Section 7216—Disclosure or use of information by preparers of returns. This ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under sections 7216 and 6713 of the Code when the tax return preparer discloses or uses tax return information in certain circumstances in communicating with taxpayers and in certain other circumstances.

Section 7216—Disclosure or use of information by preparers of returns. This ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under sections 7216 and 6713 of the Code when the tax return preparer discloses or uses tax return information under certain circumstances in connection with professional liability insurance.

Final regulations under 26 CFR Part 1 provide rules relating to the reduction in taxable income for housing displaced individuals under the Katrina Emergency Tax Relief Act of 2005 and the Heartland Disaster Tax Relief Act of 2008.

Final regulations under section 368 of the Code provide guidance regarding the qualification of certain transactions as reorganizations described in section 368(a)(1)(D) where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction.

Final, temporary, and proposed regulations under section 7216 of the Code provide rules relating to the disclosure and use of tax return information by tax return preparers. Notice 2009-13 obsoleted.

Final, temporary, and proposed regulations under section 7216 of the Code provide rules relating to the disclosure and use of tax return information by tax return preparers. Notice 2009-13 obsoleted.

This notice extends the suspension of the applicability of section 163(e)(5) of the Code for certain applicable high yield discount obligations to December 31, 2010.

This notice extends the application of Notice 2008-91, which describes an elective exclusion from the definition of “obligation” for purposes of section 956(c) of the Code, to the last taxable year of the CFC that immediately follows the last taxable year of the CFC to which the regulations described in Notice 2008-91 could apply. This notice also extends the application of Rev. Proc. 2008-26, which applies to determine whether securities are “readily marketable” for purposes of section 956(c)(2)(J), for an additional year (2010).

This notice provides procedures for corporations, electing small business corporations, and organizations required to file returns under section 6033 to request a waiver of the requirement to electronically file Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120S, U.S. Income Tax Return for an S Corporation; Form 990, Return of Organization Exempt From Income Tax; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation; and returns, amended returns, and superseding returns in the Form 1120 and 990 series of returns when required by regulations and IRS publications. Notice 2005-88 superseded.

This procedure requires taxpayers to report to the Service their groupings and regroupings of activities and the addition of specific activities within their existing groupings of activities for purposes of section 469 of the Code and section 1.469-4 of the Income Tax Regulations.

Automatic approval of changes in funding method for takeover plans and changes in pension valuation software. This announcement provides, for plan years beginning on or after January 1, 2009, automatic approval for certain changes in funding method with respect to single-employer defined benefit plans that result either from a change in the valuation software used to determine the liabilities for such plans or from a change in the enrolled actuary and the business organization providing actuarial services to the plan. This guidance is being provided in response to numerous requests from actuaries and plan sponsors, many of whom are continuing to modify their valuation software in order to implement the changes to the funding rules made by the Pension Protection Act of 2006, the Worker, Retiree, and Employer Recovery Act of 2008, and guidance regarding these legislative changes.

The IRS has revoked its determination that Call of the Wild Sportsmen, Inc., of Mt Airy, MD, qualifies as an organization described in sections 501(c)(3) and 170(c)(2) of the Code.

Section 7216—Disclosure or use of information by preparers of returns. This ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under sections 7216 and 6713 of the Code when the tax return preparer discloses or uses tax return information in certain circumstances in communicating with taxpayers and in certain other circumstances.

Section 7216—Disclosure or use of information by preparers of returns. This ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under sections 7216 and 6713 of the Code when the tax return preparer discloses or uses tax return information under certain circumstances in connection with professional liability insurance.

Final, temporary, and proposed regulations under section 7216 of the Code provide rules relating to the disclosure and use of tax return information by tax return preparers. Notice 2009-13 obsoleted.

Final, temporary, and proposed regulations under section 7216 of the Code provide rules relating to the disclosure and use of tax return information by tax return preparers. Notice 2009-13 obsoleted.

Internal Revenue Service (IRS), Treasury.

Final regulations and removal of temporary regulations.

This document contains final regulations under section 368 of the Internal Revenue Code (Code). The regulations provide guidance regarding the qualification of certain transactions as reorganizations described in section 368(a)(1)(D) where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction. This document also contains final regulations under section 358 that provide guidance regarding the determination of the basis of stock or securities in a reorganization described in section 368(a)(1)(D) where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction. This document also contains final regulations under section 1502 that govern reorganizations described in section 368(a)(1)(D) involving members of a consolidated group. These regulations affect corporations engaging in such transactions and their shareholders.

Effective Date: These regulations are effective on December 18, 2009.

Applicability Date: For dates of applicability, see §1.368-2(l)(4)(i).

Bruce A. Decker, (202) 622-7790 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

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

* * * * *

This revenue ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the tax return preparer discloses or uses tax return information under the circumstances described below.

(1) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the tax return preparer uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer?

(2) Is a tax return preparer, who is lawfully engaged in the practice of law or accountancy, liable for penalties under sections 7216 and 6713 when the tax return preparer uses tax return information of taxpayers whose tax returns the tax return preparer has prepared or processed to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact the potentially affected taxpayers for whom the tax return preparer reasonably expects to provide accounting services in the next year to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change?

(3) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the tax return preparer discloses tax return information contained in the list permitted to be maintained by the tax return preparer under section 301.7216-2(n) to a third-party service provider that creates, publishes, or distributes, by mail or e-mail, newsletters, bulletins, or similar communications to taxpayers whose tax returns the tax return preparers have prepared or processed containing tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer?

Tax Return Preparers A, B, C, D, and E prepared individual and corporate income tax returns for 2008 and several other past years and expect to prepare 2009 income tax returns in the upcoming 2010 filing season.

Prompted by legislation passed by the Congress in 2009 authorizing net operating losses for 2008 to be carried back up to five years, Tax Return Preparer A reviews income tax returns and other tax return information of taxpayers whose income tax returns A has prepared or processed, even if A has not been engaged to prepare the taxpayers’ most recent returns, in order to determine which taxpayer clients may be able to benefit from the expanded carryback rules. Following this review, A contacts the affected taxpayers to inform them of the change, advise them with regard to whether an amended return or returns can be filed for years affected by the change, and offer A’s tax return preparation services with regard to preparing and filing the amended returns. A then prepares and files amended returns for some of the taxpayers.

Also in 2009, the Internal Revenue Service issues a temporary regulation interpreting the manner that a tax credit is to be calculated in future tax years. Tax Return Preparer B, who is lawfully engaged in the practice of accountancy, is prompted by this temporary regulation to review the income tax returns of the taxpayers whose tax returns B has prepared or processed, even if B has not been engaged to prepare the taxpayers’ most recent returns, to determine who among B’s clients may be affected by the revised credit calculation for tax year 2009. Following this review, B contacts these taxpayers to notify them of the change, explain how it may affect them, and suggest actions that the taxpayers may take to properly report the credit on their 2009 returns. B only contacts those taxpayers for whom B reasonably expects to provide accounting services with respect to the 2009 tax year, including taxpayers for whom B prepared an income tax return in previous years and who have not specifically informed B that they do not wish to be contacted by B or will not be using B’s income tax return preparation services in the upcoming filing season.

Tax Return Preparer C engages Third-party Service Provider X to publish both paper and electronic monthly newsletters containing educational tax information, tax tips, tax law updates, and direct solicitation for C’s tax return preparation business. C discloses to X the names and mailing addresses of taxpayers whose tax returns C has prepared or processed who have not provided C with an email address, and X prints those addresses onto the paper newsletters it publishes for C. X provides C with the completed newsletters in paper and electronic format, and C then distributes them to C’s tax return preparation clients, using a list that contains the tax return information authorized by § 301.7216-2(n), including taxpayer names, addresses and e-mail addresses.

