Credit card nonsufficient funds (NSF) fee. This ruling provides that a credit card nonsufficient funds (NSF) fee as described in the ruling is not interest for federal income tax purposes. Also, this ruling holds that a credit card NSF fee is includible in income by the issuer of the credit card when the NSF Event, as defined therein, occurs.

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 January 2007.

This notice partially modifies the effective date and provides other clarifications of the section 482 temporary services regulations which were published in the Federal Register on August 4, 2006. Rev. Proc. 2007-13 is issued contemporaneously with this notice.

Insurance companies; loss reserves; discounting unpaid losses. The loss payment patterns and discount factors are set forth for the 2006 accident year. These factors will be used to compute discounted unpaid losses under section 846 of the Code.

Insurance companies; discounting estimated salvage recoverable. The salvage discount factors are set forth for the 2006 accident year. These factors will be used to compute discounted estimated salvage recoverable under section 832 of the Code.

This procedure finalizes Announcement 2006-50, 2006-34 I.R.B. 321, and identifies particular services that are eligible to be evaluated at cost according to the temporary regulations relating to services under section 482, which were released concurrently with Notice 2007-5 (in this Bulletin).

Cash balance defined benefit pension plans; transition rules; request for comments. This notice announces that the Service is beginning to process determination letter and examination cases that were suspended relating to cash balance and other hybrid defined pension plans. The notice also provides transitional guidance on the requirements of sections 411(a)(13) and 411(b)(5) of the Code as added by section 701(b) of the Pension Protection Act of 2006. In addition, this notice requests comments on certain issues raised by sections 411(a)(13) and 411(b)(5).

In-service distributions; section 905 of Pension Protection Act of 2006; request for comments. This notice states that the Treasury Department and the Service are considering proposing guidance under section 401(a)(36) of the Code, as added by section 905 of the Pension Protection Act of 2006. This notice requests comments on issues presented by section 401(a)(36) with respect to defined benefit plans.

General rules and specifications for private printing of substitute forms. This procedure provides requirements for reproducing paper substitutes and for furnishing substitute recipient statements for Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. It will be reproduced as the next revision of Publication 1179. Rev. Proc. 2005-69 superseded.

(1) If a credit card issuer becomes entitled to a fee if it refuses to honor a credit card convenience check that, if honored, would leave the cardholder over the cardholder’s credit limit, is the fee interest income for federal income tax purposes?

(2) When is the credit card fee that is described in Issue (1) includible in gross income by the card issuer?

X, a taxpayer that uses an overall accrual method of accounting for federal income tax purposes, issues a credit card to A. The credit card allows A to access a revolving line of credit to make purchases of goods and services and to obtain cash advances, including cash advances obtained through A’s use of a convenience check made available through A’s credit card account (an “account check”).

There is a written agreement between X and A that sets forth the terms and conditions governing A’s use of the credit card (the “Cardholder Agreement”). Under the terms and conditions of the Cardholder Agreement, X is not required to honor one of A’s account checks if, when the account check is presented to X for payment, either A is overdrawn on A’s line of credit or payment of the check would cause A to become overdrawn. Under the agreement X is entitled to impose a $25 fee (the “Credit Card NSF Fee”) on A if an account check is presented to X that, if honored, would leave A overdrawn and X does not in fact honor the check (the “NSF Event”).

A writes an account check and uses it to make a payment to a third party. X does not honor A’s account check when the third party presents it for payment because A would be overdrawn on A’s line of credit if X honored the account check at that time. X is therefore entitled to impose a $25 Credit Card NSF Fee on A in accordance with the terms of X’s Cardholder Agreement with A.

For federal income tax purposes, interest is an amount that is paid in compensation for the use or forbearance of money. Deputy v. DuPont, 308 U.S. 488 (1940); Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932). Neither the label used for the fee nor a taxpayer’s treatment of the fee for financial or regulatory reporting purposes is determinative of the proper federal income tax characterization of that fee. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-43 (1979); Rev. Rul. 72-315, 1972-1 C.B. 49.

When X determines that it will not honor A’s account check that the third party has presented for payment because A would be overdrawn on A’s line of credit, X is denying A the use of X’s funds. Thus, the $25 Credit Card NSF Fee does not compensate X for the use or forbearance of money, and it is not interest income for federal income tax purposes.

Under § 451(a) of the Internal Revenue Code, the amount of any item of gross income is includible in gross income for the taxable year in which it is received by the taxpayer, unless that amount is to be properly accounted for in a different period under the method of accounting used by the taxpayer in computing taxable income.

Under § 1.451-1(a) of the Income Tax Regulations, income is includible in gross income by a taxpayer that uses an accrual method of accounting when all events have occurred that fix the taxpayer’s right to receive that income and the amount of that income can be determined with reasonable accuracy. See also § 1.446-1(c)(1)(ii)(A). Generally, all the events that fix the right to receive income occur either when the required performance takes place, when payment is due, or when payment is made, whichever occurs first (the “All Events Test”). See, e.g., Rev. Rul. 2004-52, 2004-1 C.B. 973 (addressing credit card issuers’ treatment of credit card annual fees).

X is required to include the Credit Card NSF Fee in gross income under section 451 when the NSF Event occurs because the NSF Event fixes X’s right to receive the income and the amount can be determined with reasonable accuracy. Thus, the All Events Test is satisfied when the NSF Event occurs.

