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 July 2012.

Proposed regulations under section 1366 of the Code relate to basis of indebtedness of S corporations to their shareholders. The proposed regulations provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide. The proposed regulations affect shareholders of S corporations. A public hearing is scheduled for October 9, 2012.

This procedure provides a safe harbor for determining whether a publicly traded partnership’s (PTP’s) income from discharge of indebtedness (COD income) is qualifying income under section 7704(d) of the Code for the purpose of meeting the qualifying income exception in section 7704(c). The safe harbor treats COD income attributable to debt incurred in direct connection with the PTP’s activities that generate qualifying income (qualifying activities) as qualifying income.

This announcement withdraws (REG-100276-97) relating to financial asset securitization trusts (FASITs) under sections 860H through 860L of the Code. The FASIT provisions were repealed by PL 108-357, effective January 1, 2005, with limited exception for existing FASITs.

The following is a copy of the Competent Authority Agreement (“the Agreement”) entered into on May 21, 2012, by the Competent Authorities of the United States and the Netherlands regarding the eligibility of a besloten fonds voor gemene rekening (limited fund for mutual account) (“LFMA”) and its participants for treaty-reduced rates of withholding on U.S. source dividends and interest under the Convention between the Kingdom of the Netherlands and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on December 18, 1992, and amended by Protocols signed on October 13, 1993 and March 8, 2004.

This revenue ruling provides various prescribed rates for federal income tax purposes for July 2012 (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, and before December 31, 2013, shall not be less than 9%. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the blended annual rate for 2012 for purposes of section 7872.

This revenue procedure provides a safe harbor under which the Internal Revenue Service (IRS) will not challenge a determination by a publicly traded partnership (PTP) that income from discharge of indebtedness (COD income) is qualifying income under section 7704(d) of the Internal Revenue Code.

.01 Section 61(a) provides generally that gross income means all income from whatever source derived. Section 61(a)(12) provides that gross income includes COD income.

.02 Section 7704(a) provides generally that, except as provided in section 7704(c), a PTP is treated as a corporation.

.03 Section 7704(b) provides that the term “publicly traded partnership” means any partnership if either (1) interests in such partnership are traded on an established securities market, or (2) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).

.04 Section 7704(c)(1) provides that section 7704(a) shall not apply to any PTP for any taxable year if such partnership met the gross income requirements of section 7704(c)(2) for such taxable year and each preceding taxable year beginning after December 31, 1987, during which the partnership (or any predecessor) was in existence (qualifying income exception). Section 7704(c)(2) provides that a partnership meets the gross income requirements of section 7704(c) for any taxable year if 90 percent or more of the gross income of such partnership for such taxable year consists of qualifying income. Section 7704(c)(3) provides that section 7704(c) does not apply to any partnership that would be described in section 851(a) if such partnership were a domestic corporation.

.05 Section 7704(d)(1) provides in general that the term “qualifying income” means: (A) interest, (B) dividends, (C) real property rents, (D) gain from the sale or other disposition of real property (including property described in section 1221(a)(1)), (E) income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), or industrial source carbon dioxide, or the transportation or storage of any fuel described in subsection (b), (c), (d), or (e) of section 6426, or any alcohol fuel defined in section 6426(b)(4)(A) or any biodiesel fuel as defined in section 40A(d)(1), (F) any gain from the sale or disposition of a capital asset (or property described in section 1231(b)) held for the production of income described in any of the foregoing subparagraphs, and (G) in the case of a partnership described in the second sentence of section 7704(c)(3), income and gains from commodities (not described in section 1221(a)(1)) or futures, forwards, and options with respect to commodities. Section 7704(d)(4) provides that “qualifying income” also includes any income that would qualify under section 851(b)(2)(A) or section 856(c)(2).

.06 The legislative history to section 7704 provides that the purpose of the section 7704(c) exception for PTPs with qualifying income is to except from entity level tax those partnerships that engage in activities that are commonly considered as essentially no more than investing or that have traditionally been conducted in partnership form. See H.R. Rep. No. 391 (Part 2), 100th Cong., 1st Sess. 1066-69.

.07 Section 1.163-8T of the temporary Income Tax Regulations prescribes rules for allocating interest expense for purposes of applying the passive loss limitation of section 469 and the nonbusiness interest limitations of section 163(d) and (h). Under these rules, interest expense is generally allocated in the same manner as the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures.

This revenue procedure applies to PTPs with COD income that use the qualifying income exception in section 7704(c) to avoid corporate treatment under section 7704(a).