Tax Return Preparer D has in the past periodically published and delivered to D’s tax return preparation clients newsletters containing general educational tax information, tax tips, tax law updates, and direct solicitations for D’s tax return preparation business. Due to growth experienced by D’s tax return preparation business, D begins to outsource all aspects of this client communication activity to Third-party Service Provider X so that D may focus primarily on the business of tax return preparation. D discloses to X tax return information consisting solely of the names, addresses, and e-mail addresses of taxpayers whose income tax returns D has prepared or processed, and X then creates and distributes the newsletters to these taxpayers as directed by D.

Twice a month Tax Return Preparer E publishes her own newsletter containing general educational tax information, tax tips, tax law updates, and direct solicitations of E’s tax return preparation business. After publication, E sends the newsletters to Third-Party Service Provider X, and X then distributes the newsletters to taxpayers whose income tax returns E has prepared or processed, as instructed by E. To allow X to distribute the newsletters, E provides X with the names, addresses, and e-mail addresses of E’s tax return preparation clients.

Tax Return Preparers C, D, and E each have procedures in place that are consistent with good business practices and designed to maintain the confidentiality of the disclosed tax return information, and by following these procedures each concludes that X has sufficient data confidentiality procedures in place to protect the disclosed tax return information.

Third-party Service Provider X, located in the United States, is in the business of creating, publishing, and distributing newsletters, bulletins, advertisements, and similar communications. X does not provide substantive determinations or advice affecting the tax liability reported by taxpayers. X provides its services to tax professionals, including income tax return preparers. X creates, customizes, prints, and publishes newsletters containing general educational tax law updates it has aggregated from various sources, information on general filing requirements, general educational business or economic information and analysis, and tax compliance tips. X may also include in these communications any specific updates or solicitations submitted by its tax professional clients. X will also distribute these communications to taxpayers by mail or e-mail as directed by its clients.

Section 7216(a) establishes a criminal penalty that is applicable to tax return preparers who knowingly or recklessly disclose or use any information furnished to them for, or in connection with, the preparation of income tax returns for any purpose other than to prepare, or assist in preparing, any such returns.

Section 7216(b)(3) establishes an exception to the penalty for disclosures or uses of information which are permitted by regulations prescribed by the Secretary.

Section 6713(a) establishes a civil penalty that is applicable to tax return preparers who disclose or use any information furnished to them for, or in connection with, the preparation of tax returns for any purpose other than to prepare, or assist in preparing, any such returns.

Section 6713(b) provides that the rules of section 7216(b) shall apply for purposes of section 6713.

Section 301.7216-1(a) states that section 7216 imposes a criminal penalty for tax return preparers who “knowingly or recklessly disclose or use tax return information for a purpose other than preparing a tax return.”

Section 301.7216-1(b)(1) defines “tax return” as any return, or amended return, of income tax imposed by chapter 1 of the Internal Revenue Code.

Section 301.7216-1(b)(2)(i)(B) defines “tax return preparer” for purposes of section 7216 and the regulations thereunder as including “[a]ny person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns....”

Section 301.7216-1(b)(2)(iii) provides that a person is engaged in the business of providing auxiliary services in connection with the preparation of tax returns if, in the course of the person’s business, the person holds himself out to tax return preparers or to taxpayers as a person who performs auxiliary services, whether or not providing the auxiliary services is the person’s sole business activity and whether or not the person charges a fee for the auxiliary services.

Section 301.7216-1(b)(3)(i) generally defines tax return information to mean “any information, including, but not limited to, a taxpayer’s name, address, or identifying number, which is furnished in any form or manner for, or in connection with, the preparation of a tax return of the taxpayer.”

Section 301.7216-2(d)(1) provides that a tax return preparer may disclose, without taxpayer consent, tax return information of a taxpayer to another tax return preparer located in the United States for the purpose of obtaining auxiliary services in connection with the preparation of any tax return, so long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.

Section 301.7216-2(h)(1)(i) allows a tax return preparer who is lawfully engaged in the practice of law or accountancy to use tax return information for purposes of providing other legal or accounting services to the taxpayer consistent with applicable legal and ethical responsibilities.

Section 301.7216-2(n) allows a tax return preparer to compile and maintain a separate list containing certain information regarding taxpayers whose tax returns the tax return preparer has prepared or processed. This list may be used by the compiler solely to contact the taxpayers on the list for the purpose of providing tax information and general business or economic information or analysis for educational purposes, or soliciting additional tax return preparation services to such taxpayers. The list may not be used to solicit non-tax return preparation services to these taxpayers.

Issue 1. A change in the tax law that affects previously filed tax returns may require a tax return preparer to review taxpayer clients’ income tax return information to determine which of those clients may be affected by the change. Taxpayers who engage a tax return preparer can reasonably expect that their tax return preparer will advise them regarding a change in tax law that affects them and whether the change supports the filing of amended returns or other actions by the taxpayer related to any affected returns. A tax return preparer who performs this type of review in response to a change in tax law will contact the affected taxpayers to advise the taxpayers about the change in tax law and on a course of action to be taken, and can use a variety of mechanisms to do so (including direct contact, newsletters, e-mail, and other forms of communication).

Section 7216 does not prohibit the use of tax return information when the use is for the purpose of preparing a “tax return,” which is defined as “any return (or amended return) of income tax imposed by chapter 1 of the Internal Revenue Code.” Section 301.7216-1(b)(1) specifically includes amended returns in the definition of tax return. Accordingly, A’s use of client tax return information to identify affected taxpayers, inform them regarding the change in tax law, advise whether it would be appropriate for them to file amended income tax returns, and assist in the preparation and filing of any amended returns is permitted under section 7216, because those uses are for the purpose of preparing a tax return as defined in the regulations.

Issue 2.Section 301.7216-2(h)(1)(i) allows a tax return preparer who is lawfully engaged in the practice of law or accountancy to use tax return information “for the purpose of providing other legal or accounting services to the taxpayer,” consistent with applicable legal and ethical responsibilities. “Other legal or accounting services” that are consistent with applicable legal or ethical responsibilities can include advice related to current and future income tax compliance. Taxpayers who engage a tax return preparer lawfully engaged in the practice of law or accountancy can reasonably expect that the tax return preparer will advise them regarding changes in tax rules and regulations that might affect a tax return being prepared or future income tax return filing obligations.

Accordingly, B, who is lawfully engaged in the practice of accountancy, may use tax return information of taxpayers whose tax returns B has prepared or processed, regardless of whether B prepared or processed the most recent tax returns for a taxpayer, to determine whether the taxpayers may be affected by the temporary regulations issued by the Internal Revenue Service, and to contact the potentially affected taxpayers in order to explain the regulations and to advise them regarding their response to the regulations. B’s use of tax return information is permitted by § 301.7216-2(h)(1)(i) because it is for the purpose of providing other accounting services to taxpayers. B does not, however, use the tax return information of those taxpayers who have specifically informed B that they do not wish to be contacted by B or will not be using B’s income tax preparation services in the upcoming filing season.

Issue 3. Third-party service providers that create, publish, or distribute tax-focused newsletters, bulletins, or similar publication or communication services typically hold themselves out to tax return preparers and other tax professionals as persons who perform services that are auxiliary to tax return preparation. These service providers also may monitor current tax events and have access to a broad range of knowledgeable tax and business professionals; they are able to provide current and relevant information to a tax return preparer’s clients while allowing the tax return preparer to focus on the business of tax return preparation.