A change in the treatment of Credit Card NSF fees to comply with this revenue ruling is a change in method of accounting within the meaning of §§ 446 and 481 and the regulations issued thereunder. Accordingly, a taxpayer wishing to change its treatment of Credit Card NSF fees to comply with this revenue ruling must obtain the consent of the Commissioner under § 446(e) and § 1.446-1(e)(2)(i) by following the procedures in Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor).

(1) The Credit Card NSF Fee is not interest for federal income tax purposes.

(2) The Credit Card NSF Fee is includible in gross income for federal income tax purposes when the NSF Event occurs.

The principal authors of this revenue ruling are Jonathan Silver and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact the principal authors at (202) 622-3930 (not a toll-free call).

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2007 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. 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.Finally, Table 6 contains the deemed rate of return for transfers made during calendar year 2007 to pooled income funds described in section 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer was made.

On August 4, 2006, the Treasury Department and the IRS published T.D. 9278, 2006-34 I.R.B. 256, containing temporary and proposed regulations that address controlled services under section 482 (71 Fed. Reg. 44466). This notice makes several clarifications concerning provisions in the temporary and proposed regulations, primarily relating to the services cost method. In addition, this notice makes certain modifications to the effective date of the temporary regulations.

The temporary and proposed regulations provided for a new transfer pricing method applicable to certain controlled services transactions, the services cost method (SCM). Under specified circumstances, the SCM allows the arm’s length charge for a controlled services transaction to be determined by reference to total services costs, without a markup. Two categories of covered services are potentially eligible for this method, specified covered services and low margin covered services, both defined in Temp. Treas. Reg. § 1.482-9T(b)(4). To demonstrate that a particular controlled service qualifies for the SCM, the taxpayer must reasonably conclude, in its business judgment, that the service does not contribute significantly to key competitive advantages, core capabilities, or fundamental risks of success or failure in one or more trades or businesses of the renderer, the recipient, or both. Temp. Treas. Reg. § 1.482-9T(b)(2) (business judgment rule). Specified covered services are those controlled services that the Commissioner identifies by means of a revenue procedure. Low-margin covered services are controlled services transactions for which the arm’s length mark-up, determined by reference to comparable uncontrolled transactions, equals 7% or less.

The Treasury Department and the IRS issued a proposed revenue procedure that identified specified covered services. See Announcement 2006-50, 2006-34 I.R.B. 321 (August 21, 2006). That proposed revenue procedure identified forty-eight activities or groups of activities that constitute specified covered services. Contemporaneously with the issuance of this notice, the IRS intends to issue a final revenue procedure on this topic before December 31, 2006. The revenue procedure may be further updated, as appropriate, including in connection with the conclusion of the one-year transition period provided by this notice and in the course of finalization of the temporary regulations in response to comments.

The temporary and proposed regulations also added a provision in Temp. Treas. Reg. § 1.482-9T(b)(5) concerning shared services arrangements (SSAs). Provided that the taxpayer satisfies the conditions for use of an SSA, which includes reasonably concluding that the SSA utilizes the most reliable measure of the participants’ respective shares of the reasonably anticipated benefits from the covered services, the IRS will not make an adjustment to the taxpayer’s allocation. An SSA must be structured such that: (1) it includes two or more participants; (2) each participant reasonably anticipates a benefit from one or more covered services specified in the SSA; and (3) each covered service confers a benefit on at least one participant in the SSA. See Temp. Treas. Reg. § 1.482-9T(b)(5). Services eligible to be included in an SSA are limited to services that qualify for the SCM. Temp. Treas. Reg. § 1.482-9T(b)(5)(i).

The temporary and proposed regulations are generally effective for taxable years that begin after December 31, 2006. Temp. Treas. Reg. § 1.482-9T(n). A taxpayer may elect to apply the temporary regulations to open tax years that begin after September 10, 2003.

Numerous public comments were submitted concerning both Announcement 2006-50 and the temporary and proposed regulations. In response to these comments, this notice describes modifications to the list of specified covered services, as adopted in the final revenue procedure. The notice also modifies the effective date of the temporary regulations in several respects, as described below. Lastly, the notice makes several clarifications concerning the intended application of the regulations, as described below. These clarifications will be considered during the process of finalizing the temporary regulations. In the interim, and pending the issuance of final regulations under Treas. Reg. § 1.482-9, and other related provisions, taxpayers may rely on the guidance contained in this notice.

The Treasury Department and the IRS request further comments from interested persons on the rules announced in this notice. In addition, the revenue procedure issued contemporaneously with this notice is intended to be an evolving list of services that are eligible for the SCM. The Treasury Department and the IRS contemplate issuing updates as appropriate, including a further revision of the revenue procedure to coincide with the end of the one-year transition period and in response to comments received on the temporary regulations. Comments are solicited on the categories and listed activities in the revenue procedure, possible additions, and other revisions. For example, comments are solicited whether warehousing and other functions that support distribution should be eligible for the SCM in light of Temp. Treas. Reg. § 1.482-9T(b)(3)(ii)(E) (reselling, distribution ineligible for SCM).

Written comments may be submitted to CC:INTL:6 (Notice 2007-5), room 4607, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:INTL:6 (Notice 2007-5) Courier’s desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include “Notice 2007-5” in the subject line of any electronic communications.

The principal authors of this notice are Thomas A. Vidano and Carol B. Tan of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Thomas A. Vidano or Carol B. Tan at (202) 622-5265 (not a toll-free call).

