Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

26 CFR 1.401(l)–1: Permitted disparity in employer- provided contributions or benefits.

2012 covered compensation tables; permitted disparity. The covered compensation tables under section 401 of the Code for the year 2012 are provided for use in determining contributions to defined benefit plans and permitted disparity.

Rev. Rul. 2012–5

This revenue ruling provides tables of covered compensation under § 401(l)(5)(E) of the Internal Revenue Code (the “Code”) and the Income Tax Regulations thereunder, for the 2012 plan year.

Section 401(l)(5)(E)(i) defines covered compensation with respect to an employee as the average of the contribution and benefit bases in effect under section 230 of the Social Security Act (the “Act”) for each year in the 35-year period ending with the

CALENDAR

YEAR OF

BIRTH

year in which the employee attains social security retirement age.

Section 401(l)(5)(E)(ii) states that the determination for any year preceding the year in which the employee attains social security retirement age shall be made by assuming that there is no increase in covered compensation after the determination year and before the employee attains social security retirement age.

Section 1.401(l)–1(c)(34) defines the taxable wage base as the contribution and benefit base under section 230 of the Act.

Section 1.401(l)–1(c)(7)(i) defines covered compensation for an employee as the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee attains (or will attain) social security retirement age. A 35-year period is used for all individuals regardless of the year of birth of the individual. In determining an employee’s covered compensation for a plan year, the taxable wage base for all calendar years beginning after the first day of the plan year is assumed to be

ATTACHMENT I

2012 COVERED COMPENSATION TABLE

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

the same as the taxable wage base in effect as of the beginning of the plan year. An employee’s covered compensation for a plan year beginning after the 35-year period applicable under § 1.401(l)–1(c)(7)(i) is the employee’s covered compensation for a plan year during which the 35-year period ends. An employee’s covered compensation for a plan year beginning before the 35-year period applicable under § 1.401(l)–1(c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.

Section 1.401(l)–1(c)(7)(ii) provides that, for purposes of determining the amount of an employee’s covered compensation under § 1.401(l)–1(c)(7)(i), a plan may use tables, provided by the Commissioner, that are developed by rounding the actual amounts of covered compensation for different years of birth.

For purposes of determining covered compensation for the 2012 year, the taxable wage base is $110,100.

The following tables provide covered compensation for 2012.

2012 COVERED COMPENSATION

TABLE II

1907 1972 $4,488 1908 1973 4,704 1909 1974 5,004 1910 1975 5,316 1911 1976 5,664 1912 1977 6,060 1913 1978 6,480 1914 1979 7,044 1915 1980 7,692 1916 1981 8,460 1917 1982 9,300 1918 1983 10,236 1919 1984 11,232 1920 1985 12,276 1921 1986 13,368 1922 1987 14,520 1923 1988 15,708 1924 1989 16,968 1925 1990 18,312 1926 1991 19,728 1927 1992 21,192

2012–5 I.R.B. 337 January 30, 2012

2012 COVERED COMPENSATION

TABLE II

CALENDAR

YEAR OF

BIRTH

ATTACHMENT I

2012 COVERED COMPENSATION TABLE

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

1928 1993 22,716 1929 1994 24,312 1930 1995 25,920 1931 1996 27,576 1932 1997 29,304 1933 1998 31,128 1934 1999 33,060 1935 2000 35,100 1936 2001 37,212 1937 2002 39,444 1938 2004 43,992 1939 2005 46,344 1940 2006 48,816 1941 2007 51,348 1942 2008 53,952 1943 2009 56,628 1944 2010 59,268 1945 2011 61,884 1946 2012 64,560 1947 2013 67,200 1948 2014 69,696 1949 2015 72,096 1950 2016 74,400 1951 2017 76,620 1952 2018 78,744 1953 2019 80,808 1954 2020 82,824 1955 2022 86,664 1956 2023 88,524 1957 2024 90,300 1958 2025 91,980 1959 2026 93,600 1960 2027 95,160 1961 2028 96,660 1962 2029 98,064 1963 2030 99,468 1964 2031 100,824 1965 2032 102,096 1966 2033 103,284 1967 2034 104,364 1968 2035 105,324 1969 2036 106,176 1970 2037 106,896 1971 2038 107,556 1972 2039 108,192 1973 2040 108,768 1974 2041 109,224 1975 2042 109,584 1976 2043 109,812 1977 2044 109,908 1978 2045 110,004 1979 and Later 2046 and Later 110,100

January 30, 2012 338 2012–5 I.R.B.

