This revenue ruling provides guidance to employers funding their retiree health benefits through a wholly owned subsidiary. The ruling concludes that the arrangement is insurance for federal income tax purposes.

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 June 2014.

This revenue ruling holds that tangible assets used in converting corn to fuel grade ethanol are properly included in asset class 49.5 of Rev. Proc. 87–56 for depreciation purposes.

This notice provides guidance on an amendment to reflect the outcome of United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675 (2013) that is adopted after the beginning of a plan year that is effective during a plan year (“mid-year amendment”) to a plan described in Internal Revenue Code (“Code”) § 401(k)(12) or (13) (“§ 401(k) safe harbor plan”) or § 401(m)(11) or (12) (“§ 401(m) safe harbor plan”) of the Internal Revenue Code pursuant to Q&A-8; of Notice 2014–19, 2014–17 IRB 979.

This revenue ruling holds that tangible assets used in converting corn to fuel grade ethanol are properly included in asset class 49.5 of Rev. Proc. 87–56 for depreciation purposes.

This notice updates the appendix to Notice 2013–1, which lists the Indian tribes who have settled tribal trust cases against the United States. Notice 2012–60 originally was published in IRB 2012–41 (October 9, 2012). Notice 2012–60 was superceded by Notice 2013–1 IRB 2013–3, and the appendix to Notice 2013–1 was superceded by Notice 2013–16 (IRB 2013–14), then Notice 2013–36, then Notice 2013–55, and then Notice 2014–22. However, an additional tribe has settled its case against the United States since the publication of Notice 2014–22, so we are publishing an updated appendix to Notice 2013–1. This notice would supercede Notice 2014–22.

What is the proper asset class under Rev. Proc. 87–56, 1987–2 C.B. 674, as clarified and modified by Rev. Proc. 88–22, 1988–1 C.B. 785, for the depreciation of tangible assets that are used in converting corn to fuel grade ethanol?

Taxpayer owns a facility operated primarily to produce fuel grade ethanol. Fuel grade ethanol is a colorless, flammable liquid that is an organic chemical, and a high octane alternative fuel source. Taxpayer produces fuel grade ethanol from corn.

Taxpayer grinds the corn into flour, mixes the resulting corn flour with water, increases the temperature, and adds enzymes to convert the starch in the solution to simple sugars. Taxpayer feeds the resulting mash (water, sugars, and non-convertible solids) into fermentation tanks where yeast is added. Over a period of several days the yeast metabolizes the sugars into ethanol and carbon dioxide (CO₂). The CO₂ produced during fermentation may be collected, compressed, and sold as a by-product.

Taxpayer then sends the ethanol solution to distillation columns to separate the ethanol from the solids and water. After distillation, taxpayer produces fuel grade ethanol by further processing part of the output using dehydration to increase alcohol content. Dehydration is accomplished by using molecular sieves that separate the remaining water molecules from the ethanol. Once the dehydration is complete, Taxpayer blends the fuel grade ethanol with 2 to 5 percent denaturant (such as natural gasoline or unleaded gasoline) and sends it to storage pending sale.

Taxpayer also processes the solids and other liquids derived from the distillation to produce distillers grains, an animal feed supplement, which it sells. More than 50 percent of the economic output at Taxpayer’s facility is from fuel grade ethanol production.

Asset class 49.5 of Rev. Proc. 87–56 specifically applies to assets used in the conversion of biomass to a liquid fuel. Under energy credit provisions that were enacted near the same time asset class 49.5 was first established in 1979 by Rev. Proc. 79–26, 1979–1 C.B. 566, “biomass” means any organic substance other than oil, natural gas, coal, or product of oil or natural gas or coal. See § 48(l)(15)(B)(i), (l)(3)(B) as in effect on the day before the date of enactment [11/5/90] of the Revenue Reconciliation Act of 1990, Pub. L. 101–508.^[1] The depreciation and the former energy credit provisions of section 48(l) are both based on cost recovery concepts. Although § 48B(c)(4)(A) also includes a definition of biomass, that provision was enacted significantly later as part of the Energy Tax Incentives Act of 2005 (Pub. L. 109–58) and is specific to the production of synthesis gas. Accordingly, the definition of biomass in former § 48(l) is a more appropriate definition of biomass for purposes of asset class 49.5.

