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 October 2011.

Telecommunications services under section 199. This ruling determines in certain situations whether a taxpayer providing telecommunications services is deriving gross receipts from services, leasing or renting property, or some combination thereof for purposes of the domestic production activities deduction under section 199 of the Code.

This notice provides for the suspension of certain requirements under section 42 of the Code for low-income housing credit projects in order to provide emergency housing relief needed as a result of the devastation caused by Tropical Storm Irene in Vermont beginning on August 27, 2011.

Extension of replacement period for livestock sold on account of drought. This notice explains the circumstances under which the 4-year replacement period under section 1033(e)(2) of the Code is extended for livestock sold on account of drought. The Appendix to this notice contains a list of the counties that experienced exceptional, extreme, or severe drought during the preceding 12-month period ending August 31, 2011. Taxpayers may use this list to determine if an extension is available.

The IRS has revoked its determination that Allied Veterans of the World, Inc., & Affiliates of Charlotte, NC; Metropolitan Financial Management Corporation of Roseville, MN; Saint Rest No. 2 Missionary Baptist Church of Chicago, IL; American Homebuyers Foundation, Inc., of Conyers, GA; Bundle of Joy Daycare, Inc., of Long Beach, CA; Columbia Basin Animal Rescue and Protection Agency of Kennewick, WA; Handicap Interests International and World Religions of Saranac Lake, NY; Holographic Ecology, Inc., of Santa Barbara, CA; Mattie's Maternity Homes of Palmdale, CA; Monytek Human Services, Inc., of Pendleton, OR; and Community Day Care Center of Abbeyville, LA, qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Code.

This announcement provides notice and details regarding the new Voluntary Classification Settlement Program (VCSP). The VCSP will allow eligible taxpayers to obtain similar relief to that obtained in the current Classification Settlement Program (CSP), which is only available to taxpayers under IRS examination. The VCSP is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. To participate, taxpayers must meet certain eligibility requirements, apply to participate in VCSP, and enter into a closing agreement with the IRS.

Final regulations under section 6404 of the Code relate to the suspension of interest, penalties, additions to tax, or additional amounts under section 6404(g). Notice 2007-93 obsoleted.

This notice provides relief to insurance companies administering certain self-insurance arrangements on behalf of an employer or other entity from any information reporting obligations under section 6050W of the Code. Insurance companies may rely on this notice until the regulations under section 6050W are amended.

In the situations described below, does a taxpayer that provides telecommunication services derive gross receipts from services to customers, leasing or renting property to customers, or some combination thereof for purposes of the domestic production activities deduction under § 199 of the Internal Revenue Code?

Situation 1. Z corporation is in the business of providing telecommunication services, including the transmission of voice, data, and video communications. Z contracts with A, a corporation that is not in the telecommunications industry, to transmit A’s telecommunications. A has multiple business locations. The contract requires Z to transmit A’s telecommunications at A’s desired times, to A’s desired destinations, and at a certain speed. If Z cannot transmit A’s telecommunications according to the terms of the contract, then the contract requires Z to provide A with a service credit. The contract requires A to make payments to Z for transmitting A’s telecommunications.

Z’s optical and digital transmission equipment, usually a Synchronous Optical Network (SONET) ring, and the associated Public Switched Telephone Network (PSTN) are used to transmit A’s telecommunications. Z’s SONET ring is deployed in a ring topology and interconnects multiple business locations designated by A so that telecommunications can be transmitted between A’s business locations without being transmitted to Z’s PSTN. The SONET ring also connects with Z’s central office, switching center, or remote terminal so that telecommunications can be transmitted to and from Z’s PSTN.

The PSTN is comprised primarily of fiber optic cable and copper cable that connects switching centers with each other and connects switching centers to remote terminals. The PSTN is owned by Z and is not dedicated to A or to any of Z’s other customers. Z’s PSTN provides a multitude of different pathways to transmit telecommunications to and from A’s business locations. The SONET ring and PSTN assets used to transmit A’s telecommunications include: (1) network electronics, such as multiplexers, switches, routers, digital cross connects, optical and digital transmission equipment; (2) fiber optic cable and/or copper cable; (3) network facilities such as a central office; and (4) software.