X holds itself out as providing services that are auxiliary to tax return preparation. X’s services are provided in connection with the preparation of tax returns by C, D, and E because the services are intended to offer additional tax information and tax preparation services to the preparers’ clients. Section 301.7216-2(n) specifically allows a tax return preparer to offer such information and additional services to clients. Because it provides services in connection with the preparation of tax returns by C, D, and E, and because C, D, and E have procedures in place that are consistent with good business practices and designed to maintain the confidentiality of the disclosed tax return information and, by following these procedures, they concluded that X has sufficient data confidentiality procedures in place, X qualifies as both an auxiliary service provider and a tax return preparer under § 301.7216-1(b)(2)(i)(B).

C, D, and E may disclose to an auxiliary service provider, without taxpayer consent, tax return information to the extent necessary to obtain auxiliary services in connection with the preparation of any tax return under § 301.7216-2(d)(1), provided the service provider is located in the United States and the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers. X is located in the United States and does not provide substantive determinations or advice affecting the tax liability reported by taxpayers. As directed by C, D, and E, X may use the names and mailing or e-mail addresses disclosed to it to contact the taxpayers for the purpose of creating, publishing, or distributing newsletters, or similar bulletins or communications, containing tax information and general business or economic information and analysis for educational purposes. The newsletters may include tax law developments, information on filing requirements, and tax compliance tips, together with solicitations for additional tax return preparation services by C, D, or E, under § 301.7216-2(n). The disclosure to X does not constitute a transfer under § 301.7216-2(n) but rather a disclosure to an auxiliary service provider pursuant to § 301.7216-2(d)(1). X, however, is prohibited from the further use or disclosure of the tax return information provided to it by C, D, and E for purposes other than those related to the provision of the auxiliary services provided to C, D and E or as otherwise expressly permitted under sections 7216 and 6713.

(1) Tax Return Preparer A is not liable for penalties under sections 7216 and 6713 when A uses tax return information to contact taxpayer to inform them of a change in tax law that could affect the income tax liability on the taxpayers’ returns that were previously prepared or processed by A.

(2) Tax Return Preparer B, who is lawfully engaged in the practice of accountancy, is not liable for penalties under sections 7216 and 6713 when B uses tax return information of taxpayers whose tax returns B has prepared or processed to determine who might be affected by the temporary regulation and to contact the potentially affected taxpayers for whom B reasonably expects to provide accounting services in the next year to notify them of the changed regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change.

(3) Tax Return Preparers C, D, and E are not liable for penalties under sections 7216 and 6713 when they disclose tax return information limited to the information listed in § 301.7216-2(n) to Third-party Service Provider X, which holds itself out as providing services that include creation, publication, and distribution of newsletters, bulletins, or similar communications to taxpayers whose tax returns the tax return preparers have prepared or processed containing tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer.

The principal author of this revenue ruling is Molly K. Donnelly of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Donnelly at (202) 622-4940 (not a toll-free call).

This revenue ruling provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the preparer discloses tax return information under the circumstances described below.

(1) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the preparer discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage?

(2) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the preparer discloses to the preparer’s professional liability insurance carrier tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer, or to aid in the investigation of a claim or potential claim against the tax return preparer?

(3) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the preparer discloses tax return information to the preparer’s professional liability insurance carrier in order to secure legal representation under the terms of the insurance policy or to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer?

Tax Return Preparer A prepared income tax returns during the 2009 filing season and expects to prepare income tax returns in the 2010 filing season. During 2010, A expects to disclose to insurance agents or other insurance company representatives tax return information required to obtain or maintain professional liability insurance coverage, including information necessary to obtain price quotes from the insurance companies. The disclosed information would include a list of client names and descriptions of the services A provided to those clients. A also expects to disclose to its professional liability insurance carrier tax return information required by the terms of the insurance policy to promptly and accurately report, and to aid in the investigation of, a claim or potential claim against A, including client names, descriptions of services A provided to the named clients, a description of the claim or potential claim of professional negligence, misconduct, or fraud, and, when necessary, copies of tax returns relevant to the claim or potential claim. Finally, A expects to disclose to its professional liability insurance carrier tax return information required by the terms of the insurance policy to obtain legal representation provided by the insurance carrier under the terms of the insurance policy related to a claim or potential claim of professional negligence, misconduct, or fraud, or to an unrelated attorney for the purpose of evaluating a claim or potential claim of professional negligence, misconduct, or fraud.

All of the professional liability insurance carriers contacted by A, including their agents and representatives, are located within the United States or its territories or possessions, and all hold themselves out as providing professional liability insurance with respect to potential claims arising in connection with the preparation of tax returns. None of the insurance carriers provide substantive determinations or advice affecting the tax liability reported by taxpayers or the preparation of tax returns. The professional liability insurance carrier that issued the policy purchased by A is one these insurance carriers.

Section 7216(a) establishes a criminal penalty that is applicable to tax return preparers who knowingly or recklessly disclose or use any information furnished to them for, or in connection with, the preparation of tax returns for any purpose other than to prepare, or assist in preparing, any such returns.

Section 7216(b)(3) establishes an exception to the penalty for disclosures or uses of information which are permitted by regulations prescribed by the Secretary.

Section 6713(a) establishes a civil penalty that is applicable to tax return preparers who disclose or use any information furnished to them for, or in connection with, the preparation of tax returns for any purpose other than to prepare, or assist in preparing, any such returns.

Section 6713(b) provides that the rules of section 7216(b) shall apply for purposes of section 6713.

Section 301.7216-1(a) states that section 7216 imposes a criminal penalty for tax return preparers who “knowingly or recklessly disclose or use tax return information for a purpose other than preparing a tax return.”

Section 301.7216-1(b)(2)(i)(B) defines “tax return preparer” for purposes of section 7216 and the regulations thereunder as including “[a]ny person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns....”

Section 301.7216-1(b)(2)(iii) provides that a person is engaged in the business of providing auxiliary services in connection with the preparation of tax returns if, in the course of the person’s business, the person holds himself out to tax return preparers or to taxpayers as a person who performs auxiliary services, whether or not providing the auxiliary services is the person’s sole business activity and whether or not the person charges a fee for the auxiliary services.

Section 301.7216-2(d)(1) provides that a tax return preparer may disclose, without taxpayer consent, tax return information of a taxpayer to another tax return preparer located in the United States for the purpose of obtaining auxiliary services in connection with the preparation of any tax return, so long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.

Section 301.7216-2(g) provides that a tax return preparer may disclose, without taxpayer consent, tax return information to an attorney for the purpose of securing legal advice.

Issue 1 . Obtaining and Maintaining Professional Liability Insurance.

Insurance companies offer professional liability coverage to tax return preparers to insure against potential claims arising from the tax return preparers’ negligence, misconduct, or fraud in connection with the preparation or processing of tax returns. A tax return preparer may obtain professional liability insurance coverage in order to protect itself from such claims of negligence, misconduct, or fraud. A professional liability insurance carrier provides auxiliary services in connection with the preparation of tax returns because it provides liability coverage for claims or potential claims that relate directly to the tax returns prepared or processed by the tax return preparers it insures. In the course of obtaining professional liability insurance, various insurance companies may routinely offer, and tax return preparers may routinely receive, price quotes for such coverage in the ordinary course of their tax return preparation businesses. The tax return information required to be disclosed to an insurance provider in order to obtain and maintain insurance coverage (including obtaining a price quote) might include a list of client names and descriptions of the services provided to those clients by the tax return preparer.

The professional liability insurance policy purchased by A is an auxiliary service provided in connection with the preparation of tax returns, and the insurance carriers are tax return preparers within the meaning of § 301.7216-1(b)(2)(i)(B) and (iii). Under § 301.7216-2(d)(1), A may disclose to these insurance carriers, without taxpayer consent, the tax return information required to obtain and maintain the auxiliary services provided by the insurance carriers, including the information necessary to obtain price quotes from various professional liability insurance carriers. Disclosure by a tax return preparer of tax return information beyond that necessary to obtain or maintain insurance coverage would constitute a violation of sections 7216 and 6713 and would result in the tax return preparer’s liability for penalties under those sections. The insurance carriers who receive a list of client names or any other tax return information from A are prohibited from the further use or disclosure of the tax return information for purposes other than those related to the provision of the auxiliary services to A or as otherwise expressly permitted under sections 7216 and 6713.