The corn used in Taxpayer’s facility is biomass, that is, an organic substance other than oil, natural gas, coal, or a product thereof. Likewise, the fuel grade ethanol produced from corn (biomass) at Taxpayer’s facility is liquid fuel for purposes of asset class 49.5.

Asset class 28.0 of Rev. Proc. 87–56, which includes assets used to manufacture basic chemicals, is not the appropriate asset class for Taxpayer’s depreciable tangible assets that are used in converting corn to fuel grade ethanol, even though the interim product, ethanol, is an organic chemical. Taxpayer is primarily engaged in producing fuel grade ethanol, which is a liquid fuel, from corn, which is a biomass, at the facility. The production of ethanol by Taxpayer at the facility is integral to Taxpayer’s production of the final product, fuel grade ethanol. The production of ethanol as an interim part of the production of fuel grade ethanol and the conversion of corn to fuel grade ethanol by chemical processes does not require classification in asset class 28.0 or preclude classification in the asset class that specifically applies to the conversion of biomass to fuel. Accordingly, under the “primary use” test of § 1.167(a)–11(b)(4)(iii)(b), Taxpayer’s activity is described in asset class 49.5.

The proper asset class under Rev. Proc. 87–56 for depreciation of tangible assets used in converting corn to fuel grade ethanol is asset class 49.5 (other than § 1250 property not described in asset class 49.5 and assets classified in asset classes 00.11 through 00.4 of Rev. Proc. 87–56).

Notice 2009–64, 2009–36 I.R.B. 307 (September 8, 2009), proposed a revenue ruling concluding that ethanol plants should be depreciated using asset class 49.5 and requesting comments. Two comments were received and considered in finalizing this revenue ruling.

Pursuant to § 7805(b)(8), the Internal Revenue Service will not apply the holding in this revenue ruling to tangible assets that are used in converting biomass to a liquid fuel such as fuel grade ethanol that a taxpayer places in service before June 9, 2014.

The principal author of this revenue ruling is Ruba Nasrallah of the Office of the Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Charles Magee of the Office of the Associate Chief Counsel (Income Tax & Accounting) at (202) 317–7005 (not a toll-free number).

Does the arrangement described below constitute insurance within the meaning of subchapter L of the Internal Revenue Code? If so, does the issuer qualify as an insurance company?

X, a domestic corporation whose stock is widely held, provides health benefits within certain limits to a large group of named retired employees and their dependents, even though it is not legally obligated to do so, and may cancel the coverage at any time. X maintains a single-employer voluntary employees’ beneficiary association that satisfies the requirements of § 501(c)(9) (VEBA) and makes a contribution to the VEBA to provide the health benefits. X deducts the contribution in accordance with, and to the extent permitted by, §§ 419 and 419A of the Code. X has complied with, and will continue to comply with, all requirements of the Employment Retirement Income Security Act of 1974, as amended (ERISA).

In connection with the provision of health benefits to retirees and their dependents and as an alternative to providing the benefits on a self-insured basis, the VEBA enters into Contract A with an unrelated commercial insurance company, IC. IC’s participation in the arrangement is a condition of an exemption from the Department of Labor from certain of the prohibited transaction provisions of ERISA.

IC is taxable as a life insurance company under § 801 of the Code. Contract A provides noncancellable accident and health coverage. Under Contract A, IC will issue quarterly reimbursements to the VEBA for medical claims that are incurred by the covered retirees and their dependents and paid by the VEBA. Contract A is regulated by the relevant State insurance commissioner as an accident and health insurance contract. At the time that Contract A goes into effect, neither X nor the VEBA have any commitment or obligation to offer health benefits to the covered retirees and their dependents, and both X and the VEBA may cancel any provided coverage at any time.

In an effort to keep the premium payment under Contract A affordable, IC then enters into Contract B with X’s wholly owned subsidiary, S1, under which S1 receives a premium and reinsures 100 percent of IC’s liabilities under Contract A. Contract B constitutes S1’s sole business. S1 is regulated as an insurance company under state law, and Contract B is regulated as insurance. The amount of premium under Contract B is determined at arm’s length in accordance with applicable insurance industry standards. S1 possesses adequate capital to fulfill its obligations to IC under Contract B. There are no guarantees that the VEBA or X will reimburse S1 with respect to its obligations under Contract B, nor is any of the premium received by S1 for Contract B loaned back to the VEBA or X. In all respects, the parties conduct themselves consistent with the standards applicable to an insurance arrangement between unrelated parties, except that S1 does not reinsure any other insurance contracts.