A owns some telecommunications equipment that connects with the SONET ring to allow transmission of A’s telecommunications between A’s business locations or to the PSTN, and transmission of others’ telecommunications to A from the PSTN. A’s telecommunications equipment is located solely on A’s side of the demarcation point (point of interconnection) as that term is used in 47 C.F.R. Part 68. A’s telecommunications equipment typically includes a router, a channel service unit/data service unit, and diagnostics modem (collectively the “customer premises equipment”). The contract does not require Z to provide any services related to A’s customer premises equipment.

Z owns, installs, operates, and maintains the SONET ring and PSTN. Z will replace any SONET ring and PSTN assets when repairs or upgrades are required. The contract requires that A grant Z reasonable access to A’s premises for the purpose of installing, inspecting, testing, rearranging, maintaining, repairing, or removing any of the SONET ring assets located on A’s premises. Z maintains and repairs the SONET ring and PSTN at no additional charge to A. A is prohibited from installing, inspecting, testing, rearranging, maintaining, repairing, or removing any component of the SONET ring and/or PSTN.

Situation 2. The facts and circumstances are the same as in Situation 1, except A does not have multiple business locations and Z’s dedicated circuit, instead of a SONET ring, is used to transmit A’s telecommunications to the PSTN and others’ telecommunications from the PSTN. All telecommunications transmitted to or from A must be transmitted using the PSTN. Z’s dedicated circuit, also referred to as the “local loop” or “last mile,” is comprised of Z’s equipment (copper or fiber optic cable, point of presence equipment, and dedicated or shared equipment).

Z generally does not notify A if Z repairs the dedicated circuit or PSTN. Z may notify A if Z upgrades the dedicated circuit or PSTN. A cannot stop Z from making any necessary repairs or upgrades to the dedicated circuit or PSTN.

Situation 3. The facts are the same as Situation 2 except that A does not own the customer premises equipment required to connect with the dedicated circuit to allow transmission of A’s telecommunications. As part of the contract for Z to transmit A’s telecommunications, Z also provides the customer premises equipment, and provides support services to A in relation to managing the customer premises equipment. The contract provides that it is a lease of the customer premises equipment to A, but does not separately state the lease amount.

Z delivers and installs the customer premises equipment on A’s premises. Z, if necessary, helps maintain the customer premises equipment by providing telephone support services to A’s designated employees related to diagnosing problems and repairing and replacing the customer premises equipment. Z can also remotely perform certain maintenance or diagnostic tasks. A’s designated employees complete any required repair or replacement. A is liable for any repair charges or the replacement cost of the customer premises equipment if it is damaged or lost. A can relocate or modify the customer premises equipment, and may attach it to non-Z equipment with Z’s written authorization, which may not be unreasonably withheld. When the contract terminates, if A does not return the customer premises equipment or make it available for removal by Z, then A is liable to Z for the customer premises equipment’s then current market value. A is liable for costs of any restoration of the customer premises equipment beyond ordinary wear and tear.

Section 199(a)(1) allows a deduction equal to 9 percent (3 percent in the case of taxable years beginning in 2005 or 2006, and 6 percent in the case of taxable years beginning in 2007, 2008, or 2009) of the lesser of (A) the qualified production activities income (QPAI) of the taxpayer for the taxable year, or (B) taxable income (determined without regard to § 199) for the taxable year (or, in the case of an individual, adjusted gross income).

Sections 199(b)(1) and (b)(2) limit the amount of the deduction allowable under § 199(a) to 50 percent of the W-2 wages of the taxpayer for the taxable year that are allocable to domestic production gross receipts (DPGR).

Section 199(c)(1) defines QPAI for any taxable year as an amount equal to the excess (if any) of (A) the taxpayer’s DPGR for such taxable year, over (B) the sum of (i) the cost of goods sold that are allocable to such receipts; and (ii) other expenses, losses, or deductions (other than the deduction under § 199) that are properly allocable to such receipts.

