Islands, and Saint Lucia - have entered into tax information exchange agreements with the United States that are not of the type described in section 274(h)(6)(C)(i) because of certain limitations in the scope or implementation of those agreements. Accord

The fifty states of the United States and the District of Columbia;
The possessions of the United States, which for this purpose are American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra Atoll, the United States Virgin Islands, Wake Island, and other United States islands, cays, and reefs not part of the fifty states or the District of Columbia;
Canada;
Mexico;
The Republic of the Marshall Islands;
The Federated States of Micronesia;
The Republic of Palau;

For expenses incurred in attending a convention that began after:

Antigua and Barbuda February 9, 2003
Aruba September 12, 2004
Bahamas December 31, 2005
Barbados November 2, 1984
Bermuda December 1, 1988
Costa Rica February 11, 1991
Dominica May 8, 1988
Dominican Republic October 11, 1989
Grenada July 12, 1987
Guyana August 26, 1992
Honduras October 9, 1991
Jamaica December 17, 1986
Netherlands Antilles March 21, 2007
Panama April 18, 2011
Trinidad and Tobago February 8, 1990

The Internal Revenue Service will continue to treat Saint Lucia as not included in the North American area under section

274(h)(6) with respect to conventions that begin after April 4, 2007, except with respect to expenses for which the taxpayer

demonstrates a nonrefundable contractual obligation existing as of April 4, 2007.

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This revenue ruling will be updated as future developments result in the inclusion of other areas in, or the exclusion of areas from, the North American area.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2007–28 is superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Terra-Lynn Zentara of the Office of Associate Chief Counsel (International), Branch 7. For further information regarding this revenue ruling, contact the principal author at (202) 435–5262 (not a tollfree call).

Section 483.—Interest on Certain Deferred Payments

This ruling provides the dollar amounts, increased by the 2012 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2010-30 supplemented and superseded. See Rev. Rul. 2011-27, page 805.

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

This ruling provides the dollar amounts, increased by the 2012 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2010-30 supplemented and superseded. See Rev. Rul. 2011-27, page 805.

Section 1274A.—Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000

26 CFR 1.1274A–1: Special rules for certain trans- actions where stated principal amount does not ex- ceed $2,800,000. (Also §§ 483, 1274.)

Section 1274A – inflation adjusted numbers for 2012. This ruling provides

the dollar amounts, increased by the 2012 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2010–30 supplemented and superseded.

Rev. Rul. 2011–27

This revenue ruling provides the dollar amounts, increased by the 2012 inflation adjustment, for § 1274A of the Internal Revenue Code.

BACKGROUND

In general, §§ 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments.

In the case of a “qualified debt instrument,” the discount rate used for purposes of §§ 483 and 1274 may not exceed nine percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash method of account

ing. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) § 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) an election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and the lender. Section 1.1274A–1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

INFLATION-ADJUSTED AMOUNTS UNDER § 1274A

For debt instruments arising out of sales or exchanges after December 31, 1989, the inflation-adjusted amounts under § 1274A are shown in Table 1.

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1274A(c)(2)(A) Amount (cash method debt

instrument)

Calendar Year

of Sale or Exchange

Rev. Rul. 2011–27 Table 1

Inflation-Adjusted Amounts Under Section 1274A

1274A(b) Amount (qualified debt

instrument)

1990 $2,933,200 $2,095,100 1991 $3,079,600 $2,199,700 1992 $3,234,900 $2,310,600 1993 $3,332,400 $2,380,300 1994 $3,433,500 $2,452,500 1995 $3,523,600 $2,516,900 1996 $3,622,500 $2,587,500 1997 $3,723,800 $2,659,900 1998 $3,823,100 $2,730,800 1999 $3,885,500 $2,775,400 2000 $3,960,100 $2,828,700 2001 $4,085,900 $2,918,500 2002 $4,217,500 $3,012,500 2003 $4,280,800 $3,057,700 2004 $4,381,300 $3,129,500 2005 $4,483,000 $3,202,100 2006 $4,630,300 $3,307,400 2007 $4,800,800 $3,429,100 2008 $4,913,400 $3,509,600 2009 $5,131,700 $3,665,500 2010 $5,115,100 $3,653,600 2011 $5,201,300 $3,715,200 2012 $5,339,300 $3,813,800

Note : These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982–1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2010–30, 2010–50 I.R.B. 820, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is Andrea M. Hoffenson of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, please contact Ms. Hoffenson at (202) 622–3920 (not a toll-free call).