ATTACHMENT II

2012 ROUNDED COVERED COMPENSATION TABLE

CALENDAR

YEAR OF

BIRTH

2012 COVERED COMPENSATION

ROUNDED

1937 $39,000 1938–1939 45,000 1940 48,000 1941 51,000 1942 54,000 1943 57,000 1944 60,000 1945 63,000 1946–1947 66,000 1948 69,000 1949 72,000 1950 75,000 1951–1952 78,000 1953 81,000 1954 84,000 1955 87,000 1956–1957 90,000 1958–1959 93,000 1960–1961 96,000 1962–1963 99,000 1964–1966 102,000 1967–1969 105,000 1970–1973 108,000 1974 and Later 110,100

DRAFTING INFORMATION

The principal author of this revenue ruling is Michael Spaid of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans taxpayer assistance telephone service at 1–877–829–5500, between the hours of 8:30 a.m. and 4:30 p.m. Eastern time, Monday through Friday (a toll-free number). Mr. Spaid may be reached via e-mail at RetirementPlanQuestions@irs.gov .

Section 881.—Tax on Income of Foreign Corporations Not Connected With United States Business

26 CFR 1.881–3: Conduit financing arrangements.

T.D. 9562

Conduit Financing Arrangements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations relating to conduit financing arrangements. The final regulations apply to multiple-party financing arrangements that are effected through disregarded entities, and are necessary in order to determine which of those arrangements should be recharacterized as a conduit financing arrangement.

DATES: Effective Date : These regulations are effective on December 9, 2011.

Applicability Date : These regulations apply to payments made on or after December 9, 2011.

FOR FURTHER INFORMATION CONTACT: Quyen P. Huynh at (202) 622–3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On August 10, 1995, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published final regulations under Treas. Reg. §1.881–3 relating to conduit financing arrangements pursuant to the authority granted by section 7701(l) of the Internal Revenue Code (the conduit financing regulations). See T.D. 8611, 1995–2 C.B. 286, (60 FR 40997). On December 22, 2008, the Treasury Department and the IRS published in the Federal Register (73 FR 246) a notice of proposed rulemaking (REG–113462–08,

2012–5 I.R.B. 339 January 30, 2012

Par. 2. Section 1.881–3 is amended by:

1. Removing the language “district director” throughout this section and adding “director of field operations” in its place.

2. Removing the language “§1.1441–3(j)” throughout this section and adding “§1.1441–3(g)” in its place.

3. Removing the language “§1.1441–7(d)” throughout this section and adding “§1.1441–7(f)” in its place.

4. In the last sentence of paragraph (a)(3)(ii)(B), removing the second “financed” and adding “financing” in its place.

5. Removing the parenthetical language “(or a similar interest in a partnership or trust)” in paragraphs (a)(2)(ii)(A)( 2 ) and (a)(2)(ii)(B)( 1 ) and adding “(or a similar interest in a partnership, trust, or other person)” in its place.

6. Adding a new paragraph (a)(2)(i)(C).

7. In paragraph (e), redesignating Ex- amples 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25 as Examples 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, and 26, respectively.

8. Adding a new Example 3 in paragraph (e).

9. Revising the paragraph heading and adding a new sentence at the end of paragraph (f).

The revisions and additions read as follows:

§1.881–3 Conduit financing arrangements .

• • • • (a) * - (2) - * (i) - - (C) Treatment of disregarded entities . For purposes of this section, the term person includes a business entity that is disregarded as an entity separate from its single member owner under §301.7701–1 through §301.7701–3.
• • • • (e) Examples . - * * Example 3 . Participation of a disregarded in- termediate entity . The facts are the same as in Ex- ample 2, except that FS is an entity that is disregarded as an entity separate from its owner, FP, under §301.7701–3. Under paragraph (a)(2)(i)(C) of this section, FS is a person and, therefore, may itself be an intermediate entity that is linked by financing transactions to other persons in a financing arrangement. The DS note held by FS and the FS note held by FP

2009–4 I.R.B. 379) that proposed amending §1.881–3(a)(2)(i)(C) of the conduit financing regulations to treat an entity disregarded as an entity separate from its owner for U.S. tax purposes as a person for purposes of determining whether a conduit financing arrangement exists. The proposed regulations were proposed to be effective as of the date final regulations are published in the Federal Register . In addition, the preamble to the proposed regulations requested comments on whether “hybrid instruments” (instruments treated as debt for foreign law purposes and equity for U.S. purposes) should constitute per se “financing transactions” under §1.881–3(a)(2)(ii)(A) and part of a “financing arrangement” within the meaning of §1.881–3(a)(2)(i)(A), or whether, at a minimum, certain hybrid instruments should be so treated, depending on specific factors or criteria.

Only one comment letter responding to the notice of proposed rulemaking was received. No public hearing was requested or held. After consideration of the comment, this Treasury decision adopts the proposed regulations with minor edits to Example 3 and to clarify that the effective date of the final regulations also applies to new Example 3 .