This notice announces that the Service is beginning to process determination letter and examination cases in which an application for a determination letter or a plan under examination involves an amendment to change a traditional defined benefit plan into a cash balance plan and provides related guidance. This notice also provides transitional guidance on the requirements of §§ 411(a)(13) and 411(b)(5) of the Internal Revenue Code (Code), as added by section 701(b) of the Pension Protection Act of 2006, Public Law 109-280 (PPA ’06), which was enacted on August 17, 2006. This guidance generally relates to cash balance plans and other hybrid defined benefit pension plans and to amendments that convert defined benefit pension plans to hybrid defined benefit pension plans. This notice also requests comments on certain issues raised by §§ 411(a)(13) and 411(b)(5).

A defined benefit pension plan generally must satisfy the minimum vesting standards of § 411(a) and the accrual requirements of § 411(b) in order to be qualified under § 401(a). Both sections have been modified by section 701(b) of PPA ’06, which added §§ 411(a)(13) and 411(b)(5) to the Code.

Section 411(a)(13)(A) provides that a plan described in § 411(a)(13)(C) is not treated as failing to meet either (i) the requirements of § 411(a)(2) (subject to a special vesting rule in § 411(a)(13)(B) with respect to benefits derived from employer contributions), or (ii) the requirements of § 411(c) or § 417(e) with respect to benefits derived from employer contributions, solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance in a hypothetical account or as an accumulated percentage of the participant’s final average compensation.

A plan is described in § 411(a)(13)(C)(i) if the plan is a defined benefit plan under which the accrued benefit (or any portion thereof) of a participant is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. Under § 411(a)(13)(C)(ii), the Secretary is to issue regulations that treat any defined benefit plan (or any portion of such a plan) that has an effect similar to a plan described in § 411(a)(13)(C)(i) as if it were described in § 411(a)(13)(C)(i). For purposes of this notice, a plan described either in § 411(a)(13)(C)(i) or in regulations or other guidance issued pursuant to § 411(a)(13)(C)(ii) is referred to as a statutory hybrid plan.

Section 411(b)(1)(H)(i) provides that a defined benefit plan fails to comply with § 411(b) if, under the plan, an employee’s benefit accrual is ceased, or the employee’s rate of benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5)(A), as added by section 701(b)(1) of PPA ’06, generally provides that a plan will not be treated as failing to meet the requirements of § 411(b)(1)(H)(i) if a participant’s benefit accrued to date, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this notice, a participant’s benefit accrued to date is referred to as the participant’s accumulated benefit. Under § 411(b)(5)(A)(iv), for purposes of the safe harbor standard of § 411(b)(5)(A), a participant’s accumulated benefit may, under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation.

Section 411(b)(5)(B) imposes several requirements on a statutory hybrid plan as a condition of satisfying § 411(b)(1)(H). First, § 411(b)(5)(B)(i) provides that a statutory hybrid plan is treated as failing to meet the requirements of § 411(b)(1)(H) if the terms of the plan provide for an interest credit (or an equivalent amount) for any plan year at a rate that is greater than a market rate of return. Second, § 411(b)(5)(B)(ii) and (iii) contain minimum benefit rules that apply if, after June 29, 2005, an amendment is adopted that converts a defined benefit plan to a statutory hybrid plan. For purposes of this notice, such an amendment is referred to as a conversion amendment. Third, § 411(b)(5)(B)(vi) provides a special rule for projecting variable interest crediting rates in the case of a terminating statutory hybrid plan. In addition, § 411(a)(13)(B) requires a statutory hybrid plan to provide that an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions.

Section 411(b)(5)(E) provides that a plan is not treated as failing to meet the requirements of § 411(b)(1)(H) solely because the plan provides for indexing of accrued benefits under the plan. Under § 411(b)(5)(E)(iii), indexing means, in connection with an accrued benefit, the periodic adjustment of the accrued benefit by means of the application of a recognized investment index or methodology.

Section 701(a) of PPA ’06 added provisions to the Employee Retirement Income Security Act of 1974, Public Law 93-406 (ERISA) that are parallel to the above described sections of the Code that were added by section 701(b) of PPA ’06. The guidance provided in this notice with respect to the Code also applies for purposes of the parallel amendments to ERISA made by PPA ’06.^[1]

Section 701(c) of PPA ’06 added provisions to the Age Discrimination in Employment Act of 1967, Public Law 90-202 (ADEA), that are parallel to § 411(b)(5) of the Code. Executive Order 12067 requires all Federal departments and agencies to advise and offer to consult with the Equal Employment Opportunity Commission (EEOC) during the development of any proposed rules, regulations, policies, procedures or orders concerning equal employment opportunity. Treasury and the Service have consulted with the EEOC prior to the issuance of this notice.

The amendments made by section 701 of PPA ’06 are generally effective for periods beginning on or after June 29, 2005. There are a number of special effective date rules, some of which are described in this notice. Section 701(d) of PPA ’06 provides that nothing in the amendments made by section 701 should be construed to create an inference concerning the treatment of statutory hybrid plans or conversions of plans into such plans under § 411(b)(1)(H), or concerning the determination of whether a statutory hybrid plan fails to meet the requirements of § 411(a)(2), 411(c), or 417(e) as in effect before such amendments solely because the present value of the accrued benefit (or any portion thereof) of any participant is equal to the amount expressed as the balance in a hypothetical account or as an accumulated percentage of the participant’s final average compensation.

Section 702 of PPA ’06 requires the Secretary to prescribe regulations for the application of the provisions of section 701 of PPA ’06 in cases where the conversion of a plan to a statutory hybrid plan is made with respect to a group of employees who become employees by reason of a merger, acquisition, or similar transaction.

