* * * * *

(g)* * *

(2)* * *

(v)* * *

(B)* * *

(2) [Reserved]. For further guidance, see §1.482-7T(g)(2)(v)(B)(2).

* * * * *

(4) * * *

(vi) * * *

(F) * * *

(2) [Reserved]. For further guidance, see §1.482-7T(g)(4)(vi)(F)(2).

* * * * *

(viii) * * *

Example 8. [Reserved]. For further guidance, see §1.482-7T(g)(4)(viii), Example 8.

* * * * *

Par. 3. Section 1.482-7T is added to read as follows:

(a) through (g)(2)(v)(B)(1) [Reserved]. For further guidance, see §1.482-7(a) through (g)(2)(v)(B)(1).

(2) Implied discount rates. In some circumstances, the particular discount rate or rates used for certain activities or transactions logically imply that certain other activities will have a particular discount rate or set of rates (implied discount rates). To the extent that an implied discount rate is inappropriate in light of the facts and circumstances, which may include reliable direct evidence of the appropriate discount rate applicable for such other activities, the reliability of any method is reduced where such method is based on the discount rates from which such an inappropriate implied discount rate is derived. See paragraphs (g)(4)(vi)(F)(2) and (g)(4)(viii), Example 8 of this section.

(g)(2)(v)(B)(3) through (g)(4)(vi)(F)(1) [Reserved]. For further guidance, see §1.482-7(g)(2)(v)(B)(3) through (g)(4)(vi)(F)(1).

(2) Use of differential income stream as a consideration in assessing the best method. An analysis under the income method that uses a different discount rate for the cost sharing alternative than for the licensing alternative will be more reliable the greater the extent to which the implied discount rate for the projected present value of the differential income stream is consistent with reliable direct evidence of the appropriate discount rate applicable for activities reasonably anticipated to generate an income stream with a similar risk profile to the differential income stream. Such differential income stream is defined as the stream of the reasonably anticipated residuals of the PCT Payor’s licensing payments to be made under the licensing alternative, minus the PCT Payor’s cost contributions to be made under the cost sharing alternative. See, for example, Example 8 of this paragraph (g)(4)(viii).

(g)(4)(vii) through (viii) (Example 7) [Reserved]. For further guidance, see §1.482-7(g)(4)(vii) through (g)(4)(viii) (Example 7).

(viii) Example 8. (i) The facts are the same as in Example 1, except that the taxpayer determines that the appropriate discount rate for the cost sharing alternative is 20%. In addition, the taxpayer determines that the appropriate discount rate for the licensing alternative is 10%. Accordingly, the taxpayer determines that the appropriate present value of the PCT Payment is $146 million.

(ii) Based on the best method analysis described in Example 2, the Commissioner determines that the taxpayer’s calculation of the present value of the PCT Payments is outside of the interquartile range (as shown in the sixth column of Example 2), and thus warrants an adjustment. Furthermore, in evaluating the taxpayer’s analysis, the Commissioner undertakes an analysis based on the difference in the financial projections between the cost sharing and licensing alternatives (as shown in column 11 of Example 1). This column shows the anticipated differential income stream of additional positive or negative income for FS over the duration of the CSA Activity that would result from undertaking the cost sharing alternative (before any PCT Payments) rather than the licensing alternative. This anticipated differential income stream thus reflects the anticipated incremental undiscounted profits to FS from the incremental activity of undertaking the risk of developing the cost shared intangibles and enjoying the value of its divisional interests. Taxpayer’s analysis logically implies that the present value of this stream must be $146 million, since only then would FS have the same anticipated value in both the cost sharing and licensing alternatives. A present value of $146 million implies that the discount rate applicable to this stream is 34.4%. Based on a reliable calculation of discount rates applicable to the anticipated income streams of uncontrolled companies whose resources, capabilities, and rights consist primarily of software applications intangibles and research and development teams similar to USP’s platform contributions to the CSA, and which income streams, accordingly, may be reasonably anticipated to reflect a similar risk profile to the differential income stream, the Commissioner concludes that an appropriate discount rate for the anticipated income stream associated with USP’s platform contributions (that is, the additional positive or negative income over the duration of the CSA Activity that would result, before PCT Payments, from switching from the licensing alternative to the cost sharing alternative) is 16%, which is significantly less than 34.4%. This conclusion further suggests that Taxpayer’s analysis is unreliable. See paragraphs (g)(2)(v)(B)(2) and (4)(vi)(F)(1) and (2) of this section.

(iii) The Commissioner makes an adjustment of $296 million, so that the present value of the PCT Payments is $442 million (the median results as shown in column 6 of Example 2).

(g)(5) through (k) [Reserved]. For further guidance, see §1.482-7(g)(5) through (k).

(l) Effective/Applicability Date. Treas. Reg. §1.482-7T(g)(2)(v)(B)(2), (g)(4)(vi)(F)(2) and (g)(4)(viii), Example 8 apply to taxable years beginning on or after December 19, 2011.

(m) [Reserved]. For further guidance, see §1.482-7(m).

(n) Expiration date. The applicability of this section expires on December 19, 2014.

Approved December 8, 2011.