Explanation and Summary of Comment

The comment supported the proposed regulations and their interpretation of the term “person” to include a business entity that is disregarded as an entity separate from its single member owner under §301.7701–1 through §301.7701–3. The comment stated that to disregard an entity that is “regarded” for purposes of claiming treaty benefits would be inconsistent with the policy and purpose of the anti-conduit financing regulations.

As relates to hybrid instruments, the comment did not support either approach raised in the preamble to the proposed regulations, expressing both policy and administrative concerns with each. The comment stated that any specific abuses that the Treasury Department and the IRS were concerned about could be better addressed by a more targeted rule that described the specific transactions and limited the application of the regulations to those transactions. In light of the wide array of considerations raised, the Trea

sury Department and the IRS have decided to continue to study the area and not to provide any specific rules on hybrid instruments as part of this regulation package. Accordingly, these regulations are finalized without change, except to clarify that the effective date of the final regulations also applies to new Example 3 and to make minor edits to Example 3 . The Treasury Department and the IRS continue to solicit comments on the treatment of hybrid instruments in financing transactions.

No inference should be drawn from any provision of these final regulations as to the treatment of financing transactions entered into with disregarded entities before the effective date of these final regulations or involving hybrid instruments.

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 is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding this regulation was 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 Quyen P. Huynh of the Office of Associate Chief Counsel (International). 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 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

January 30, 2012 340 2012–5 I.R.B.

amount of premium. As stated in Notice 2011–21, the temporary regulations apply to TIPS issued on or after April 8, 2011. See §601.601(d)(2)(ii)(b).

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, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is William E. Blanchard, Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

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 * * *

Section 1.1275–7T also issued under 26 U.S.C. 1275(d). - * *

Par. 2. Section 1.1275–7T is added to read as follows:

§1.1275–7T Inflation-indexed debt instruments (temporary) .

(a) through (h) [Reserved]. For further guidance, see §1.1275–7(a) through (h).

(i) [Reserved]

are financing transactions within the meaning of paragraph (a)(2)(ii) of this section, and together constitute a financing arrangement within the meaning of paragraph (a)(2)(i) of this section.

• • • • (f) Effective/applicability date . - - Paragraph (a)(2)(i)(C) and Example 3 of paragraph (e) of this section apply to payments made on or after December 9, 2011.

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

Approved November 29, 2011.

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

(Filed by the Office of the Federal Register on December 8, 2011, 8:45 a.m., and published in the issue of the Federal Register for December 9, 2011, 76 F.R. 76895)

Section 1275.—Other Definitions and Special Rules

26 CFR 1.1275–7T: Inflation-indexed debt instru- ments (temporary).

T.D. 9561

Treasury Inflation-Protected Securities Issued at a Premium

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations that provide guidance on the tax treatment of Treasury InflationProtected Securities issued with more than a de minimis amount of premium. The text of these temporary regulations also serves as the text of the proposed regulations (REG–130777–11) set forth in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective on December 5, 2011.

Applicability Date: For the date of applicability, see §1.1275–7T(k).

FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202) 622–3950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Treasury Inflation-Protected Securities (TIPS) are securities issued by the Department of the Treasury. The principal amount of a TIPS is adjusted for any inflation or deflation that occurs over the term of the security. The rules for the taxation of inflation-indexed debt instruments, including TIPS, are contained in §1.1275–7 of the Income Tax Regulations. See also §1.171–3(b) (rules for inflationindexed debt instruments with bond premium).

The coupon bond method described in §1.1275–7(d) has applied to TIPS rather than the more complex discount bond method described in §1.1275–7(e). Under §1.1275–7(d)(2)(i), however, the coupon bond method is not available with respect to inflation-indexed debt instruments that are issued with more than a de minimis amount of premium (that is, an amount greater than .0025 times the stated principal amount of the security times the number of complete years to the security’s maturity).

In Notice 2011–21, 2011–19 I.R.B. 761, to provide a more uniform method for the federal income taxation of TIPS, the Department of the Treasury and the Internal Revenue Service announced that regulations would be issued to provide that taxpayers must use the coupon bond method described in §1.1275–7(d) for TIPS issued with more than a de minimis amount of premium. As a result, the discount bond method described in §1.1275–7(e) would not apply to TIPS issued with more than a de minimis amount of premium. Notice 2011–21 provided that the regulations would be effective for TIPS issued on or after April 8, 2011.

Explanation of Provisions

The temporary regulations in this document contain the rules described in Notice 2011–21. Under the temporary regulations, a taxpayer must use the coupon bond method described in §1.1275–7(d) for a TIPS that is issued with more than a de minimis amount of premium. The temporary regulations contain an example of how to apply the coupon bond method to a TIPS issued with more than a de minimis

2012–5 I.R.B. 341 January 30, 2012

(j) Treasury Inflation-Protected Securities issued with more than a de minimis amount of premium —(1) Coupon bond method . Notwithstanding §1.1275–7(d)(2)(i), the coupon bond method described in §1.1275–7(d) applies to Treasury Inflation-Protected Securities (TIPS) issued with more than a de minimis amount of premium. For this purpose, the de minimis amount is determined using the principles of §1.1273–1(d).