Proposed regulations (EE-184-86, 1988-1 C.B. 881) under §§ 411(b)(1)(H) and 411(b)(2) were published by Treasury and the Service in the Federal Register on April 11, 1988 (53 F.R. 11876), as part of a package of regulations that also included proposed regulations under §§ 410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age for participation, vesting, normal retirement age, and actuarial adjustments after normal retirement age, respectively).^[2]

Notice 96-8, 1996-1 C.B. 359, described the application of §§ 411 and 417(e), prior to the enactment of PPA ’06, to a single-sum distribution under a cash balance plan where interest credits under the plan are frontloaded (i.e., where future interest credits to an employee’s hypothetical account balance are not conditioned upon future service and thus accrue at the same time that the benefits attributable to a hypothetical allocation to the account accrue). Under the analysis set forth in Notice 96-8, in order to comply with §§ 411(a) and 417(e) in calculating the amount of a single-sum distribution under a cash balance plan, the balance of an employee’s hypothetical account must be projected to normal retirement age and converted to an annuity under the terms of the plan, and then the employee must be paid at least the present value of the projected annuity, determined in accordance with § 417(e). Under that analysis, where a cash balance plan provides frontloaded interest credits using an interest rate that is higher than the § 417(e) applicable interest rate, payment of a single-sum distribution equal to the current hypothetical account balance as a complete distribution of the employee’s accrued benefit may result in a violation of § 417(e) or a forfeiture in violation of § 411(a). In addition, Notice 96-8 proposed a safe harbor that provided that, if frontloaded interest credits are provided under a plan at a rate no greater than the sum of identified standard indices and associated margins, no violation of § 411(a) or 417(e) would result if the employee’s entire accrued benefit is distributed in the form of a single-sum distribution equal to the employee’s hypothetical account balance, provided the plan uses appropriate annuity conversion factors.

On September 15, 1999, the Service’s Director, Employee Plans, issued a field directive requiring that open determination letter applications and examination cases that involved the conversion of a defined benefit plan formula into a benefit formula commonly known as a cash balance formula be submitted for technical advice with respect to the conversion’s effect on the qualified status of the plan (referred to in this notice as the 1999 Field Directive). The 1999 Field Directive identified as a cash balance formula a benefit formula in a defined benefit plan by whatever name (e.g., personal account plan, pension equity plan, life cycle plan, cash account plan, etc.) that, rather than expressing the accrued benefit as a life annuity commencing at normal retirement age, defines benefits for each employee by reference to a single-sum distribution amount. In Announcement 2003-1, 2003-1 C.B. 281, the Service announced that the cases that were the subject of the 1999 Field Directive would not be processed pending issuance of regulations addressing age discrimination.

This part III provides transitional guidance with respect to rules in §§ 411(a)(13) and 411(b)(5) that relate to statutory hybrid plans and the conversion of a defined benefit plan into a statutory hybrid plan. The transitional guidance provided in this part III applies pending the issuance of further guidance.

A. Section 411(a)(13)(C): Definition of statutory hybrid plan.

1. In general. A statutory hybrid plan described in § 411(a)(13)(C)(i) and (ii) is a plan that is either a lump sum based plan or a plan that has a similar effect to a lump sum based plan. For purposes of this notice, the term lump sum based plan means a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation, and includes a plan under which the accrued benefit under the terms of the plan is calculated as the actuarial equivalent of such a hypothetical account balance or accumulated percentage. Whether a plan is a lump sum based plan is determined based on how the accumulated benefit of a participant is expressed under the terms of the plan, and does not depend on whether the plan provides for an optional form of benefit in the form of a lump sum payment.

2. Similar effect to a lump sum based plan.

(i) Treated as having a similar effect. Except as provided below in part IIIA(2)(ii) of this notice, a plan that is not a lump sum based plan is treated as having a similar effect to a lump sum based plan if the plan provides that a participant’s accrued benefit (payable at normal retirement age) is expressed as a benefit that includes automatic periodic increases through normal retirement age that results in the payment of a larger amount at normal retirement age to a similarly situated participant who is younger. This includes a plan that provides for indexing of accrued benefits within the meaning of § 411(b)(5)(E)(iii), such as a plan that expresses the accrued benefit as an indexed annuity.

(ii) Not treated as having a similar effect.

(I) Plan with post-retirement adjustment. A plan described in § 411(b)(5)(E) that solely provides for post-retirement adjustment of the amounts payable to a participant is not treated as having a similar effect to a lump sum based plan.

(II) Variable annuity plan. A variable annuity plan is not treated as having a similar effect to a lump sum based plan if it has an assumed interest rate used for purposes of adjustment of amounts payable to a participant that is at least five percent. For this purpose, a variable annuity plan includes any plan which provides that the amount payable is periodically adjusted by reference to the difference between the rate of return of plan assets (or specified market indices) and the assumed interest rate.

B. Section 411(a)(13): Special rules for the application of §§ 411(a)(2), 411(c), and 417(e).

1. In general. Section 411(a)(13)(A) provides special rules with respect to §§ 411(a)(2), 411(c), and 417(e) for benefits expressed as the balance of a hypothetical account maintained for a participant or as the current value of the accumulated percentage of a participant’s final average compensation under a lump sum based plan. Specifically, with respect to such benefits, a lump sum based plan is not treated as failing to meet the requirements of § 411(a)(2), or the requirements of §§ 411(c) and 417(e) with respect to such benefits derived from employer contributions, solely because the present value of such benefits of any participant is, under the terms of the plan, equal to the amount expressed as the balance in the hypothetical account or as the accumulated percentage of the participant’s final average compensation. Section 411(a)(13)(A) does not apply to benefits under a statutory hybrid plan that are expressed neither as the balance of a hypothetical account maintained for a participant nor as the current value of the accumulated percentage of a participant’s final average compensation.