Section 7701.—Definitions

26 CFR 301.7701–2: Business entities; definitions.

T.D. 9553

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Disregarded Entities; Excise Taxes and Employment Taxes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations relating to disregarded entities and excise taxes. These 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.

These 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.

DATES: Effective Date: These regulations are effective on October 26, 2011.

Applicability Date: For dates of applicability, see §§301.7701–2(e)(2), 301.7701–2(e)(5), and 301.7701–2(e)(6).

FOR FURTHER INFORMATION CONTACT: Michael H. Beker, (202) 622–3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Procedure and Administration Regulations (26 CFR part 301) under section 7701 of the Internal Revenue Code (Code).

Temporary regulations (T.D. 9462, 2009–42 I.R.B. 504 [74 FR 46903]) and a cross-reference notice of proposed

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to tax liabilities imposed by Chapter 49 of the Code. The issues are similar to those addressed in §301.7701–2(c)(2)(v). Accordingly, the IRS and the Treasury Department plan to issue regulations addressing the treatment of those entities with respect to tax liabilities imposed by Chapter 49 of the Code.

C. Firearms excise tax and harbor maintenance tax

The rules in the final regulations do not apply to the firearms excise tax administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB) and the harbor maintenance tax administered by U.S. Customs and Border Protection (Customs). Rules in 26 CFR part 301 generally do not apply for purposes of these taxes and taxpayers should not assume that a single owner entity will be disregarded under applicable TTB or Customs rules.

Availability of IRS documents

The IRS revenue rulings cited in this preamble are published in the Internal Revenue Cumulative Bulletin and are available from the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954.

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 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 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 Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Michael H. Beker, Office of the Associate Chief Counsel (Passthroughs

rulemaking (REG–116614–08, 2009–42 I.R.B. 536 [74 FR 46957]) were published in the Federal Register on September 14, 2009 (the 2009 proposed regulations). On October 14, 2009, corrections to the temporary regulations (74 FR 52677) and to the cross-reference notice of proposed rulemaking (74 FR 52708) were published in the Federal Register.

The 2009 proposed regulations clarify that a single-owner eligible entity that is disregarded as an entity separate from its owner for any purpose under §301.7701–2, but regarded as an entity for certain excise tax purposes under §301.7701–2(c)(2)(v), is treated as a corporation with respect to those excise taxes. In addition, the 2009 proposed regulations 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).

No public hearing was requested or held. One written comment was received. After consideration of the comment, the proposed regulations are adopted by this Treasury decision and the temporary regulations are removed.

Summary of the Comment and Explanation of Provisions

A. Air transportation excise tax

The commenter asked whether an amount paid to a single-member limited liability company (SMLLC) by its owner for air transportation provided to its owner will be deemed to be paid to a separate corporation and therefore subject to federal transportation excise taxes under section 4261. On August 16, 2007, final regulations under §301.7701–2(c)(2)(v)(A) were published in the Federal Register (T.D. 9356, 2007–2 C.B. 675 [72 FR 45891]) (the 2007 final regulations). The 2007 final regulations provide that a single-owner eligible entity that is disregarded as an entity separate from its owner for Federal tax purposes is treated as a separate entity for certain excise tax purposes, including Federal tax liabilities imposed by Chapter 33 of the Code. Under this rule, amounts paid after December 31, 2007, to an SMLLC by its owner for air transportation are subject

to the tax imposed by section 4261. The commenter suggested that the rule in the 2007 final regulations created a tax liability where one did not exist before.

Prior to the adoption of the §301.7701–2 regulations in 1997, amounts paid from one state law entity to another for air transportation were potentially subject to the section 4261 tax, regardless of the relationship between the entities. See for example, Rev. Ruls. 76–394, 1976–2 C.B. 355, and 70–325, 1970–1 C.B. 231, which involve transportation between related corporations and between corporations and their shareholders. Because there are separate and distinct entities in each case, these rulings hold that payments made from one entity to another for taxable air transportation are “amounts paid” for purposes of the section 4261 tax. While section 4282 provides a limited exception in the case of air transportation excise taxes for certain affiliated groups that do not offer air transportation services to non-affiliated members, no exception had been provided prior to 1997 for other situations.