Subchapter L of the Code sets forth the regime for taxing insurance companies. In particular, § 801(a) provides that a life insurance company must pay tax on its life insurance company taxable income, which is defined in § 801(b) to mean life insurance gross income less life insurance deductions. Section 816(a), in part, defines a life insurance company as an insurance company that has life insurance reserves and unearned premiums and unpaid losses on noncancellable life, accident, or health policies comprising more than 50 percent of total reserves. Under § 816(a), the term “insurance company” means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. Section 831(c) applies the same definition of “insurance company” to determine whether a taxpayer is an insurance company other than a life insurance company and therefore subject to tax under § 831(a).

Neither the Code nor the regulations define the terms “insurance” or “insurance contract.” The United States Supreme Court, however, has explained that for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present. Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).

The risk transferred must be risk of economic loss. Allied Fidelity Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978), cert. denied, 439 U.S. 835 (1978). The risk must contemplate the fortuitous occurrence of a stated contingency, Commissioner v. Treganowan, 183 F.2d 288, 290–91 (2d Cir. 1950), cert. denied, 340 U.S. 853 (1950), and must not be merely an investment or business risk. Le Gierse, 312 U.S. at 542; Rev. Rul. 89–96, 1989–2 C.B. 114.

Risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer, such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Risk distribution incorporates the statistical phenomenon known as the law of large numbers. Id. Distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set aside for the payment of such a claim. Id. By assuming numerous, relatively small, independent risks that occur randomly over time, the insurer smoothes out losses to match more closely its receipt of premiums. Id.

Courts have recognized that risk distribution necessarily entails a pooling of premiums, so that a potential insured is not in significant part paying for its own risks. Ocean Drilling & Exploration Co. v. United States, 988 F.2d 1135, 1153 (Fed. Cir. 1993) (“Risk distribution involves spreading the risk of loss among policyholders.”); see also Beech Aircraft Corp. v. United States, 797 F.2d 920, 922 (10th Cir. 1986) (“[R]isk distributing’ means that the party assuming the risk distributes his potential liability, in part, among others.”); Crawford Fitting Co. v. United States, 606 F.Supp. 136, 147 (N.D. Ohio 1985) (“[T]he court finds . . . that various nonaffiliated persons or entities facing risks similar but independent of those faced by plaintiff were named insureds under the policy, enabling the distribution of risk thereunder.”); AMERCO and Subsidiaries v. Commissioner, 96 T.C. 18, 41 (1991), aff’d, 979 F.2d 162 (9th Cir. 1992) (“The concept of risk-distributing emphasizes the pooling aspect of insurance: that it is the nature of an insurance contract to be part of a larger collection of coverages, combined to distribute risk between insureds.”). Accordingly, Rev. Rul. 2005–40, 2005–2 C.B. 4, concludes that an arrangement under which an issuer contracts to indemnify the risks of a single policyholder does not qualify as insurance for federal income tax purposes because those risks are not, in turn, distributed among other insureds or policyholders. Similarly, Rev. Rul. 2002–89, 2002–C.B. 984, concludes that the requirements of risk shifting and risk distribution are not satisfied when a wholly owned subsidiary’s agreement to indemnify the risks of its parent represents 90% of the subsidiary’s business.

In Rev. Rul. 92–93, 1992–2 C.B. 45, modified by Rev. Rul. 2001–31, 2001–1 C.B. 1348, a parent corporation carried insurance on its employees’ lives under a group-term life insurance contract purchased from its wholly owned insurance subsidiary. In concluding that the value of insurance was includible in the employees’ gross income, the revenue ruling stated:

Revenue Ruling 92–93 states that “[t]he holdings of this revenue ruling also apply to accident and health insurance.” See also Rev. Rul. 92–94, 1992–2 C.B. 144.

To determine the nature of an arrangement for federal income tax purposes, it is necessary to consider all the facts and circumstances of a particular case, including the risks being shifted and distributed. The proper characterization of an arrangement may determine whether the issuer qualifies as an insurance company for federal income tax purposes and whether amounts paid under such arrangement may be deductible.