Section 199(c)(4)(A)(i)(I) provides that the term DPGR means the taxpayer’s gross receipts that are derived from any lease, rental, license, sale, exchange, or other disposition of qualifying production property that was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States.

Section 1.199-3(i)(1) of the Income Tax Regulations provides that applicable Federal income tax principles apply to determine whether a transaction is, in substance, a lease, rental, license, sale, exchange, or other disposition, whether it is a service, or whether it is some combination thereof. Section 1.199-3(i)(4)(i)(A) provides that gross receipts derived from the performance of services generally do not qualify as DPGR.

Section 1.199-3(i)(6)(ii) provides that gross receipts derived from customer and technical support, telephone and other telecommunication services, online services (such as Internet access services, online banking services, providing access to online electronic books, newspapers, and journals), and other similar services do not constitute gross receipts derived from a lease, rental, license, sale, exchange, or other disposition of computer software. Example 3 of § 1.199-3(i)(6)(v) concludes that gross receipts derived from telephone and related telecommunication services run by computer software produced by the taxpayer are attributable to a service and do not constitute gross receipts derived from a lease, rental, license, sale, exchange, or other disposition of computer software.

Rev. Rul. 68-109, 1968-1 C.B. 10, holds that switchboards or dial switching apparatus installed by the taxpayer, a regulated communications utility, at a customer location and used to furnish communications services to tax-exempt organizations or governmental units were eligible for the investment tax credit because the equipment installed was not owned or leased by the tax-exempt organizations or governmental units. The taxpayer retained all ownership in, and possession and control over, the equipment. The agreement entered into between the taxpayer and the customer was not a sale or lease but a service contract. The services furnished by the taxpayer and the manner in which they must be furnished were described in tariffs (which did not include provisions that authorized the taxpayer to sell or lease any of the property in question) on file with the Federal Communications Commission, and with the pertinent state public utility regulatory agencies.

Rev. Rul. 72-407, 1972-2 C.B. 10, holds that fully serviced vehicles that were furnished on a daily basis to a department of the United States Government were ineligible property for purposes of the investment tax credit because the vehicles were provided under a lease arrangement rather than a service contract. The ruling reasons that the provision of vehicles was more analogous to the facts under Rev. Rul. 71-397, 1971-2 C.B. 63 (in which an owner-manufacturer’s machines placed with and for the use of tax-exempt organizations and governmental units were not eligible for the investment tax credit because the manufacturer did not have possession and use of the machines), than to the facts under Rev. Rul. 68-109. The ruling reasons that, because the vehicles were not part of an integrated network and no government regulations prohibited a lease of the vehicles, provision of the vehicles was fundamentally different from the provision of communications services considered in Rev. Rul. 68-109. The vehicles were provided to the governmental unit by the taxpayer; however, the taxpayer did not use them to render services to the governmental unit. Instead, the placement of the vehicles with the governmental unit allowed the governmental unit to provide services to itself.

In addition, case law addresses whether a contract is a lease or a service contract. For example, in Xerox Corporation v. United States, 656 F.2d 659 (Ct. Cl. 1981), the court held that machines were eligible for the investment tax credit because the machines were not leased but supplied as an integral part of service. The court, after citing Rev. Rul. 68-109 and other rulings, focused the service-versus-lease analysis on the possessory interest a taxpayer retains in the property and whether the property is part of an integrated operation. The court described four factors to use when analyzing the possessory interest: (1) retention of property ownership by taxpayer (see Rev. Rul. 68-109); (2) retention of possession and control of the property by taxpayer (see Rev. Rul. 68-109 and Rev. Rul. 71-397); (3) retention of risk of loss by the taxpayer (see Rev. Rul. 68-109); and (4) reservation of the right to remove the property, and replace it with comparable property.

In Smith v. Commissioner, T.C. Memo. 1989-318, in determining whether the taxpayer was eligible for the investment tax credit, the court listed four factors for distinguishing leases from service contracts: (1) which party has the use and possession or control of the equipment; (2) which party operates the machine; (3) whether the tax-exempt organization pays for the use of the machine for some duration, or, instead pays based upon the number of procedures executed; and (4) whether the equipment is part of a broader, integrated system of equipment and services.