The adoption of the §301.7701–2 regulations in 1997 departed from this longstanding precedent by making those previously taxable transactions no longer subject to excise tax when the owner of an eligible entity elected to be a disregarded entity. The 2007 regulations merely restored the long-standing and reasonable pre–1997 rule. Accordingly, the final regulations retain the rule that excise taxes imposed on amounts paid for covered services (such as air transportation) apply to amounts paid between state law entities for such services (unless a statutory exception applies).

B. Indoor tanning services excise tax

After the 2009 proposed regulations were published, section 10907 of the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)) added new Chapter 49 to the Code, which contains an excise tax on amounts paid for indoor tanning services under new section 5000B. The IRS and Treasury Department are aware of issues relating to the treatment of qualified subchapter S subsidiaries and single-owner eligible entities that are disregarded as entities separate from their owners with respect

2011–48 I.R.B. 807 November 28, 2011

and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

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 301.7701–2 is amended by:

Revising paragraphs (c)(2)(iii), (c)(2)(iv)(B), (c)(2)(v)(B), (c)(2)(v)(C) Example (iv), (e)(2), and (e)(6).
Adding two sentences at the end of paragraph (e)(5).

The additions and revisions read as follows:

§301.7701–2 Business entities; definitions .

- - - (c) - * (2) - * (iii) Tax liabilities of certain disre- garded entities —(A) In general . An entity that is disregarded as separate from its owner for any purpose under this section is treated as an entity separate from its owner for purposes of—

( 1 ) Federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded;

( 2 ) Federal tax liabilities of any other entity for which the entity is liable; and

( 3 ) Refunds or credits of Federal tax. (B) Examples . The following examples illustrate the application of paragraph (c)(2)(iii)(A) of this section:

Example 1 . In 2006, X, a domestic corporation that reports its taxes on a calendar year basis, merges into Z, a domestic LLC wholly owned by Y that is disregarded as an entity separate from Y, in a state law merger. X was not a member of a consolidated group at any time during its taxable year ending in December 2005. Under the applicable state law, Z is the successor to X and is liable for all of X’s debts. In 2009, the Internal Revenue Service (IRS) seeks to extend the period of limitations on assessment for X’s 2005 taxable year. Because Z is the successor to X and is liable for X’s 2005 taxes that remain unpaid, Z is the proper party to sign the consent to extend the period of limitations.

Example 2 . The facts are the same as in Example 1, except that in 2007, the IRS determines that X miscalculated and underreported its income tax liability for 2005. Because Z is the successor to X and is liable for X’s 2005 taxes that remain unpaid, the deficiency may be assessed against Z and, in the event that Z fails to pay the liability after notice and demand, a general tax lien will arise against all of Z’s property and rights to property.

(iv) - - (B) Treatment of entity . An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as a corporation with respect to taxes imposed under Subtitle C—Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and 25 of the Internal Revenue Code).

- - - (v) - - (B) Treatment of entity . An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as a corporation with respect to items described in paragraph (c)(2)(v)(A) of this section.

(C) - - Example . - - * (iv) Assume the same facts as in paragraph (c)(2)(v)(C) Example (i) and (ii) of this section. If LLCB does not pay the tax on its sale of coal under

chapter 32 of the Internal Revenue Code, any notice of lien the Internal Revenue Service files will be filed as if LLCB were a corporation.

- - - (e) * - (2) Paragraph (c)(2)(iii) of this section applies on and after September 14, 2009. For rules that apply before September 14, 2009, see 26 CFR part 301, revised as of April 1, 2009.
- - - (5) - - - However, paragraph (c)(2)(iv)(B) of this section applies with respect to wages paid on or after September 14, 2009. For rules that apply before September 14, 2009, see 26 CFR part 301 revised as of April 1, 2009.

(6)(i) Except as provided in this paragraph (e)(6), paragraph (c)(2)(v) of this section applies to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008.

(ii) Paragraphs (c)(2)(v)(B) and (c)(2)(v)(C) Example (iv) of this section apply on and after September 14, 2009.

§301.7701–2T [Removed]

Par. 5. Section 301.7701–2T is removed.

Steven T. Miller, Deputy Commissioner for Services and Enforcement.

Approved October 18, 2011.

Emily S. McMahon, Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 25, 2011, 8:45 a.m., and published in the issue of the Federal Register for October 26, 2011, 76 F.R. 66181)

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