2. Effective date. Section 411(a)(13)(A) is effective for distributions made after August 17, 2006. The Service expects to issue regulations shortly interpreting the effective date of § 411(a)(13)(A).

3. Section 411(d)(6) relief. In the case of a lump sum based plan that provides for a single-sum distribution to a participant that exceeds the participant’s hypothetical account balance or accumulated percentage of final average compensation, the plan may be amended to eliminate the excess for distributions made after August 17, 2006, under the rules of section 1107 of PPA ’06. Because such an amendment is made pursuant to section 701 of PPA ’06, section 1107 of PPA ’06 applies to the amendment if the amendment satisfies the requirements specified in section 1107. Thus, if the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, for a governmental plan), and the plan is operated as if such amendment were in effect as of the first date the amendment is effective, then the amendment does not violate section 411(d)(6) with respect to distributions made after the later of August 17, 2006, or the effective date of the amendment.

4. Section 4980F. Pursuant to this notice, in the case of an amendment described in section B(3) of this part III, a notice required under § 4980F (and the parallel provision at section 204(h) of ERISA) must be provided at least 30 days before the date the amendment is first effective. Thus, if an amendment described in section B(3) of this part III that significantly reduces the rate of future benefit accrual for purposes of § 4980F is adopted retroactively (i.e., is adopted after the effective date of the amendment) as an amendment under the rules of section 1107 of PPA ’06, then the notice required under § 4980F must be provided at least 30 days before the earliest date on which the plan is operated in accordance with the amendment.

5. Vesting. See § 411(a)(13)(B) for a special 3-year vesting schedule for statutory hybrid plans.

C. Section 411(b)(5)(A)(iv): Scope of rule. In applying the age discrimination test set forth in § 411(b)(5)(A)(i), a lump sum based plan may under § 411(b)(5)(A)(iv) determine the accumulated benefit of a participant as the balance of a hypothetical account or the current value of the accumulated percentage of the employee’s final average compensation even if the plan defines the participant’s accrued benefit as an annuity at normal retirement age that is actuarially equivalent to such balance or value.

D. Section 411(b)(5)(B)(i): Market rate of return.

1. Future guidance on market rate of return. During 2007, Treasury and the Service expect to issue guidance that addresses the market rate of return rules at § 411(b)(5)(B)(i), including the special rule regarding preservation of capital under § 411(b)(5)(B)(i)(II) and the minimum rate of return rules in the second sentence of § 411(b)(5)(B)(i)(I). The guidance is also expected to address the extent to which § 411(d)(6) relief provided under section 1107 of PPA ’06 applies to an amendment to a statutory hybrid plan that changes the plan’s interest crediting rate where such amendment is adopted after August 17, 2006.

2. Safe harbor. Pending further guidance, a market rate of return for purposes of § 411(b)(5)(B)(i) includes the rate of interest on long-term investment grade corporate bonds (as described in § 412(b)(5)(B)(ii)(II) prior to amendment by PPA ’06 for plan years beginning prior to January 1, 2008, and the third segment rate described in § 430(h)(2)(C)(iii) for subsequent plan years) or the rate of interest on 30-year Treasury securities (as described in § 417(e)(3) prior to amendment by PPA ’06). In addition, a market rate of return for purposes of § 411(b)(5)(B)(i) includes the sum of any of the standard indices and the associated margin for that index as described in part IV of Notice 96-8.

3. Certain plan termination requirements. See § 411(b)(5)(B)(vi) for required plan terms related to termination of a statutory hybrid plan.

E. Section 411(b)(5)(B)(ii) — (iv): Special rules for conversion amendments.

1. In general. Section 411(b)(5)(B)(ii) provides that if a conversion amendment is adopted with respect to a plan after June 29, 2005, the plan is treated as failing to meet the requirements of § 411(b)(1)(H) unless the requirements of § 411(b)(5)(B)(iii) are met with respect to each individual who was a participant in the plan immediately before the adoption of the conversion amendment.

2. Requirements of § 411(b)(5)(B)(iii). Subject to § 411(b)(5)(B)(iv), § 411(b)(5)(B)(iii) is satisfied with respect to any participant if the accrued benefit of the participant under the terms of the plan as in effect after the conversion amendment is not less than the sum of—

(i) the participant’s accrued benefit for years of service before the effective date of the conversion amendment, determined under the terms of the plan as in effect before the amendment, and

(ii) the participant’s accrued benefit for years of service after the effective date of the amendment, determined under the terms of the plan as in effect after the amendment.

3. Requirements of § 411(b)(5)(B)(iv). Under § 411(b)(5)(B)(iv), a plan must credit the accumulation account or similar account for purposes of the accrued benefit described in part IIIE(2)(ii) of this notice with the amount of any early retirement benefit or retirement-type subsidy for the plan year in which the participant retires if, as of such time, the participant has met the age, years of service, and other requirements under the plan for entitlement to such benefit or subsidy. For this purpose, the date on which a participant retires means the annuity starting date for the participant’s benefit.