The IRS will not challenge a PTP’s determination that COD income is qualifying income under section 7704(d) if COD income is attributable to debt incurred in direct connection with activities of the PTP that generate qualifying income (qualifying activities). The PTP may demonstrate that COD income is attributable to debt incurred in direct connection with the PTP’s qualifying activities by any reasonable method. One reasonable method for demonstrating that COD income is attributable to debt incurred in direct connection with the PTP’s qualifying activities is to trace the proceeds of the debt generating COD income to qualifying activities under an approach similar to the one used in section 1.163-8T. Ordinarily, a method that allocates COD income based solely on the ratio of qualifying gross income to total gross income will not be considered reasonable. The IRS may consider a request for a private letter ruling on whether a method is reasonable.

This revenue procedure is effective for COD income of a PTP attributable to debt discharged on or after June 15, 2012. PTPs may apply this revenue procedure for COD income attributable to debt discharged in any taxable year for which the statute of limitations has not expired.

The principal author of this revenue procedure is Wendy L. Kribell of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue procedure, contact Wendy L. Kribell at (202) 622-3050 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations relating to basis of indebtedness of S corporations to their shareholders. These proposed regulations provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide. The proposed regulations affect shareholders of S corporations. This document also provides notice of a public hearing on these proposed regulations.

Written or electronic comments must be received by September 10, 2012. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for October 9, 2012, must be received by September 10, 2010.

Send submissions to: CC:PA:LPD:PR (REG-134042-07), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 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-134042-07), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-134042-07). The public hearing will be held in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the proposed regulations, Caroline E. Hay at (202) 622-3070; concerning the submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Oluwafunmilayo (Funmi) P. Taylor at (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The principal authors of these proposed regulations are Caroline E. Hay, Michael H. Beker, and Stacy L. Short, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

The following is a copy of the Competent Authority Agreement (“the Agreement”) entered into on May 21, 2012, by the Competent Authorities of the United States and the Netherlands regarding the eligibility of a besloten fonds voor gemene rekening (limited fund for mutual account) (“LFMA”) and its participants for treaty-reduced rates of withholding on U.S. source dividends and interest under the Convention between the Kingdom of the Netherlands and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on December 18, 1992, and amended by Protocols signed on October 13, 1993 and March 8, 2004.

The text of the Agreement is as follows:

The Competent Authorities of the Netherlands and the United States enter into the following agreement (the “Agreement”) to clarify the application of the Convention between the Kingdom of the Netherlands and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on December 18, 1992, and amended by Protocols signed on October 13, 1993 and March 8, 2004 (the “Treaty”) with respect to U.S. source dividends and interest paid to a besloten fonds voor gemene rekening (limited fund for mutual account) (“LFMA”). The Agreement is entered into under Article 29 (Mutual Agreement Procedure) of the Treaty.

A LFMA is a Dutch arrangement whereby participants in the LFMA agree to pool their capital to invest collectively in a variety of assets and to share in the proceeds of the investment. A LFMA is not a legal entity, but is an aggregate of the LFMA’s assets and obligations. Each participant in a LFMA is entitled to a pro rata share, based on the size of the investor’s interest in the LFMA, of the LFMA’s assets and any income generated by the LFMA’s assets. A participant’s interest in a LFMA is based on the amount of participations held by the participant. Participations are recorded in registered form and no certificates are issued. Each participation represents an equal interest in the net asset value of the LFMA.

Under Dutch law, a LFMA is treated as a fiscally transparent entity and the participants in the LFMA, wherever resident, are required to take into account separately, on a current basis, the participant’s respective share of an item of income paid to the LFMA, whether or not distributed to the participant. In addition, the character and source of the item of income in the hands of the participant are determined as if such item of income were realized directly from the source from which realized by the LFMA. Accordingly, participants in a LFMA are subject to tax on their proportionate share of the LFMA’s income in the same manner as if they had received the income or assets directly.

It is understood that a LFMA organized under Dutch law is not a “resident” of the Netherlands within the meaning of Article 4 (Resident) of the Treaty because it is not a person that is liable to tax in the Netherlands. Therefore, a LFMA is not eligible to claim benefits in its own right under the Treaty.

Paragraph 4 of Article 24 (Basis of Taxation) of the Treaty provides that:

Pursuant to Article 24(4), the Competent Authorities agree that U.S. source dividends and interest received by a LFMA will be treated as income derived by a resident of the Netherlands to the extent that such income is subject to tax as the income of a resident of the Netherlands. Thus, a person who is a resident of the Netherlands that derives dividends or interest Income through a LFMA may be entitled to treaty benefits if such person otherwise meets all applicable requirements under the Treaty.