Issue 2. Reporting and Investigating Claims.

Services provided by a professional liability insurance carrier include investigation and management of claims or potential claims arising in connection with the preparation of tax returns by the covered tax return preparer. In order to request coverage for a claim or potential claim, a tax return preparer is required to promptly and accurately report claims or potential claims to its professional liability insurance carrier. In order to properly evaluate all claims or potential claims, aid in claim investigation and management, and process the payment of valid claims, a professional liability insurance carrier may require the tax return preparer to disclose additional information, such as client names, descriptions of the services provided to the named clients containing tax return information, tax return information describing the circumstances of the claim or potential claim, and copies of tax returns relevant to a claim or potential claim. Disclosure of tax return information in connection with these communications is required to allow A to obtain the auxiliary services provided by its professional liability insurance carrier, and is permitted without taxpayer consent under § 301.7216-2(d)(1), provided the information is necessary in order to obtain those services. Disclosure by a tax return preparer of tax return information beyond that necessary to obtain the auxiliary services would constitute a violation of sections 7216 and 6713 and would result in the tax return preparer’s liability for penalties under those sections.

Issue 3 . Obtaining Legal Advice or Representation.

A typical benefit provided to a tax return preparer by the terms of a professional liability insurance policy issued in connection with the preparation of tax returns includes the selection and engagement, by the insurance carrier, of an attorney to represent the preparer during the pendency of a claim investigation or litigation related to a claim, with the cost of the attorney paid for by the insurance carrier. When A seeks to have the professional liability insurance carrier provide this legal representation under the terms of the professional liability insurance policy, A does so for the purpose of obtaining auxiliary services in connection with the preparation of a tax return and may disclose relevant tax return information, without taxpayer consent, to the insurance carrier as an auxiliary services provider under § 301.7216-2(d)(1). Disclosure by a tax return preparer of tax return information beyond the scope of the legal representation constitutes a violation of sections 7216 and 6713 and would result in the tax return preparer’s liability for penalties under those sections. After the professional liability insurance carrier selects an attorney to represent A in relation to the claim or potential claim, A may disclose to that attorney tax return information related to the claim or potential claim without taxpayer consent under § 301.7216-2(g)(1).

When a tax return preparer seeks legal advice or representation in relation to any claim or potential claim of negligence, misconduct, or fraud from an attorney who is not a representative of the professional liability insurance carrier, the tax return preparer may disclose tax return information to that attorney without taxpayer consent under § 301.7216-2(g)(1).

(1) Tax Return Preparer A is not liable for penalties under sections 7216 and 6713 when A discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage, including obtaining price quotes for such insurance coverage.

(2) Tax Return Preparer A is not liable for penalties under sections 7216 and 6713 when A discloses to A’s professional liability insurance carrier tax return information relevant to a claim or potential claim of professional negligence, misconduct, or fraud that is required by the insurance carrier to promptly and accurately report the claim or potential claim against A or to aid in the investigation of that claim or potential claim.

(3) Tax Return Preparer A is not liable for penalties under sections 7216 and 6713 when A discloses to its professional liability insurance carrier tax return information required by the insurance carrier in order to secure legal representation relating to a professional liability claim, or tax return information relevant to a claim or potential claim of professional negligence, misconduct, or fraud to the attorney selected by the insurance carrier or to an unrelated attorney for the purpose of evaluating a claim or potential claim against A.

The principal author of this revenue ruling is Molly K. Donnelly of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Donnelly at (202) 622-4940 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final and temporary regulations.

This document contains final and temporary regulations that provide rules relating to the disclosure and use of tax return information by tax return preparers. These regulations provide updated guidance affecting tax return preparers regarding the use of information related to lists for solicitation of tax return business; the disclosure or use of statistical compilations of data under section 7216 of the Internal Revenue Code (Code) by a tax return preparer in connection with, or in support of, a tax return preparer’s tax return preparation business, including identification of additional limited circumstances when a tax return preparer who compiles statistical information may disclose the compilation without taxpayer consent, and the placement of additional restrictions on the content of the compilation that may be disclosed under those circumstances without taxpayer consent; and the disclosure or use of information for the purpose of performing conflict reviews. The text of these temporary regulations also serves as the text of the proposed regulations (REG-131028-09) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

Effective Date: These regulations are effective on January 4, 2010.

Applicability Date: For date of applicability, see §301.7216-2T(s).

Molly K. Donnelly, (202) 622-4940 (not a toll-free number).

Accordingly, 26 CFR part 301 is amended as follows:

The principal author of these regulations is Molly K. Donnelly, Office of the Associate Chief Counsel (Procedure and Administration).

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Internal Revenue Service (IRS), Treasury.

Final regulations and removal of temporary regulations.

This document contains final regulations relating to the reduction in taxable income under section 302 of the Katrina Emergency Tax Relief Act of 2005. The final regulations also reflect legislation under section 702 of the Heartland Disaster Tax Relief Act of 2008. The final regulations affect taxpayers who provide housing in their principal residences to individuals displaced by certain major disasters.

Effective Date: These regulations are effective on December 14, 2009.

Applicability Date: For date of applicability, see §1.9300-1(h).

Shareen S. Pflanz, 202-622-4920 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

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

* * * * *

This notice extends the temporary suspension of the rules for certain applicable high yield discount obligations (“AHYDOs”) pursuant to § 163(e)(5)(F) of the Internal Revenue Code.

Under § 163(e)(5), in the case of an AHYDO as defined in § 163(i), a corporation is not allowed a deduction for the disqualified portion of the original issue discount (“OID”) on the obligation, and the corporation’s deduction for the remaining portion of the OID is deferred until the OID is paid in cash or in property (other than debt of the issuer or a related person within the meaning of § 453(f)(1)). Section 163(e)(5)(F)(i), which was added to the Internal Revenue Code by section 1232(a) of the American Recovery and Reinvestment Tax Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009), generally provides that § 163(e)(5) does not apply to any AHYDO issued during the period beginning on September 1, 2008, and ending on December 31, 2009, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an AHYDO and the issuer (or obligor) of which is the same as the issuer (or obligor) of such AHYDO.

Section 163(e)(5)(F)(iii) permits the Secretary to suspend the applicability of § 163(e)(5) for AHYDOs issued after December 31, 2009, if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets.

Pursuant to the authority granted in § 163(e)(5)(F)(iii), the suspension of the applicability of § 163(e)(5) provided for in § 163(e)(5)(F)(i) is extended to December 31, 2010 for any AHYDO that is a qualified obligation. For purposes of the preceding sentence, an AHYDO is a qualified obligation only if: (1) the AHYDO is issued after December 31, 2009, and on or before December 31, 2010, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation that is not an AHYDO; (2) the issuer (or obligor) of the AHYDO is the same as the issuer (or obligor) of the obligation exchanged for the AHYDO; (3) the AHYDO does not pay interest that would be treated as contingent interest for purposes of § 871(h)(4) (without regard to § 871(h)(4)(D)); (4) the AHYDO is not issued to a related person (within the meaning of § 108(e)(4)); (5) the issue price of the AHYDO is determined under § 1273(b)(1), 1273(b)(2), 1273(b)(3), or 1274(b)(3), whichever is applicable, and the regulations thereunder; and (6) the AHYDO would not otherwise be an AHYDO if its issue price were increased by the amount of any discharge of indebtedness income realized by the issuer (or obligor) upon the exchange.