4. Effective date. Section 411(b)(5)(B)(ii) applies to a conversion amendment that is adopted after, and takes effect after, June 29, 2005. See section 701(e)(5) of PPA ’06 for a special election with respect to § 411(b)(5)(B)(ii).

F. Safe harbor for conversions related to mergers and acquisitions.

1. Future guidance on conversions related to mergers and acquisitions. In accordance with section 702 of PPA ’06, the Service expects to issue regulations not later than August 17, 2007, regarding an amendment to convert a defined benefit plan into a hybrid defined benefit plan with respect to a group of employees who become employees by reason of a merger, acquisition, or similar transaction.

2. Safe harbor. Pending further guidance, a plan amendment described in part IIIE that is also described in part IIIF(1) of this notice is not treated as failing to meet the requirements of § 411(b)(1)(H) if the benefit of each participant under the plan as amended is not less than the sum of:

(A) the participant’s section 411(d)(6) protected benefit (as defined in § 1.411(d)-3(g)(14)) with respect to service before the effective date of the conversion amendment, determined under the terms of the plan as in effect before the amendment, and

(B) the participant’s section 411(d)(6) protected benefit with respect to service on and after the effective date of the conversion amendment, determined under the terms of the plan as in effect after the amendment.

For purposes of this paragraph F(2), the benefits under clause (A) and the benefits under clause (B) of this paragraph F(2) must each be determined in the same manner as if they were provided under separate plans that are independent of each other (e.g., without any benefit offsets).

In light of the enactment of section 701 of PPA ’06, the Service is no longer applying the 1999 Field Directive and Announcement 2003-1 and is beginning to process the determination letters and examination cases that were the subject of such field directive and announcement (referred to as moratorium plans in this notice). This part IV describes certain rules that will be applied for purposes of processing moratorium plans. Qualification requirements that are not described in this part IV (e.g., the backloading rules of § 411(b)(1)(A), (B), and (C)) continue to apply.

A. Age discrimination.

1. In general. Except as provided in part IVA(2) of this notice, a moratorium plan will be reviewed as to whether accruals under the plan that relate to service performed by the participant after the conversion violate § 411(b)(1)(H). For this purpose, a moratorium plan will not be treated as failing to satisfy the requirements of § 411(b)(1)(H) merely because a moratorium plan that is frontloaded provides that interest credits through normal retirement age are accrued in the year of the related hypothetical allocation.

2. Pre-6/30/05 conversions. For purposes of processing a determination letter application for a moratorium plan, the plan will not be reviewed as to whether the conversion of the plan satisfies the requirements of § 411(b)(1)(H) if the amendment that results in the conversion was adopted prior to June 30, 2005. Therefore, determination letters issued to moratorium plans will not consider, and may not be relied on with respect to, whether such a conversion satisfies the requirements of § 411(b)(1)(H), as in effect prior to the addition of § 411(b)(5) by PPA ’06, including the effect of any wearaway.

3. Post-6/29/05 conversions. In the case of a moratorium plan that involves a conversion of the plan to a statutory hybrid plan pursuant to an amendment that is adopted after June 29, 2005, the conversion must satisfy the requirements of § 411(b)(5)(B)(ii) (described in part IIIE of this notice).

B. Distributions before August 18, 2006. The Service expects to issue regulations interpreting the effective date of § 411(a)(13)(A) (described in part IIIB(2) of this notice). Until this guidance is issued, the Service will not process a moratorium plan that does not satisfy the requirements of Notice 96-8 with respect to distributions made before August 18, 2006.

C. Terminating plans. Under Title IV of ERISA, a standard termination may only occur if, when the final distribution of assets occurs, the plan is sufficient for benefit liabilities determined as of the termination date. See § 4041(b)(1)(D) of ERISA; 29 C.F.R. § 4041.8(a). The Pension Benefit Guaranty Corporation (PBGC) has informed the Service that, for purposes of Title IV of ERISA, a terminating plan with a termination date that is prior to August 18, 2006, cannot apply § 411(a)(13)(A) in determining its benefit liabilities with respect to any distributions made by the terminating plan.

Treasury and the Service expect to issue regulations with respect to the transitional guidance provided in this notice and the issues described in part IIIB(2) of this notice. These initial regulations may address some additional issues, but will not address all of the outstanding issues relating to §§ 411(a)(13) and 411(b)(5).

Comments are requested on the following additional issues. These comments will be considered in conjunction with the comments received in response to the initial regulations in developing additional guidance.

Written comments should be submitted by April 16, 2007. Send submissions to CC:PA:LPD:DRU (Notice 2007-6), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered to CC:PA:LPD:DRU (Notice 2007-6), Room 5203, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007-6). All comments will be available for public inspection.

The principal authors of this notice are Kathleen J. Herrmann of the Employee Plans, Tax Exempt and Government Entities Division and Christopher A. Crouch, Lauson C. Green, and Linda S. F. Marshall of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Herrmann at (202) 283-9888 and Mr. Crouch, Mr. Green, and Ms. Marshall at (202) 622-6090 (not toll-free numbers).

The Treasury Department and the Internal Revenue Service are considering proposing guidance under § 401(a)(36) of the Internal Revenue Code, as added by section 905 of the Pension Protection Act of 2006, Public Law 109-280, 120 Stat. 780 (PPA ’06). This notice requests comments on issues presented by § 401(a)(36) of the Code with respect to defined benefit plans.