Applicable Federal income tax principles relevant to determining whether a taxpayer’s gross receipts are derived from providing telecommunication services or from a lease or rental of property include the factors described in § 7701(e)(1). Section 7701(e)(1) provides that for purposes of chapter 1, of which § 199 is a part, a contract that purports to be a service contract shall be treated as a lease of property if such contract is properly treated as a lease of property taking into account all relevant factors, including whether or not (A) the service recipient is in physical possession of the property, (B) the service recipient controls the property, (C) the service recipient has a significant economic or possessory interest in the property, (D) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract, (E) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and (F) the total contract price does not substantially exceed the rental value of the property for the contract period.

Although authorities on Federal income tax principles such as those summarized above demonstrate that Federal income tax principles are generally used to determine a single character for a given transaction, § 1.199-3(i)(1) provides that, solely for purposes of § 199, a single transaction may, depending on applicable Federal income tax principles, have both a services element and a lease element. Accordingly, the application of Federal income tax principles described in § 1.199-3(i)(1) requires an analysis of relevant factors taken from Federal income tax principles, but does not require a determination of a single character. However, analysis of the relevant factors may lead to a determination that the transaction has only a single character element for purposes of § 199.

In Situation 1, under the applicable Federal income tax principles described above, Z is using its SONET ring and PSTN to provide telecommunication services to A, not providing a combination of telecommunication services with a lease or rental of Z’s SONET ring or PSTN to A. Although a determination for § 199 purposes that a transaction constitutes exclusively the provision of services requires thorough consideration of all relevant facts and circumstances, several significant factors in Situation 1 support this conclusion.

For instance, Z maintains control of the SONET ring and PSTN that are necessary for Z to fulfill the conditions of its contract with A. To fulfill the contract terms, Z must transmit A’s telecommunications at A’s desired times, to A’s desired destinations, and at a certain speed. A contracts with Z for the quantity and quality of telecommunication services, but does not control how Z uses the SONET ring and PSTN to provide the services.

Further, A does not have a possessory interest in the SONET ring and PSTN that Z uses to complete the transmissions. Z must operate the SONET ring and PSTN because, if A makes the payments due under the contract to Z, Z is required to transmit A’s telecommunications. A does not operate, maintain, repair or upgrade the SONET ring and PSTN. A grants Z reasonable access to A’s premises for the purpose of installing, inspecting, testing, rearranging, maintaining, repairing, or removing any of the SONET ring assets located on A’s premises. Z operates, maintains, repairs, and upgrades the SONET ring and PSTN at no additional charge to A. A is prohibited from installing, inspecting, testing, rearranging, maintaining, repairing, or removing any component of the SONET ring or PSTN. Z is the party with a possessory interest in the SONET ring and PSTN. Z must be able to operate the SONET ring and PSTN because, if Z cannot transmit A’s telecommunications according to the terms of the contract (i.e., A’s desired times, destinations, and speed), then Z is required to provide a service credit.

In addition, the SONET ring and PSTN are part of Z’s broader integrated operation of transmitting telecommunications. While the SONET ring allows Z to transmit A’s telecommunications between A’s designated business locations without accessing Z’s PSTN, the SONET ring also connects with Z’s central office, switching center, or remote terminal so that telecommunications can be transmitted to and from Z’s PSTN. The PSTN is owned by Z and is not dedicated to A or to any of Z’s other customers. The PSTN provides a multitude of different pathways to transmit telecommunications to and from A’s business locations.

In this situation, A contracts with Z for reliable telecommunication services and Z provides those services using its SONET ring and PSTN subject to the contract terms governing the quantity and quality of services that Z must provide. Accordingly, Z’s gross receipts derived from transmitting A’s telecommunications are derived from the performance of services without the lease or rental of Z’s SONET ring and PSTN to A for purposes of § 199.

In Situation 2, under the applicable Federal income tax principles described above, Z is using the dedicated circuit and PSTN to provide telecommunication services to A, not providing a combination of telecommunication services with a lease or rental of Z’s dedicated circuit or PSTN to A. Although a determination for § 199 purposes that a transaction constitutes exclusively the provision of services requires thorough consideration of all relevant facts and circumstances, several significant factors in Situation 2 support this conclusion.