For example, assume that prior to 2010 Corporation X issued a debt instrument that was not an AHYDO. In 2010, Corporation X exchanges the debt instrument issued prior to 2010, which has an adjusted issue price of $100x as of the exchange date, for a new debt instrument that is an AHYDO with an issue price of $80x (determined under § 1273(b)(3)) and a stated redemption price at maturity of $100x. Corporation X realizes $20x of discharge of indebtedness income on the exchange. To determine whether the new debt instrument is a qualified obligation, the issue price of the new debt instrument is increased from $80x to $100x ($80x plus $20x) and this deemed issue price is used to determine whether the new debt instrument is an AHYDO for purposes of this notice. If the new debt instrument would be an AHYDO if the issue price were $100x, then the new debt instrument is not a qualified obligation and the new debt instrument does not qualify for the relief provided by § 163(e)(5)(F) and this notice. If the new debt instrument would not be an AHYDO if the issue price were $100x, then the new debt instrument is a qualified obligation and the new debt instrument does qualify for the relief provided by § 163(e)(5)(F) and this notice, provided that the other requirements to be a qualified obligation are satisfied.

The principal author of this notice is William E. Blanchard of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact William E. Blanchard at (202) 622-3950 (not a toll-free call).

1. On October 27, 2008, the Treasury Department and the Internal Revenue Service (Service) published Notice 2008-91, 2008-43 I.R.B. 1001, which describes regulations that the Treasury Department and the Service intend to issue that will provide an elective exclusion from the definition of “obligation” for purposes of section 956 of the Internal Revenue Code for the first two taxable years of a controlled foreign corporation ending after October 3, 2008. Notice 2008-91, however, does not apply to taxable years of a controlled foreign corporation beginning after December 31, 2009. The Treasury Department and the Service subsequently issued Notice 2009-10, 2009-1 C.B. 419, to provide that the regulations described in Notice 2008-91 will also apply to the third consecutive taxable year of a controlled foreign corporation, if any, that ends after October 3, 2008, and that ends on or before December 31, 2009.

This notice provides that the regulations described in Notice 2008-91 will also apply to the taxable year of a controlled foreign corporation that immediately follows the last taxable year of such controlled foreign corporation to which the regulations described in Notice 2008-91 could apply without regard to this notice. In no case shall the regulations described in Notice 2008-91 apply to a taxable year of a controlled foreign corporation beginning on or after January 1, 2011. The Treasury Department and the Service do not anticipate extending the application of the regulations described in Notice 2008-91 to any additional periods.

2. On May 27, 2008, the Treasury Department and the Service published Rev. Proc. 2008-26, 2008-1 C.B. 1014, which applies to determine whether securities are “readily marketable” for purposes of section 956(c)(2)(J) for any day during calendar years 2007 or 2008, for which it is relevant whether securities are readily marketable for purposes of that section. In Notice 2009-10, the Treasury Department and the Service subsequently extended that period to include any such day during calendar year 2009. This notice extends the application of Rev. Proc. 2008-26 to any day during calendar year 2010, for which it is relevant whether securities are readily marketable for purposes of section 956(c)(2)(J) (in addition to any day during calendar years 2007, 2008 or 2009).

The principal author of this notice is Phyllis E. Marcus of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Phyllis E. Marcus at (202) 622-3840 (not a toll-free call).

This notice provides procedures for corporations, electing small business corporations, and organizations required to file returns under section 6033 (filers) to request a waiver of the requirement to electronically file Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120S, U.S. Income Tax Return for an S Corporation; Form 990, Return of Organization Exempt From Income Tax; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation; and returns, amended returns, and superseding returns in the Form 1120 and 990 series of returns when required by regulations and IRS publications. This notice also includes guidance on the timely filing of a return required to be electronically filed that is rejected.

Section 6011(e) authorizes the Internal Revenue Service (Service) to issue regulations that require an entity to file returns on electronic media when the entity is required to file at least 250 returns during the calendar year. On November 13, 2007, the Treasury Department and the Service issued final regulations that require certain large corporations, electing small business corporations, and organizations required to file returns under section 6033 to electronically file their income tax or annual information returns. T.D. 9363, 2007-2 C.B. 1084, 72 F.R. 63807.

Under the final regulations, corporations that meet this 250 return threshold and that have assets of $10 million or more generally must file their Form 1120 or Form 1120S returns electronically for taxable years ending on or after December 31, 2006. Foreign corporations that meet this 250 return threshold and that have assets of $10 million or more generally must file their Form 1120-F electronically for taxable years ending on or after December 31, 2008.

The final regulations also generally require that tax exempt organizations with assets of $10 million or more that are required to file returns under section 6033 and that meet the 250 return threshold file their Form 990 electronically for taxable years ending on or after December 31, 2006. The final regulations further generally require certain tax exempt organizations, private foundations, or section 4947(a)(1) trusts (regardless of asset size) that are required to file returns under section 6033 and that meet the 250 return threshold to file their Form 990-PF electronically for taxable years ending on or after December 31, 2006.

Final regulations sections 301.6011-5, 301.6033-4, and 301.6037-2 and IRS publications provide for exceptions and hardship waivers from the electronic filing requirement for corporations, organizations required to file returns under section 6033, and electing small business corporations. IRS Publication 4163, Modernized e-File (MeF) Information for Authorized IRS e-file Providers for Business Returns, and IRS Publication 4164, Modernized e-File (MeF) Guide for Software Developers And Transmitters, contain instructions for filing corporate and tax-exempt organization returns electronically, and exclude certain types of returns from the electronic filing requirement. For a complete and up to date list of the exclusions or for further information on electronic filing, refer to Publication 4163, Publication 4164, and the IRS.gov Internet site. The Service will post answers to Frequently Asked Questions on this site.

If the return required to be filed electronically is transmitted on or before the due date (including extensions) and is rejected, but the electronic return originator or the filer comply with the following requirements for timely submission of the return, the return will be considered timely filed and any elections attached to the return will be considered valid. For returns filed on or after January 1, 2010, the Service will allow the filer 10 calendar days from the date of first transmission to perfect the return for electronic resubmission.

If the electronic return cannot be accepted for processing electronically, the filer must file a paper return with the Service Center where it would normally be filed. In order for the paper return to be considered timely, it must be postmarked by the U.S. Postal Service (or a foreign postal service, or in the case of private delivery services designated by Notice 2004-83, 2004-2 C.B. 1030, have a postmark date as determined by Notice 97-26, 1997-1 C.B. 413), or delivered to the Service by the later of the due date of the return (including extensions), or 10 calendar days after the date the Service last gives notification to the filer that the return has been rejected, as long as:

(1) The first transmission was made on or before the due date of the return (including extensions) and

(2) The last transmission was made within 10 calendar days of the first transmission.

The paper return must be completed consistent with the instructions to file the return, including providing required information from the taxpayer and include the signature of the tax return preparer, if any. The PIN that was used on the electronically filed return that was rejected may not be used as the signature on the paper return. Corporations, partnerships, and tax-exempt organizations that are required to e-file must contact the e-Help Desk ((866) 255-0654) for assistance in correcting rejected returns before filing a paper return. If the taxpayer cannot correct the rejected return errors, they must receive authorization from the e-Help Desk prior to filing a paper return. However, the taxpayer is not otherwise required to complete a waiver request as discussed below.

If the paper return is postmarked after its due date (including extensions), then the paper return should include an explanation of why the return is being filed after the due date and include a copy of the Service’s final rejection notification. Similarly, if the paper return is being submitted by a corporation, partnership, or tax-exempt entity that is required to e-file the return, then the return should include an explanation of why the return is being filed in paper form and include a copy of the Service’s final rejection notification. A paper return filed in accordance with the above procedures will be considered timely filed, any elections attached to the return will be considered valid, and no penalty will be imposed for failing to e-file the return.