Internal Revenue Service (IRS), Treasury.

Withdrawal of notice of proposed rulemaking.

This document withdraws a notice of proposed rulemaking relating to financial asset securitization trusts (FASITs). The FASIT provisions (sections 860H through 860L) of the Internal Revenue Code (Code) were repealed by Public Law 108-357, effective January 1, 2005, with a limited exception for existing FASITs.

Julanne Allen at (202) 622-3920 (not a toll-free number).

The Office of Professional Responsibility (OPR) announces recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the Internal Revenue Service (IRS), which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

The disciplinary sanctions to be imposed for violation of the regulations are:

Disbarred from practice before the IRS—An individual who is disbarred is not eligible to represent taxpayers before the IRS.

Suspended from practice before the IRS—An individual who is suspended is not eligible to represent taxpayers before the IRS during the term of the suspension.

Censured in practice before the IRS—Censure is a public reprimand. Unlike disbarment or suspension, censure does not affect an individual’s eligibility to represent taxpayers before the IRS, but OPR may subject the individual’s future representations to conditions designed to promote high standards of conduct.

Monetary penalty—A monetary penalty may be imposed on an individual who engages in conduct subject to sanction or on an employer, firm, or entity if the individual was acting on its behalf and if it knew, or reasonably should have known, of the individual’s conduct.

Disqualification of appraiser—An appraiser who is disqualified is barred from presenting evidence or testimony in any administrative proceeding before the Department of the Treasury or the IRS.

Under the regulations, attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents may not assist, or accept assistance from, individuals who are suspended or disbarred with respect to matters constituting practice (i.e., representation) before the IRS, and they may not aid or abet suspended or disbarred individuals to practice before the IRS.

Disciplinary sanctions are described in these terms:

Disbarred by decision after hearing, Suspended by decision after hearing, Censured by decision after hearing, Monetary penalty imposed after hearing, and Disqualified after hearing—An administrative law judge (ALJ) conducted an evidentiary hearing upon OPR’s complaint alleging violation of the regulations and issued a decision imposing one of these sanctions. After 30 days from the issuance of the decision, in the absence of an appeal, the ALJ’s decision became the final agency decision.

Disbarred by default decision, Suspended by default decision, Censured by default decision, Monetary penalty imposed by default decision, and Disqualified by default decision—An ALJ, after finding that no answer to OPR’s complaint had been filed, granted OPR’s motion for a default judgment and issued a decision imposing one of these sanctions.

Disbarment by decision on appeal, Suspended by decision on appeal, Censured by decision on appeal, Monetary penalty imposed by decision on appeal, and Disqualified by decision on appeal—The decision of the ALJ was appealed to the agency appeal authority, acting as the delegate of the Secretary of the Treasury, and the appeal authority issued a decision imposing one of these sanctions.

Disbarred by consent, Suspended by consent, Censured by consent, Monetary penalty imposed by consent, and Disqualified by consent—In lieu of a disciplinary proceeding being instituted or continued, an individual offered a consent to one of these sanctions and OPR accepted the offer. Typically, an offer of consent will provide for: suspension for an indefinite term; conditions that the individual must observe during the suspension; and the individual’s opportunity, after a stated number of months, to file with OPR a petition for reinstatement affirming compliance with the terms of the consent and affirming current eligibility to practice (i.e., an active professional license or active enrollment status). An enrolled agent or an enrolled retirement plan agent may also offer to resign in order to avoid a disciplinary proceeding.

Suspended by decision in expedited proceeding, Suspended by default decision in expedited proceeding, Suspended by consent in expedited proceeding—OPR instituted an expedited proceeding for suspension (based on certain limited grounds, including loss of a professional license and criminal convictions).

OPR has authority to disclose the grounds for disciplinary sanctions in these situations: (1) an ALJ or the Secretary’s delegate on appeal has issued a decision on or after September 26, 2007, which was the effective date of amendments to the regulations that permit making such decisions publicly available; (2) the individual has settled a disciplinary case by signing OPR’s “consent to sanction” form, which requires consenting individuals to admit to one or more violations of the regulations and to consent to the disclosure of the individual’s own return information related to the admitted violations (for example, failure to file Federal income tax returns); or (3) OPR has issued a decision in an expedited proceeding for suspension.

Announcements of disciplinary sanctions appear in the Internal Revenue Bulletin at the earliest practicable date. The sanctions announced below are alphabetized first by the names of states and second by the last names of individuals. Unless otherwise indicated, section numbers (e.g., § 10.51) refer to the regulations.