For instance, A does not control the dedicated circuit or PSTN as Z maintains the same control as Z has over the SONET ring and PSTN in Situation 1. Further, A does not have a possessory interest in the dedicated circuit and PSTN that Z uses to complete the transmissions. Z, in fact, has broader access to a dedicated circuit than a SONET ring. Also, the dedicated circuit is part of Z’s broader integrated operation. The dedicated circuit must connect with Z’s PSTN to transmit telecommunications to and from A’s business location.

In this situation A contracts with Z for reliable telecommunication services and Z provides those services using its dedicated circuit and PSTN subject to the contract terms governing the quantity and quality of services that Z must provide. Accordingly, Z’s gross receipts derived from transmitting A’s telecommunications are derived from the performance of services without the lease or rental of Z’s dedicated circuit or PSTN to A for purposes of § 199.

In Situation 3, under the applicable Federal income tax principles described above, Z is providing a combination of telecommunication services using its dedicated circuit and PSTN and a lease or rental of Z’s customer premises equipment to A. Although a determination for § 199 purposes that a transaction constitutes a combination of services and a lease or rental requires thorough consideration of all relevant facts and circumstances, several significant factors in Situation 3 support this conclusion.

With respect to the dedicated circuit and PSTN, the same analysis applies to Situation 3 as applied in Situation 2. In this situation, A’s contract with Z also includes the provision of customer premises equipment. The customer premises equipment is necessary to allow A to connect with the dedicated circuit so that Z can transmit telecommunications to and from A’s business location.

A controls the customer premises equipment in generally the same manner as in Situation 2 where A owns the customer premises equipment. However, in this case, Z owns, provides necessary telephone support services for, and can perform certain remote maintenance and diagnostic tasks on the customer premises equipment. Nevertheless, A has a possessory interest in the customer premises equipment. Z must operate the dedicated circuit and PSTN, but just as in Situation 2, A operates the customer premises equipment. A designates employees to perform equipment replacement and repair of the customer premises equipment. Z provides telephone assistance, but only if necessary. A can relocate or modify the customer premises equipment, and may attach it to non-Z equipment with Z’s written authorization, which may not be unreasonably withheld. A is liable for any repair charges or the replacement cost of the equipment if it is damaged or lost. When the contract terminates, if A does not return the customer premises equipment or make it available for removal by Z, then A is liable to Z for the customer premises equipment’s then current market value. If A does return it and the customer premises equipment has more than ordinary wear and tear, then A is liable for those restoration costs. The facts demonstrate in this situation that A has a possessory interest in the customer premises equipment.

Because A is ultimately the party responsible for ensuring that the customer premises equipment is available to connect with the dedicated circuit to allow Z to transmit telecommunications to and from A’s business location using Z’s dedicated circuit and PSTN, the customer premises equipment should not be considered part of Z’s broader integrated network.

In this situation A contracts with Z for reliable telecommunication services and Z provides those services using its dedicated circuit and PSTN subject to the contract terms governing the quantity and quality of services that Z must provide, but A also contracts for the lease or rental of customer premises equipment. Accordingly, Z’s gross receipts derived from transmitting A’s telecommunications are derived from a combination of services using its dedicated circuit and PSTN and a lease or rental of the customer premises equipment to A.

The terms “lease” and “rent” are used interchangeably throughout the Code, and for purposes of this analysis a distinction is unnecessary. The characterization of a transaction as a combination of services and a lease as opposed to a combination of services and a rental has no effect under § 199.

In Situation 1, Z’s gross receipts are derived from the performance of telecommunication services without the lease or rental of Z’s SONET ring and PSTN to A for purposes of § 199 and do not constitute DPGR.

In Situation 2, Z’s gross receipts are derived from the performance of telecommunication services without the lease or rental of Z’s dedicated circuit and PSTN to A for purposes of § 199 and do not constitute DPGR.