The procedures set forth in the preceding paragraphs apply to submissions of paper returns only when the filer has unsuccessfully attempted to e-file. Filers who are required to e-file but desire to seek a waiver of that requirement under a claim of undue hardship must use the procedures discussed below in order to receive IRS approval of a waiver request.

When certain filers required to file over 250 returns fail to file electronically as required, those filers may be liable for failure to file penalties under I.R.C. §§ 6651 or 6652, unless the filer can establish that the failure to file the return electronically was due to reasonable cause and not due to willful neglect. The final regulations permit the Service to waive the electronic filing requirement if the filer demonstrates that undue hardship would result if it were required to file its return electronically. The regulations require that filers seeking a waiver should request that waiver in the manner prescribed in applicable revenue procedures or publications.

The Service will approve or deny requests for a waiver of the electronic filing requirement based on each filer’s particular facts and circumstances. In determining whether to approve or deny a waiver request, the Service will consider the filer’s ability to timely file its return electronically without incurring an undue economic hardship. The Service will generally grant a waiver where the filer can demonstrate the undue hardship that would result by complying with the electronic filing requirement, including any incremental costs to the filer. Mindful of the software and technological issues in filing electronically, the Service also generally will grant a waiver where technology issues prevent the filer from filing its return electronically. Guidance on situations in which deviations or exclusions from the electronic filing requirement can be made without a waiver is available in IRS Publication 4163, IRS Publication 4164, and on the IRS.gov Internet site.

To request a waiver, the filer must file a written request containing the following information:

(1) A notation at the top of the request stating, in large letters, the type of form followed by the words “e-file Waiver Request” (e.g., “Form 1120 e-file Waiver Request” or “Form 990 e-file Waiver Request”).

(2) The filer’s name, federal tax identification number, mailing address, contact name, phone number and e-mail address.

(3) The type of form for which the waiver is requested.

(4) The taxable year for which the waiver is requested.

(5) The value of the filer’s total assets at the end of the taxable year as reported (or to be reported) on the entity’s return.

(6) A detailed statement which lists:

a) the steps the filer has taken in an attempt to meet its requirement to timely file its return electronically,

b) why the steps were unsuccessful,

c) the undue hardship that would result by complying with the electronic filing requirement, including any incremental costs to the filer of complying with the electronic filing requirement. Incremental costs are those costs that are above and beyond the costs to file on paper. The incremental costs must be supported by a detailed computation. The detailed computation must include a schedule detailing the costs to file on paper and the costs to file electronically.

(7) A statement as to what steps the filer will take to assure its ability to file future returns electronically.

(8) A statement (signed by an officer authorized to sign the return, as defined in section 6062 of the Code) with the following language:

Under penalties of perjury, I declare that the information contained in this waiver request is true, correct and complete to the best of my knowledge and belief.

Requests made by an authorized representative of the filer must include a valid power of attorney.

The waiver request should not be attached to the filer’s paper tax return. Extension requests or payments should not be submitted with the waiver request.

Filers are encouraged to file electronic filing waiver requests for failure to file a return electronically as soon as possible after it is determined that the filer is unable to electronically file the return or amended return. This will give the Service time to process the waiver request.

Until the Service issues further guidance, filers should file a waiver request with the Ogden Submission Processing Center.

Use the following address if using the U.S. Postal Service:

Use the following address if using an overnight delivery service:

Filers may also fax the waiver request to the following number: (877) 477-0575.

The Service will review and process waiver requests in a timely manner and will send the filer written notice of any approval or rejection of the filer’s waiver request. The Service will not be considered to have waived the e-filing requirement unless the filer receives written approval from the Service that the waiver request has been approved. In the absence of written approval, a failure to e-file may be subject to penalty unless such failure was due to reasonable cause and not willful neglect.

This notice supersedes Notice 2005-88, 2005-2 C.B. 1060.

This notice is effective for all returns, including amended and superseding returns, filed after December 31, 2009.

Software developers and vendors may contact the e-Help Desk at (866) 255-0654 with questions about corporate e-file. Further information is available on the e-file for Charities and Nonprofits webpage at the IRS.gov Internet site.

The principal author of this announcement is Michael Hara of the Office of Associate Chief Counsel (Procedure & Administration). For questions concerning a request for waiver, you may contact the e-Help Desk at (866) 255-0654. To have your call directed to the appropriate area, select the options for e-file questions, business returns, and the form type for which you are calling.

This revenue procedure requires taxpayers to report to the Internal Revenue Service their groupings and regroupings of activities and the addition of specific activities within their existing groupings of activities for purposes of section 469 of the Internal Revenue Code and § 1.469-4 of the Income Tax Regulations.

On August 4, 2008, Notice 2008-64, 2008-31 I.R.B. 268, (the notice) was published in the Internal Revenue Bulletin. The notice proposed a disclosure regime for taxpayer groupings under section 469 and solicited comments both on whether the proposal sufficiently balanced the need for disclosure with taxpayer burden, and on alternative approaches. In response, the Service received several comments suggesting ways in which the proposal could be improved. This revenue procedure reflects some of the changes suggested by the comments received. Specifically, the regime proposed in the notice required taxpayers to make a disclosure whenever there is a disposition of an activity within a chosen grouping; this requirement has been removed. In addition, the notice did not contain a relief provision for taxpayers that, in a given year, fail to make the required disclosure. Section 4.07 of this revenue procedure contains a relief provision for taxpayers that can meet certain additional criteria to demonstrate their groupings of activities.

.01 Section 469 generally provides that losses from and credits attributable to passive trade or business activities, to the extent they exceed, respectively, income from or the regular tax liability associated with all such passive activities, are disallowed for the taxable year and carried forward to the subsequent taxable year, subject to certain exceptions.

.02 Section 469(g)(1)(A) generally provides that if during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), and all gain or loss realized on such disposition is recognized, the excess of (i) any loss from such activity for such taxable year (determined after the application of section 469(b)), over (ii) any net income or gain for such taxable year from all other passive activities (determined after the application of section 469(b)), shall be treated as a loss which is not from a passive activity.

.03 Section 1.469-4 sets forth the rules for grouping a taxpayer’s trade or business activities and rental activities for purposes of applying the passive activity loss and credit limitation rules of section 469.

.04 Section 1.469-4(c)(1) provides that one or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.

.05 Section 1.469-4(c)(2) provides guidelines for determining whether activities constitute an appropriate economic unit and, therefore, may be treated as a single activity. Section 1.469-4(d) describes limitations on grouping certain activities. Section 1.469-4(d)(5) provides that a C corporation subject to section 469, an S corporation, or a partnership (a section 469 entity) must group its activities under the rules of § 1.469-4. Once a section 469 entity groups its activities, a shareholder or partner may group those activities with each other, with the activities conducted directly by the shareholder or partner, and with activities conducted through other section 469 entities, in accordance with the rules of this section. The shareholder or partner may not treat activities grouped together by a section 469 entity as separate activities.

.06 Section 1.469-4(e)(1) provides that except as provided in § 1.469-4(e)(2) and § 1.469-11 (providing three periods of time, all of which are now closed, in which a taxpayer could have regrouped its activities without having to establish that the original grouping was clearly inappropriate under § 1.469-4(e)(2)), once a taxpayer has grouped activities under § 1.469-4, the taxpayer generally may not regroup those activities in subsequent taxable years. Taxpayers must comply with disclosure requirements that the Commissioner may prescribe with respect to both their original groupings and the addition and disposition of specific activities within those existing groupings in subsequent taxable years.