In the situation above, the risks being indemnified are the covered retirees’ and their dependents’ risks of incurring medical expenses during retirement due to accident and health contingencies. Although the VEBA entered into Contract A, the covered retirees’ health insurance is an economic benefit to the retirees since it relieves them of the expense of purchasing health insurance for themselves and their dependents. Furthermore, at the time that Contract A goes into effect, neither X nor the VEBA have any commitment or obligation to offer health benefits to the covered retirees and their dependants, and both X and the VEBA may cancel any provided coverage at any time. Consequently, the risks that are shifted in the situation above are those of the covered retirees and their dependents and not risks of the VEBA or X. These risks are reinsured by S1 under Contract B. The risks under Contract B are distributed among this large group of covered individuals, and the analyses of Rev. Rul. 2002–89 and Rev. Rul. 2005–40 are inapplicable. Accordingly, the risks under Contract B are insurance risks, and Contract B constitutes insurance for federal income tax purposes.

In the situation above, S1 is regulated as an insurance company under state law. Contract B constitutes insurance. Because Contract B is more than half of the business done by S1 during this year, S1 qualifies as an insurance company under Subchapter L for this taxable year.

This revenue ruling does not address whether the health benefits are provided through a self-insured medical reimbursement plan for purposes of the nondiscrimination rules under § 105(h) (see Treas. Reg. § 1.105–11(b)(1)(iii)).

This ruling also does not address the deductibility of a contribution by X to the VEBA under §§ 419 and 419A; whether S1, or any account held by IC or S1, with respect to Contract A or Contract B is a welfare benefit fund (as defined in § 419(e)); or the application of § 419A(g). Furthermore, because the arrangement described in this revenue ruling provides welfare benefits through a VEBA, this ruling does not address certain issues that would arise if an employer provided welfare benefits other than through a VEBA, including whether an entity (or any account held by any person) that is part of such an arrangement is a welfare benefit fund or, if not, whether the arrangement is a plan deferring the receipt of compensation for purposes of §§ 404(a)(5) and 404(b).

Rev. Rul. 2002–89 and Rev. Rul. 2005–40 are distinguished.

The principal author of this revenue ruling is Sheryl B. Flum of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Ms. Flum at (202) 317-6995 (not a toll-free number).

This revenue ruling provides various prescribed rates for federal income tax purposes for June 2014 (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)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, with respect to housing credit dollar amount allocations made before January 1, 2014, shall not be less than 9%. Finally, 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.

This notice provides guidance on an amendment to reflect the outcome of United States v. Windsor, 570 U.S. ___, 133 S.Ct. 2675 (2013), that is adopted after the beginning of a plan year and is effective during a plan year (“mid-year amendment”) to a plan described in § 401(k)(12) or (13) (“§ 401(k) safe harbor plan”) or § 401(m)(11) or (12) (“§ 401(m) safe harbor plan”) of the Internal Revenue Code pursuant to Q&A–8 of Notice 2014–19, 2014–17 I.R.B. 979 (April 21, 2014).

Notice 2014–19 provides guidance on the application (including the retroactive application) of the Windsor decision and the holdings of Rev. Rul. 2013–17, 2013–38 I.R.B. 201 (Sept. 16, 2013), to retirement plans qualified under § 401(a).

Q&A–8 of Notice 2014–19 provides:

Q–8. What is the deadline to adopt a plan amendment pursuant to this notice?

A–8. The deadline to adopt a plan amendment pursuant to this notice is the later of (i) the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007–44, or its successor, or (ii) December 31, 2014. Moreover, in the case of a governmental plan, any amendment made pursuant to this notice need not be adopted before the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.

Under § 1.401(k)–3(e)(1) of the Treasury Regulations, a § 401(k) safe harbor plan must be adopted before the beginning of the plan year and be maintained throughout a full 12–month plan year, except as otherwise provided in § 1.401(k)–3(g) (relating to the reduction or suspension of safe harbor contributions) or in guidance of general applicability published in the Internal Revenue Bulletin. Under § 1.401(m)–3(f)(1), similar rules apply to § 401(m) safe harbor plans, including § 403(b) plans. The IRS has been asked whether a § 401(k) or (m) safe harbor plan may adopt a mid-year amendment pursuant to Q&A–8 of Notice 2014–19.

May a sponsor of a § 401(k) or (m) safe harbor plan adopt a mid-year amendment pursuant to Q&A–8 of Notice 2014–19?

Yes. A plan will not fail to satisfy the requirements to be a § 401(k) or (m) safe harbor plan merely because the plan sponsor adopts a mid-year amendment pursuant to Q&A–8 of Notice 2014–19.

Notice 2014–19 is amplified by providing further guidance with respect to safe harbor plan mid-year amendments.