In Situation 3, Z’s gross receipts are derived from a combination of the performance of telecommunication services using its dedicated circuit and PSTN and a lease or rental of the customer premises equipment described above to A for purposes of § 199. Z’s gross receipts derived from the performance of services do not constitute DPGR and Z’s gross receipts derived from the lease or rental of the customer premises equipment only qualify as DPGR if Z meets the other requirements of § 199 with respect to the customer premises equipment.

The principal author of this revenue ruling is James A. Holmes of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Mr. Holmes at (202) 622-3040 (not a toll-free call).

This revenue ruling provides various prescribed rates for federal income tax purposes for October 2011 (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%. 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.

Internal Revenue Service (IRS), Treasury.

Final regulations and removal of temporary regulations.

This document contains final regulations regarding the suspension of interest, penalties, additions to tax, or additional amounts under section 6404(g) of the Internal Revenue Code. The final regulations explain the general rules for suspension and exceptions to those general rules, and incorporate a special rule from Notice 2007-93, 2007-2 C.B. 1072, regarding the effective date of the changes to section 6404(g) made by the Small Business and Work Opportunity Tax Act of 2007. The final regulations affect taxpayers who file timely individual income tax returns and who fail to receive notification from the IRS of additional tax liability within the time period prescribed by section 6404(g).

Effective Date: These regulations are effective on August 22, 2011.

Applicability Date: Section 301.6404-4(a)(5) applies to notices under section 6404(g)(1)(A) that are provided by the IRS on or after November 26, 2007, and that relate to individual Federal income tax returns that were timely filed before that date.

Nathan Rosen, (202) 622-3630 (not a toll-free number).

Accordingly, 26 CFR part 301 is amended as follows:

The principal author of these regulations is Nathan Rosen of the Office of Associate Chief Counsel (Procedure and Administration).

* * * * *

The Internal Revenue Service is suspending certain requirements under § 42 of the Internal Revenue Code for low-income housing credit projects to provide emergency housing relief needed as a result of the devastation caused by Tropical Storm Irene in Vermont beginning on August 27, 2011. This relief is being granted pursuant to the Service’s authority under § 42(n) and § 1.42-13(a) of the Income Tax Regulations.

On September 1, 2011, the President declared a major disaster for the State of Vermont. This declaration was made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq. Subsequently, the Federal Emergency Management Agency (FEMA) designated jurisdictions for Individual Assistance. The State of Vermont has requested that the Service allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who resided in jurisdictions designated for Individual Assistance in Vermont and who have been displaced because their residences were destroyed or damaged as a result of the devastation caused by Tropical Storm Irene. Based upon this request and because of the widespread damage to housing caused by Tropical Storm Irene, the Service has determined that the Vermont Housing Finance Agency (Agency) may provide approval to project owners to provide temporary emergency housing for displaced individuals in accordance with this notice.

The Service has determined that it is appropriate to temporarily suspend certain income limitation requirements under § 42 for certain qualified low-income projects. The suspension will apply to low-income housing projects approved by the Agency, in which vacant units are rented to displaced individuals. The Agency will determine the appropriate period of temporary housing for each project, not to extend beyond September 30, 2012 (temporary housing period).

The non-transient use requirement of § 42(i)(3)(B)(i) shall not apply to any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Agency in accordance with section I of this notice.

All other rules and requirements of § 42 will continue to apply during the temporary housing period established by the Agency. After the end of the temporary housing period, the applicable income limitations contained in § 42(g)(1), the available unit rule under § 42(g)(2)(D)(ii), the nontransient requirement of § 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals shall resume. If a project owner offers to rent a unit to a displaced individual after the end of the temporary housing period, the displaced individual must be certified under the requirements of § 42(i)(3)(A)(ii) and § 1.42-5(b) and (c) to be a qualified low-income tenant. To qualify for the relief in this notice, the project owner must additionally meet all of the following requirements:

This notice is effective September 1, 2011 (the date of the President’s major disaster declaration as a result of the devastation caused by Tropical Storm Irene in Vermont beginning on August 27, 2011).

The collection of information contained in this notice 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 1545-2217.