.07 Section 1.469-4(e)(2) provides that if it is determined that a taxpayer’s original grouping was clearly inappropriate or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities and must comply with the disclosure requirements that the Commissioner may prescribe.

.08 Section 1.469-4(f) provides that the Commissioner may regroup a taxpayer’s activities if any of the activities resulting from the taxpayer’s grouping is not an appropriate economic unit and a principal purpose of the taxpayer’s grouping (or failure to regroup under paragraph (e) of § 1.469-4) is to circumvent the underlying purposes of section 469.

This revenue procedure applies to all taxpayers to which the rules in § 1.469-4 apply. Special rules apply for groupings by partnerships and S corporations and are described in section 4.05 of this revenue procedure. This revenue procedure does not apply to the rental real estate activities (as defined in § 1.469-9(b)(3)) of a taxpayer in a year in which the taxpayer is a qualifying taxpayer (as defined in § 1.469-9(b)(6)) if it has made the election provided for in § 1.469-9(g).

.01 Disclosure Requirements for Taxpayer Groupings.

Sections 4.02 through 4.04 of this revenue procedure require taxpayers to report to the Service, as part of their annual income tax return, certain changes to the taxpayer’s groupings that occur during the taxable year. Section 4.05 of this revenue procedure provides special rules for groupings by partnerships and S corporations. Section 4.06 of this revenue procedure governs the treatment of groupings existing prior to the effective date of this revenue procedure. Section 4.07 of this revenue procedure stipulates the consequences for failing to make the disclosures required by sections 4.02 through 4.04.

.02 Statement Required for New Groupings.

A taxpayer shall file a written statement with its original income tax return for the first taxable year in which two or more trade or business activities or rental activities are originally grouped as a single activity. This statement must identify the names, addresses, and employer identification numbers, if applicable, for the trade or business activities or rental activities that are being grouped as a single activity. In addition, any statement reporting a new grouping of two or more trade or business activities or rental activities as a single activity must contain a declaration that the grouped activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.

.03 Statement Required for Addition of New Activities to Existing Groupings.

If a taxpayer adds a new trade or business activity or a rental activity to an existing grouping for a taxable year, the taxpayer shall file a written statement with the taxpayer’s original income tax return for that taxable year. This statement must identify the names, addresses, and employer identification numbers, if applicable, for the new trade or business activity or rental activity that is being added to the existing grouping, as well as the names, addresses, and employer identification numbers, if applicable, for the activity or activities within the existing grouping. In addition, the statement reporting an addition to an existing grouping must contain a declaration that the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.

.04 Statement Required for Regroupings.

Under § 1.469-4(e)(2), if it is determined that the taxpayer’s original grouping was clearly inappropriate or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities. If such a determination and regrouping is made, the taxpayer shall file a written statement with the taxpayer’s original income tax return for the taxable year in which the trade or business activities or rental activities are regrouped. This statement must identify the names, addresses, and employer identification numbers, if applicable, for the trade or business or rental activities that are being regrouped. If two or more activities are regrouped into a single activity, the statement reporting a regrouping must also contain a declaration that the regrouped activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469. Furthermore, the statement reporting a regrouping must contain an explanation of why the taxpayer’s original grouping was determined to be clearly inappropriate or the nature of the material change in the facts and circumstances that makes the original grouping clearly inappropriate.

.05 Special Rules for Groupings by Partnerships and S Corporations.

Under § 1.469-4(d)(5), a section 469 entity must group its activities under the rules of that section. However, partnerships and S corporations are not subject to the requirements of §§ 4.02, 4.03, and 4.04 of this revenue procedure. Instead, partnerships and S corporations must comply with the disclosure instructions for grouping activities provided for on Form 1065, U.S. Return of Partnership Income and Form 1120S, U.S. Income Tax Return for an S Corporation, respectively. Generally, compliance with the applicable form requires disclosing the entity’s groupings to the partner or shareholder by separately stating the amounts of income and loss for each grouping conducted by the entity on attachments to the entity’s annual Schedule K-1. The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity under §§ 4.02, 4.03, and 4.04 of this revenue procedure unless the partner or shareholder (1) groups together any of the activities that the entity does not group together, (2) groups the entity’s activities with activities conducted directly by the partner or shareholder, or (3) groups the entity’s activities with activities conducted through other section 469 entities. Pursuant to § 1.469-4(d)(5)(i), a shareholder or partner may not treat activities grouped together by a section 469 entity as separate activities.

.06 Reporting of Pre-Existing Groupings Required only upon Change.

A taxpayer is not required to file a written statement reporting the grouping of the trade or business activities and rental activities that have been made prior to the effective date of this revenue procedure (pre-existing groupings) until the taxpayer makes a change to the grouping as described in sections 4.03 and 4.04 of this revenue procedure.

.07 Effect of Failure to Report.

Except as provided in § 4.05, if a taxpayer is engaged in two or more trade or business activities or rental activities and fails to report whether the activities have been grouped as a single activity in accordance with this revenue procedure, then each trade or business activity or rental activity will be treated as a separate activity for purposes of applying the passive activity loss and credit limitation rules of section 469. Notwithstanding the previous sentence, a timely disclosure shall be deemed made by a taxpayer who has filed all affected income tax returns consistent with the claimed grouping of activities and makes the required disclosure on the income tax return for the year in which the failure to disclose is first discovered by the taxpayer. If the failure to disclose is first discovered by the Service, however, the taxpayer must also have reasonable cause for not making the disclosures required by this revenue procedure. Although the default rule established by this section 4.07 will generally result in unreported activities being treated as separate activities, the Commissioner may still regroup a taxpayer’s activities to prevent tax avoidance pursuant to § 1.469-4(f). This revenue procedure provides alternative relief for untimely filing of the disclosures required by this revenue procedure; therefore, relief for untimely disclosures under § 301.9100 of the Procedure and Administration Regulations is not available pursuant to § 301.9100-1(d)(2).

This revenue procedure is effective for taxable years beginning on or after January 25, 2010.

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-2156.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in section 4. This information is required to be submitted in order to disclose a taxpayer’s grouping of activities. This information will be used to measure gain or loss for purposes of section 469. The collection of information is required to assist in compliance with tax obligations. The likely respondents are individuals and section 469 entities, including certain C corporations, S corporations, and partnerships.

The estimated total annual reporting burden for the taxable years in which this revenue procedure applies is 36,000 hours.

The estimated annual burden per respondent for the taxable years in which this revenue procedure applies varies from 10 minutes to 20 minutes, depending on individual circumstances, with an estimated average burden of 15 minutes. The estimated annual number of respondents for the taxable years in which this revenue procedure applies is 144,000.

The estimated annual frequency of responses is regular.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal authors of this revenue procedure are Bryan A. Rimmke and Jonathan E. Cornwell of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Mr. Rimmke or Mr. Cornwell at (202) 622-3050 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

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

In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9478) that provide updated guidance affecting tax return preparers regarding the use of information related to lists for solicitation of tax return business; the disclosure or use of statistical compilations of data under section 7216 of the Internal Revenue Code (Code) by a tax return preparer in connection with, or in support of, a tax return preparer’s tax return preparation business, including identification of additional limited circumstances when a tax return preparer who compiles statistical information may disclose the compilation without taxpayer consent, and the placement of additional restrictions on the content of the compilation that may be disclosed under those circumstances without taxpayer consent; and the disclosure or use of information for the purpose of performing conflict reviews. The text of those temporary regulations also serves as the text of these proposed regulations. This document invites comments from the public on these regulations.

Written or electronic comments and requests for a public hearing must be received by March 5, 2010.

Send submissions to: CC:PA:LPD:PR (REG-131028-09), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-131028-09), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-131028-09).