The principal authors of this notice are Angelique Carrington of the Employee Plans, Tax Exempt and Government Entities Division, and Jeremy Lamb of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Carrington at RetirementPlanQuestions@irs.gov or Mr. Lamb at (202) 317-6700 (not a toll-free number).

Notice 2013–1, 2013–3 IRB 281, provides guidance on the federal tax treatment of per capita payments that members of Indian tribes receive from proceeds of certain settlements of tribal trust cases between the United States and those Indian tribes. Additional tribes have settled tribal trust cases against the United States since publication of Notice 2013–1. This notice provides an updated Appendix that reflects the additional settlement agreements.

Notice 2013–1 Appendix is modified and superseded.

For further information regarding this notice, please contact Telly Meier at phone number (202) 317-8494(not a toll-free number).

Appendix

Tribes That Have Entered into Settlement Agreements of Tribal Trust Cases

1.Assiniboine and Sioux Tribes of the Fort Peck Reservation

2.Bad River Band of Lake Superior Chippewa Indians

3.Blackfeet Tribe of the Blackfeet Indian Reservation

4.Bois Forte Band of Chippewa

5.Cachil Dehe Band of Wintun Indians of the Colusa Rancheria

6.Chippewa Cree Tribe of the Rocky Boy’s Reservation

7.Coeur d’Alene Tribe

8. Confederated Salish and Kootenai Tribes

9. Confederated Tribes of Siletz Indians

10. Confederated Tribes of the Colville Reservation

11. Confederated Tribes of the Goshute Reservation

12. Crow Creek Sioux Tribe

13. Eastern Shawnee Tribe of Oklahoma

14. Hualapai Indian Tribe

15. Iowa Tribe of Kansas and Nebraska

16. Kaibab Band of Paiute Indians of Arizona

17. Kickapoo Tribe of Kansas

18. Lac Courte Oreilles Band of Lake Superior Chippewa Indians

19. Lac du Flambeau Band of Lake Superior Chippewa Indians

20. Leech Lake Band of Ojibwe

21. Lower Brule Sioux Tribe

22. Makah Indian Tribe of the Makah Reservation

23. Mescalero Apache Tribe

24. Minnesota Chippewa Tribe

25. Nez Perce Tribe

26. Nooksack Indian Tribe

27. Northern Cheyenne Tribe of Indians

28. Omaha Tribe o Nebraska

29. Passamaquoddy Tribe of Maine

30. Pawnee Nation

31. Prairie Band of Potawatomi Nation

32. Pueblo of Zia

33. Quechan Tribe of the Fort Yuma Reservation

34. Red Cliff Band of Lake Superior Chippewa Indians

35. Rincon Luiseño Band of Indians

36. Rosebud Sioux Tribe

37. Round Valley Indian Tribes

38. Salt River Pima-Maricopa Indian Community

39. Santee Sioux Tribe of Nebraska

40. Sault Ste. Marie Tribe

41. Shoshone-Bannock Tribes of the Fort Hall Reservation

42. Soboba Band of Luiseno Indians

43. Spirit Lake Dakotah Nation

44. Spokane Tribe of Indians

45. Standing Rock Sioux Tribe

46. Stillaguamish Tribe of Indians

47. Summit Lake Paiute Tribe

48. Swinomish Indian Tribal Community

49. Te-Moak Tribe of Western Shoshone Indians

50. Tohono O’odham Nation

51. Tulalip Tribes

52. Tule River Indian Tribe

53. Ute Indian Tribe of the Uintah and Ouray Reservation

54. Ute Mountain Ute Tribe

55. Winnebago Tribe of Nebraska

56. Qawalangin Tribe of Unalaska

57. Tlingit & Haida Tribes of Alaska

58. Northwestern Band of Shoshone Indians

59. Hoopa Valley Tribe

60. Ak-Chin Indian Community

61. Oglala Sioux Tribe

62. Yoruk Tribe

63. Cheyenne River Sioux Tribe

64. Paiute-Shoshone Indians of the Bishop Community of the Bishop Colony

65. Seminole Nation of Oklahoma

66. Otoe-Missouria Tribe of Oklahoma

67. Samish Indian Nation

68. Tonkawa Tribe of Indians of Oklahoma

69. Yakama Nation

70. Miami Tribe of Oklahoma

71. Shoshone Indian Tribe of the Wind River Reservation

72. Pueblo of Laguna