(2) Example . The following example illustrates the application of the bond premium rules to a TIPS issued with bond premium:

Example . (i) Facts . X, a calendar year taxpayer, purchases at original issuance TIPS with a stated principal amount of $100,000 and a stated interest rate of .125 percent, compounded semiannually. For purposes of this example, assume that the TIPS are issued in Year 1 on January 1, stated interest is payable on June 30 and December 31 of each year, and that the TIPS mature on December 31, Year 5. X pays $102,000 for the TIPS, which is the issue price for the TIPS as determined under §1.1275–2(d)(1). Assume that the inflation-adjusted principal amount for the first coupon in Year 1 is $101,225 (resulting in an interest payment of $63.27) and for the second coupon in Year 1 is $102,500 (resulting in an interest payment of $64.06). X elects to amortize bond premium under §1.171–4. (For simplicity, contrary to actual practice, the TIPS in this example were issued on the date with respect to which the calculation of the first coupon began.)

(ii) Bond premium . The stated interest on the TIPS is qualified stated interest under §1.1273–1(c). X acquired the TIPS with bond premium of $2,000 (basis of $102,000 minus the TIPS’ stated principal amount of $100,000). See §§1.171–1(d), 1.171–3(b), and 1.1275–7(f)(3). The $2,000 is more than the de

minimis amount of premium for the TIPS of $1,250 (.0025 times the stated principal amount of the TIPS ($100,000) times the number of complete years to the TIPS’ maturity (5 years)). Under paragraph (j)(1) of this section, X must use the coupon bond method to determine X’s income from the TIPS.

(iii) Allocation of bond premium . Under §1.171–3(b), the bond premium of $2,000 is allocable to each semiannual accrual period by assuming that there will be no inflation or deflation over the term of the TIPS. Moreover, for purposes of §1.171–2, the yield of the securities is determined by assuming that there will be no inflation or deflation over their term. Based on this assumption, for purposes of section 171, the TIPS provide for semiannual interest payments of $62.50 and a $100,000 payment at maturity. As a result, the yield of the securities for purposes of section 171 is -0.2720 percent, compounded semiannually. Under §1.171–2, the bond premium allocable to an accrual period is the excess of the qualified stated interest allocable to the accrual period ($62.50 for each accrual period) over the product of the taxpayer’s adjusted acquisition price at the beginning of the accrual period (determined without regard to any inflation or deflation) and the taxpayer’s yield. Therefore, the $2,000 of bond premium is allocable to each semiannual accrual period in Year 1 as follows: $201.22 to the accrual period ending on June 30, Year 1 (the excess of the stated interest of $62.50 over ($102,000 x -0.002720/2)); and $200.95 to the accrual period ending on December 31, Year 1 (the excess of the stated interest of $62.50 over ($101,798.78 x -0.002720/2)). The adjusted acquisition price at the beginning of the accrual period ending on December 31, Year 1 is $101,798.78 (the adjusted acquisition price of $102,000 at the beginning of the accrual period ending on June 30, Year 1 reduced by the $201.22 of premium allocable to that accrual period).

(iv) Income determined by applying the coupon bond method and the bond premium rules . Under §1.1275–7(d)(4), the application of the coupon bond method to the TIPS results in a positive inflation ad

justment in Year 1 of $2,500, which is includible in X’s income for Year 1. However, because X acquired the TIPS at a premium and elected to amortize the premium, the premium allocable to Year 1 will offset the income on the TIPS as follows: The premium allocable to the first accrual period of $201.22 first offsets the interest payable for that period of $63.27. The remaining $137.95 of premium is treated as a deflation adjustment that offsets the positive inflation adjustment. See §1.171–3(b). The premium allocable to the second accrual period of $200.95 first offsets the interest payable for that period of $64.06. The remaining $136.89 of premium is treated as a deflation adjustment that further offsets the positive inflation adjustment. As a result, X does not include in income any of the stated interest received in Year 1 and includes in Year 1 income only $2,225.16 of the positive inflation adjustment for Year 1 ($2,500 - $137.94

• $136.89).

(k) Effective/applicability date . Notwithstanding §1.1275–7(h), this section applies to Treasury Inflation-Protected Securities issued on or after April 8, 2011. (l) Expiration date . The applicability of this section expires on or before December 2, 2014.

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

Approved November 21, 2011.

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

(Filed by the Office of the Federal Register on December 2, 2011, 8:45 a.m., and published in the issue of the Federal Register for December 5, 2011, 76 F.R. 75781)

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