The Treasury Department and the Internal Revenue Service are considering issuing guidance with respect to § 401(a)(36). Comments are requested on the guidance that should be issued. In particular, comments on the following specific issues related to § 401(a)(36) and defined benefit plans are requested:

Written comments should be submitted by April 16, 2007. Send submissions to CC:PA:LPD:DRU (Notice 2007-8), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered between the hours of 8 a.m. and 5 p.m., Monday through Friday, to Courier’s Desk, Internal Revenue Service, Attn: CC:PA:LPD:DRU (Notice 2007-8), 1111 Constitution Avenue, NW, Washington, D.C. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007-8). All comments will be available for public inspection.

The principal drafter of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:30 a.m. and 4:30 p.m. Eastern Time, Monday through Friday. Ms. Herrmann may be reached at (202) 283-9888 (not a toll-free number).

This revenue procedure prescribes the loss payment patterns and discount factors for the 2006 accident year. These factors will be used for computing discounted unpaid losses under § 846 of the Internal Revenue Code. See Rev. Proc. 2003-17, 2003-1 C.B. 427, for background concerning the loss payment patterns and application of the discount factors.

This revenue procedure applies to any taxpayer that is required to discount its unpaid losses under § 846 for a line of business using discount factors published by the Secretary.

.01 The following tables present separately for each line of business the discount factors under § 846 for accident year 2006. All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2006, which is 3.98 percent, and by assuming all loss payments occur in the middle of the calendar year.

.02 If the groupings of individual lines of business on the annual statement change, taxpayers must discount the unpaid losses on the affected lines of business in accordance with the discounting patterns that would have applied to those unpaid losses based on their classification on the 2000 annual statement. See Rev. Proc. 2003-17, 2003-1 C.B. 427, section 2, for additional background on discounting under section 846 and the use of the Secretary’s tables.

.03 Section V of Notice 88-100, 1988-2 C.B. 439, sets forth a composite method for computing discounted unpaid losses for accident years that are not separately reported on the annual statement. The tables separately provide discount factors for taxpayers who elect to use the composite method of section V of Notice 88-100. See Rev. Proc. 2002-74, 2002-2 C.B. 980.

.04 Section 2.03(4) of Rev. Proc 2003-17 requested comments as to whether a methodology should be adopted to smooth the raw payment data and thus produce a more stable pattern of discount factors. This issue will be addressed in the new determination year, which is 2007. Accordingly, taxpayers may still submit comments that should include a reference to Rev. Proc. 2007-9 on this issue to the following address:

CC:PA:LPD:PR (Rev. Proc. 2007-9), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD (Rev. Proc. 2007-9), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, e-mail comments to Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.

.05 Tables.

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622-8435 (not a toll-free call).

This revenue procedure prescribes the salvage discount factors for the 2006 accident year. These factors must be used to compute discounted estimated salvage recoverable under § 832 of the Internal Revenue Code.

Section 832(b)(5)(A) requires that all estimated salvage recoverable (including that which cannot be treated as an asset for state accounting purposes) be taken into account in computing the deduction for losses incurred. Under § 832(b)(5)(A), paid losses are to be reduced by salvage and reinsurance recovered during the taxable year. This amount is adjusted to reflect changes in discounted unpaid losses on nonlife insurance contracts and in unpaid losses on life insurance contracts. An adjustment is then made to reflect any changes in discounted estimated salvage recoverable and in reinsurance recoverable.

Pursuant to § 832(b), the amount of estimated salvage is determined on a discounted basis in accordance with procedures established by the Secretary.

This revenue procedure applies to any taxpayer that is required to discount estimated salvage recoverable under § 832.

.01 The following tables present separately for each line of business the discount factors under § 832 for the 2006 accident year. All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2006, which is 3.98 percent, and by assuming all estimated salvage is recovered in the middle of each calendar year. See Rev. Proc. 2003-18, 2003-1 C.B. 439, for background regarding the tables.

.02 These tables must be used by taxpayers irrespective of whether they elected to discount unpaid losses using their own historical experience under § 846.

.03 Section V of Notice 88-100, 1988-2 C.B. 439, provides a composite discount factor to be used in determining the discounted unpaid losses for accident years that are not separately reported on the NAIC Annual Statement. The tables separately provide discount factors for taxpayers who elect to use the composite method. Rev. Proc. 2002-74, 2002-2 C.B. 980, clarifies that for certain insurance companies subject to tax under § 831 the composite method for discounting unpaid losses set forth in Notice 88-100, section V, 1988-2 C.B. 439, is permitted but not required. This revenue procedure further provides alternative methods for computing discounted unpaid losses that are permitted for insurance companies not using the composite method, and sets forth a procedure for insurance companies to obtain automatic consent of the Commissioner to change to one of the methods described in Rev. Proc. 2002-74.

.04 Tables.

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622-8435 (not a toll-free call).

This revenue procedure identifies specified covered services within the meaning of Temp. Treas. Reg. § 1.482-9T(b)(4)(i). The activities identified in this revenue procedure are support services common among taxpayers in a variety of industry sectors, and generally do not involve a significant arm’s length markup on total services costs. Services identified in this revenue procedure must meet the other conditions set forth in Temp. Treas. Reg. § 1.482-9T(b) to be evaluated under the services cost method.