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 collection of information in this notice is in the section titled “OTHER REQUIREMENTS” under “(3) Certifications and Recordkeeping.” This information is required to enable the Service to verify whether individuals are displaced as a result of the devastation caused by Tropical Storm Irene in Vermont beginning on August 27, 2011, and thus warrant temporary housing in vacant low-income housing units. The collection of information is required to obtain a benefit. The likely respondents are individuals and businesses.

The estimated total annual recordkeeping burden is 150 hours.

The estimated annual burden per recordkeeper is approximately 15 minutes. The estimated number of recordkeepers is 600.

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

The principal author of this notice is David Selig of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Mr. Selig at (202) 622-3040 (not a toll-free call).

Section 6050W of the Internal Revenue Code requires information returns to be made for each calendar year by merchant acquiring entities and third party settlement organizations with respect to payments made in settlement of payment card transactions and third party network transactions occurring in that calendar year. The requirement to make information returns applies to returns for calendar years beginning after December 31, 2010.

In August 2010, the Treasury Department and the Internal Revenue Service published final regulations providing guidance to assist persons required to report payment card and third party network transactions to payees of those transactions. T.D. 9496, 2010-43 I.R.B. 484, 75 F.R. 49821 (August 16, 2010). Under the final regulations, a healthcare network generally is outside the scope of section 6050W because a healthcare network does not enable the transfer of funds from buyers to sellers. §1.6050W-1(e) (Example 17). The preamble to the final regulations acknowledges a comment to the effect that a self-insurance arrangement likewise should be treated as outside the scope of section 6050W. 75 F.R. at 49823; 2010-43 I.R.B. at 486. Although the final regulations do not address this issue directly, the preamble states that the suggestion was not adopted “because this arrangement could create a third party payment network of which the health insurance entity is the third party settlement organization to the extent that the health insurance entity effectively enables buyers (the self-insuring companies) to transfer funds to sellers of healthcare goods or services.”

Upon further consideration, the Treasury Department and the Internal Revenue Service have decided to amend the existing regulations under section 6050W to expressly provide that an insurance company or an affiliate administering a self-insured arrangement on behalf of an employer or other entity on a cost-plus basis, or under an Administrative Services Only (ASO) plan or an Administrative Services Contract (ASC) plan, will not be treated as a third party settlement organization. Insurance companies and their affiliates may rely on the interim guidance provided in this notice until the regulations are amended.

Before amending the existing regulations, the Treasury Department and the Internal Revenue Service invite comments from the public regarding the contents of this notice. Comments should be submitted by November 3, 2011 to:

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:

Alternatively, persons may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov. Persons should include “Notice 2011-78” in the subject line. All comments submitted by the public will be available for public inspection and copying in their entirety.

The principal author of this notice is Girish Prasad of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice, contact Mr. Prasad at (202) 622-4910 (not a toll-free call).

This notice provides guidance regarding an extension of the replacement period under § 1033(e) of the Internal Revenue Code for livestock sold on account of drought in specified counties.

.01 Nonrecognition of Gain on Involuntary Conversion of Livestock. Section 1033(a) generally provides for nonrecognition of gain when property is involuntarily converted and replaced with property that is similar or related in service or use. Section 1033(e)(1) provides that a sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number that would be sold following the taxpayer’s usual business practices is treated as an involuntary conversion if the livestock is sold or exchanged solely on account of drought, flood, or other weather-related conditions.

.02 Replacement Period. Section 1033(a)(2)(A) generally provides that gain from an involuntary conversion is recognized only to the extent the amount realized on the conversion exceeds the cost of replacement property purchased during the replacement period. If a sale or exchange of livestock is treated as an involuntary conversion under § 1033(e)(1) and is solely on account of drought, flood, or other weather-related conditions that result in the area being designated as eligible for assistance by the federal government, § 1033(e)(2)(A) provides that the replacement period ends four years after the close of the first taxable year in which any part of the gain from the conversion is realized. Section 1033(e)(2)(B) provides that the Secretary may extend this replacement period on a regional basis for such additional time as the Secretary determines appropriate if the weather-related conditions that resulted in the area being designated as eligible for assistance by the federal government continue for more than three years. Section 1033(e)(2) is effective for any taxable year with respect to which the due date (without regard to extensions) for a taxpayer’s return is after December 31, 2002.