Concerning the proposed regulations, Molly K. Donnelly, (202) 622-4940; concerning the submissions of comments and requests for hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

The principal author of these regulations is Molly K. Donnelly, Office of the Associate Chief Counsel (Procedure and Administration).

* * * * *

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on January 25, 2010, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

This announcement provides, for plan years beginning on or after January 1, 2009, automatic approval for certain changes in funding method with respect to single-employer defined benefit plans that result either from a change in the valuation software used to determine the liabilities for such plans or from a change in the enrolled actuary and the business organization providing actuarial services to the plan. This guidance is being provided in response to numerous requests from actuaries and plan sponsors, many of whom are continuing to modify their valuation software in order to implement the changes to the funding rules made by the Pension Protection Act of 2006 (PPA ’06), the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA ’08), and guidance regarding these legislative changes.

A change in funding method can occur when the business organization providing actuarial services to a plan modifies its valuation software. A change in funding method can also occur when the enrolled actuary and business organization providing actuarial services for a plan is changed and the new enrolled actuary uses different valuation software than the prior enrolled actuary, or otherwise applies the overall funding method in a different manner (plans for which both the enrolled actuary and the business organization providing actuarial services are changed are referred to as “takeover plans”).

Under § 412(c)(5) of the Code (and its counterpart in section 302(c)(5) of ERISA) as in effect prior to PPA ‘06, any change of funding method required the approval of the Secretary. Revenue Procedure 2000-40, 2000-2 C.B. 357, provided automatic approval for certain changes in funding method resulting from changes in valuation software (section 4.04) and for changes in funding method that occurred with respect to takeover plans (section 4.03). With respect to changes in funding method resulting from changes in valuation software, Revenue Procedure 2000-40 provided approval for the changes if: (1) net charges to the funding standard account determined using the new valuation software did not differ by more than 2% from the net charges determined using the old valuation software (the “pre-PPA 2% test”); (2) the modification to the computations in the valuation software or the use of a different valuation software system were designed to produce results that were no less accurate than the results produced prior to the modification or change; and (3) the approval for takeover plans described in the next paragraph was not applicable.

With respect to takeover plans, Revenue Procedure 2000-40 provided approval for changes in funding method if: (1) there was both a change in the enrolled actuary for the plan and a change in the business organization providing actuarial services to the plan; and (2) the method used by the new actuary was applied to the prior plan year and that the absolute value of each resulting difference in normal cost, accrued liability (if directly computed under the method), and actuarial value of assets, that was attributable to the change in method did not exceed 5% of the respective amounts calculated by the prior actuary for that prior year (the “pre-PPA 5% test”).

Section 412 of the Code and section 302 of ERISA, as amended by PPA ‘06, retain the requirement that a change in funding method be approved by the Secretary. Under PPA ‘06, a single funding method must be used for any single-employer defined benefit plan, but there may be some variation in the manner the method is applied. Final regulations were issued under § 430 on October 15, 2009, T.D. 9467, 2009-50 I.R.B. 760, 74 FR 53004, (the “October 2009 regulations”) and are generally effective for plan years beginning on or after January 1, 2010. Under § 1.430(d)-1(f)(1)(iv) of the October 2009 regulations, a plan’s funding method includes not only the overall funding method used by the plan, but also each specific method of computation used in applying the overall method. Accordingly, a change in valuation software can result in a change in funding method that requires the approval of the Secretary.

The October 2009 regulations provide approval for a number of changes in funding method and for changes in the interest rate. For the first plan year beginning on or after January 1, 2008, any changes in funding method that are not inconsistent with the requirements of § 430 are treated as having been approved by the Commissioner and do not require specific prior approval. For plan years beginning in 2009 and 2010, certain changes in funding method (concerning the methodology of allocating liabilities to years, the selection of the valuation date, and the selection of the asset valuation method) and in the selection of interest rates are also approved. Section 1.430(d)-1(g)(3) provides general approval for a change in funding method (which would include a change in funding method resulting from a change in valuation software) for the first plan year beginning on or after January 1, 2010. However, if certain sections of the regulations were applied to a plan for a plan year beginning on or after January 1, 2009, but before January 1, 2010, approval is provided with respect to such a plan for a change in funding method (including a change in funding method resulting from a change in valuation software) for that plan year, in lieu of the general approval for changes for the first plan year beginning on or after January 1, 2010.

Even though approval was provided for certain changes for the 2009 and 2010 plan years, actuaries and plan sponsors have expressed concern that changes in valuation software may encompass changes in funding method for which the October 2009 regulations do not provide automatic approval. Furthermore, forthcoming regulations under § 430 may result in additional changes in valuation software.

Revenue Procedure 2000-40 has not been updated to reflect the changes made by PPA ‘06. Moreover, the calculations that were used for the pre-PPA 2% test and the pre-PPA 5% test are not used under § 430 of the Code and section 303 of ERISA.

For plan years beginning on or after January 1, 2009, automatic approval is provided for any change in funding method under § 430 if the following conditions are satisfied:

(1) There has been a change both in the enrolled actuary for the plan and in the business organization providing actuarial services to the plan;

(2) The new method is substantially the same as the method used by the prior enrolled actuary and is consistent with the description of the method contained in the prior actuarial valuation report or prior Schedule SB of Form 5500;

(3) The funding target and target normal cost (without regard to any adjustments for employee contributions and plan-related expenses), as determined for the prior plan year by the new enrolled actuary (using the actuarial assumptions of the prior enrolled actuary), are both within 5% of those values as determined by the prior enrolled actuary; and

(4) For plan years beginning on or after January 1, 2011, the actuarial value of plan assets, as determined for the prior plan year by the new enrolled actuary (using the actuarial assumptions of the prior enrolled actuary), is within 5% of the value as determined by the prior enrolled actuary.

Conditions (2), (3), and (4) are each applied by disregarding any change in funding method for which approval has been automatically provided (without regard to this announcement) for the current plan year. For example, automatic approval is provided under § 1.430(d)-1(g)(3)(ii)(C) for changes in the allocation of liabilities that are necessary to apply the rules of § 1.430(d)-1(c)(1)(iii) for a plan year beginning before January 1, 2010. Thus, if such a change in funding method is made for a takeover plan for the 2009 plan year, the 5% test of condition (3) with respect to the prior plan year (2008) is determined using the allocation of liabilities used by the prior enrolled actuary.

For plan years beginning on or after January 1, 2009, automatic approval is provided for any change in funding method under § 430 resulting from a change in valuation software if the following conditions are satisfied:

(1) There has not been both a change in the enrolled actuary for the plan and a change in the business organization providing actuarial services to the plan;

(2) Except to the extent automatic approval has been provided for a change in funding method without regard to this announcement, the underlying method is unchanged and is consistent with the information contained in the prior actuarial valuation report and prior Schedule SB of Form 5500;

(3) The new valuation software is generally used by the enrolled actuary for the single-employer plans to which the enrolled actuary provides actuarial services;

(4) The funding target and target normal cost (without regard to any adjustments for employee contributions and plan-related expenses) under the new valuation software (for either the current plan year or the prior plan year) are each within 2% of the respective values under the prior valuation software (all other factors being held constant);

(5) For plan years beginning on or after January 1, 2011, the actuarial value of assets for the plan under the new valuation software (for either the current plan year or the prior plan year) is within 2% of the value under the prior valuation software (all other factors being held constant); and

(6) The modifications to the computations in the valuation software or the use of a different valuation software system are designed to produce results that are no less accurate than the results produced prior to the modifications or change.

The automatic approval provided by this announcement will apply until it is superseded by future guidance.

The principal authors of this announcement are James E. Holland, Jr. and Carolyn E. Zimmerman of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this announcement, please email RetirementPlanQuestions@irs.gov.