The section 482 regulations provide pricing methods for transactions between controlled parties, including transactions involving services. The existing regulations for transactions involving services were issued in 1968. Section 1.482-2(b) of the existing regulations provides a “cost safe harbor” that permits certain “non-integral” services to be priced at cost. In 2003, the Treasury Department and IRS issued proposed regulations that set forth a simplified cost based method (SCBM) intended to preserve some benefits of the current Treas. Reg. § 1.482-2(b) cost safe harbor. A number of commentators noted that SCBM called for quantitative judgments that business people are not qualified to make by themselves. As a practical matter, taxpayers would be required to devote significant compliance resources to enlist outside consultants or otherwise to develop support for those judgments.

In 2006, the Treasury Department and the IRS issued temporary regulations that eliminated the SCBM and replaced it with the services cost method (SCM), as set forth in Temp. Treas. Reg. § 1.482-9T(b). The Treasury Department and IRS recognized that because the section 482 services regulations potentially affect a large volume of intragroup back office services that are common across many industries, it is in the interest of sound tax administration to minimize the compliance burden of such services, which would typically bear low arm’s length markups.

The SCM evaluates whether the price for covered services, as defined, is arm’s length by reference to the total services costs with no markup. Section 1.482-9T(b)(4) of the temporary regulations provides for two categories of covered services eligible for the SCM. The first category is described in Temp. Treas. Reg. § 1.482-9T(b)(4)(i) and consists of specified covered services that will be identified in this revenue procedure. These specified covered services are so identified because they constitute support services of a type common across industry sectors that generally do not involve a significant arm’s length markup on total services costs. A second category of services described in Temp. Treas. Reg. § 1.482-9T(b)(4)(ii), low margin covered services, has a median comparable arm’s length markup on total services costs of less than or equal to 7 percent. The second category is not addressed in this revenue procedure.

The Internal Revenue Service identified forty-eight activities that constitute specified covered services in a proposed revenue procedure included in Announcement 2006-50, 2006-34 I.R.B. 321, which was published in the Internal Revenue Bulletin on August 21, 2006. A number of public comments were received with respect to the SCM in general and Announcement 2006-50.

Notice 2007-5, issued contemporaneously with this Revenue Procedure, contains clarifications concerning several provisions related to the SCM. In addition, the notice partially modifies the effective date of the temporary regulations. Subject to the exceptions described below, the effective date of the temporary regulations, insofar as they pertain to the identification of controlled services eligible to be priced at cost, is moved back one year. The provisions related to the SCM in Temp. Treas. Reg. § 1.482-9T(b) will thus apply to taxable years beginning after December 31, 2007. The only SCM provision that has immediate effect, i.e., for taxable years beginning after December 31, 2006, is the business judgment rule in Temp. Treas. Reg. § 1.482-9T(b)(2).

The net effect of this modification is that, for taxable years with beginning dates from January 1, 2007 to December 31, 2007, taxpayers may apply the existing regulations in Treas. Reg. § 1.482-2(b) for purposes of identifying controlled services that are eligible to be priced on a cost basis, without a markup. For such taxable years, any services priced at cost must be “non-integral” within the meaning of existing Treas. Reg. § 1.482-2(b)(7), and they must also satisfy the SCM business judgment test in Temp. Treas. Reg. § 1.482-9T(b)(2).

Alternatively, for tax years beginning between January 1, 2007 and December 31, 2007, taxpayers may elect to apply the SCM as set forth in Temp. Treas. Reg. § 1.482-9T(b), without taking into account any of the modifications described in the previous two paragraphs.

A number of commentators stated that the list of specified covered services in Announcement 2006-50 was too narrow. In response to comments, this revenue procedure significantly broadens the existing categories and adds a number of new activities to the list of specified covered services. In addition, a provision covering “other similar activities” has been added to each category of activities.

The following categories of services are eligible for treatment as specified covered services under Temp. Treas. Reg. § 1.482-9T(b)(4)(i):

The services cost method (SCM) as set forth in Temp. Treas. Reg. § 1.482-9T(b) evaluates whether the price for covered services, as defined, is arm’s length by reference to the total services costs with no markup. Two categories of covered services are eligible for the SCM. The first category, specified covered services, is described in Temp. Treas. Reg. § 1.482-9T(b)(i) and is limited to services that are described in this revenue procedure. The second category, low margin covered services, is not described in this revenue procedure.

This revenue procedure is generally effective for taxable years beginning after December 31, 2007. Taxpayers may elect to apply retroactively the provisions of Section 1.482-9T of the temporary regulations to certain taxable years. See Temp. Treas. Reg. §1.482-9T(n)(1). In the case of a valid election, this revenue procedure would also apply to the taxable years subject to such an election.

The Treasury Department and the IRS request further comments from interested persons on the listing contained in this revenue procedure. The revenue procedure is intended to be an evolving list of services that are eligible for the SCM. The Treasury Department and the IRS contemplate issuing updates as appropriate, including a further revision of the revenue procedure to coincide with the end of the one-year transition period and in response to comments received on the temporary regulations. Comments are solicited on the categories and listed activities in the revenue procedure, possible additions, and other revisions. For example, comments are solicited whether warehousing and other functions that support distribution should be eligible for the SCM in light of Temp. Treas. Reg. §1.482-9T(b)(3)(ii)(E) (reselling, distribution ineligible for SCM).

Written comments may be submitted to CC:INTL:Br6 (Rev. Proc. 2007-13), room 4607, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:INTL:Br6 (Rev. Proc. 2007-13) Courier’s desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include “Rev. Proc. 2007-13” in the subject line of any electronic communications.

The principal authors of this revenue procedure are Thomas A. Vidano and Carol B. Tan of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure, contact Thomas A. Vidano or Carol B. Tan at (202) 435-5265 (not a toll-free call).