Notice 2006-82, 2006-2 C.B. 529, provides for extensions of the replacement period under § 1033(e)(2)(B). If a sale or exchange of livestock is treated as an involuntary conversion on account of drought and the taxpayer’s replacement period is determined under § 1033(e)(2)(A), the replacement period will be extended under § 1033(e)(2)(B) and Notice 2006-82 until the end of the taxpayer’s first taxable year ending after the first drought-free year for the applicable region. For this purpose, the first drought-free year for the applicable region is the first 12-month period that (1) ends August 31; (2) ends in or after the last year of the taxpayer’s 4-year replacement period determined under § 1033(e)(2)(A); and (3) does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region. The applicable region is the county that experienced the drought conditions on account of which the livestock was sold or exchanged and all counties that are contiguous to that county.

A taxpayer may determine whether exceptional, extreme, or severe drought is reported for any location in the applicable region by reference to U.S. Drought Monitor maps that are produced on a weekly basis by the National Drought Mitigation Center. U.S. Drought Monitor maps are archived at www.drought.unl.edu/dm/archive.html.

In addition, Notice 2006-82 provides that the Internal Revenue Service will publish in September of each year a list of counties, districts, cities, or parishes (hereinafter “counties”) for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxpayers may use this list instead of U.S. Drought Monitor maps to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region.

The Appendix to this notice contains the list of counties for which exceptional, extreme, or severe drought was reported during the 12-month period ending August 31, 2011. Under Notice 2006-82, the 12-month period ending on August 31, 2011, is not a drought-free year for an applicable region that includes any county on this list. Accordingly, for a taxpayer who qualified for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2011 (or, in the case of a fiscal year taxpayer, at the end of the taxable year that includes August 31, 2011), the replacement period will be extended under § 1033(e)(2) and Notice 2006-82 if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer’s first taxable year ending after a drought-free year for the applicable region.

The principal author of this notice is Sue-Jean Kim of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Ms. Kim at (202) 622-4960 (not a toll-free call).

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 October 11, 2011, 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.

The Internal Revenue Service (IRS) has developed a new program to permit taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. The Voluntary Classification Settlement Program (VCSP) allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes and obtain relief similar to that obtained in the current Classification Settlement Program (CSP). The VCSP is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. To participate in the program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP, and enter into a closing agreement with the IRS.

Whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances and is generally determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some factual situations, the determination of the proper worker classification status under the common law may not be clear. For taxpayers under IRS examination, the current CSP is available to resolve federal employment tax issues related to worker misclassification, if certain criteria are met. The examination CSP permits the prospective reclassification of workers as employees, with reduced federal employment tax liabilities for past nonemployee treatment. The CSP allows business and tax examiners to resolve the worker classification issues as early in the administrative process as possible, thereby reducing taxpayer burden and providing efficiencies for both the taxpayer and the government.

In order to facilitate voluntary resolution of worker classification issues and achieve the resulting benefits of increased tax compliance and certainty for taxpayers, workers and the government, the IRS has determined that it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes.

The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers for the previous three years. The taxpayer cannot currently be under audit by the IRS. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.

A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509 of the Internal Revenue Code; will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. Additionally, a taxpayer participating in the VCSP will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

Eligible taxpayers who wish to participate in the VCSP must submit an application for participation in the program. Information about the VCSP and the application will be available on www.irs.gov. Along with the application, the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848) should be provided. The IRS will contact the taxpayer or authorized representative to complete the process once it has reviewed the application and verified the taxpayer’s eligibility. The IRS retains discretion whether to accept a taxpayer’s application for the VCSP. Taxpayers whose application has been accepted will enter into a closing agreement with the IRS to finalize the terms of the VCSP and will simultaneously make full and complete payment of any amount due under the closing agreement.

The principal author of this announcement is Joseph Perera of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Joseph Perera at 202-622-6040 (not a toll-free call).