Section 1.861-9T(e) provides rules governing the apportionment of interest expense by a partner in a partnership. In general, §1.861-9T(e) adopts an aggregate, or look-through, approach to apportioning a partner’s distributive share of interest expense incurred by the partnership. Section 1.861-9T(e)(1) provides the general rule that a partner’s distributive share of the interest expense of a partnership is considered related to all income-producing activities and assets of the partner. Similarly, §1.861-9T(e)(2) requires that a corporate partner whose direct or indirect interest in the partnership is 10 percent or more apportion its distributive share of partnership interest expense by reference to the partner’s assets, including the partner’s pro rata share of the partnership’s assets.

By contrast, limited partners (whether individual or corporate) and corporate general partners with a less-than-10-percent partnership interest are excepted from aggregate treatment. Under §1.861-9T(e)(4)(i), such partners must directly allocate their distributive share of partnership interest expense to their distributive share of partnership gross income. In addition, for purposes of allocating other interest expense incurred directly by such a partner, §1.861-9T(e)(4)(ii) provides that the relevant asset is the partner’s interest in the partnership, and not the partner’s share of the partnership assets. This approach for such minority partners avoids the potential administrative burden that an aggregate approach would impose on such minority partners.

These temporary regulations revise §1.861-9T(e)(2) to clarify that a corporate partner with a 10 percent or greater interest in a partnership must allocate its direct interest expense to all of its assets, including its proportionate share of partnership assets. The IRS and the Treasury Department believe that an aggregate approach for corporate partners with a 10 percent or greater interest in the partnership is appropriate and consistent with the aggregate approach applicable to apportioning such partner’s distributive share of interest expense incurred by the partnership.

These temporary regulations also revise §1.861-9T(e)(2) to provide that when a corporate partner with a 10 percent or greater interest in a partnership uses the tax book value or alternative tax book value method, and therefore must use the partnership’s inside basis in its assets when allocating interest expense, the partnership’s inside basis includes any section 734(b) adjustments and any section 743(b) adjustments of the corporate partner for this purpose. Section 1.861-9T(e)(3) is also revised to provide a similar rule for individual partners who are general partners or limited partners with a 10 percent or greater interest in the partnership.

Section 864(e)(2) requires that the allocation and apportionment of interest expense be made on the basis of assets and not gross income (the asset method). Under the asset method, interest expense is apportioned between (or among) statutory and residual groupings of gross income in proportion to the average total values of assets within each such grouping for the taxable year. For this purpose, taxpayers may elect to value assets based on their fair market value (the FMV method), tax book value, or alternative tax book value. §§1.861-8T(c)(2) and 1.861-9(i).

The temporary regulations set forth a multi-step methodology for determining the fair market value of a taxpayer’s assets. Section 1.861-9T(h)(1) provides rules for determining the fair market value of the taxpayer’s intangible assets. First, the taxpayer determines the aggregate value of assets that it and its subsidiaries own (Step 1); second, the taxpayer values its tangible assets, excluding any stock or indebtedness in a related person (Step 2); and third, it subtracts the amount determined in Step 2 from the amount determined in Step 1 to arrive at total intangible asset value (Step 3). The intangible assets owned by the taxpayer are then apportioned among the taxpayer’s affiliates under §1.861-9T(h)(2) on the basis of net income (Step 4).

Once a taxpayer has determined the fair market value of its intangible assets, those assets must be characterized as provided in §1.861-9T(h)(3) (Step 5). Finally, the rules of §1.861-9T(h)(4) apply to determine the value of stock in a related person held by the taxpayer (or by another person related to the taxpayer) (Step 6). Under those rules, §1.861-9T(h)(4) states that the value of such stock is equal to the sum of the following amounts, less the taxpayer’s pro rata share of liabilities of such related person: (i) the intangible assets apportioned to the related person in Step 4, above; (ii) the tangible assets (as determined in Step 2) held by the related person; and (iii) the total value of stock held in all other related persons held by the related person.

The IRS and the Treasury Department have become aware that certain taxpayers are taking the position that the language of Step 2 of the FMV method, which requires related party debt to be excluded as an asset as part of the process for determining total intangible asset value, means that such debt also is not treated as an asset in the hands of the taxpayer for the broader purpose of applying the asset method. In addition, for purposes of valuing the stock in related persons under Step 6, some taxpayers are taking the position that those rules exclude related party debt as an asset (because of the reference in §1.861-9T(h)(4) to §1.861-9T(h)(1)(ii)), but permit reduction of the value of the stock of the related person obligor by the amount of the related party debt as a liability (because the language of §1.861-9T(h)(4)(ii) does not limit the reduction for liabilities to unrelated party liabilities).

The IRS and the Treasury Department believe that interpreting the regulations to require that the related party debt be taken into account as a liability for purposes of valuing stock in the related person without also treating the related party debt as an asset in the creditor’s hands distorts the relative values of assets assigned to each statutory grouping. This result is contrary to the general principles of the §1.861-9 regulations, which are based on the concept that interest expense must be apportioned on the basis of the value of all assets. Accordingly, these temporary regulations amend §1.861-9T(h)(4) to reflect the fact that related party debt is an asset that must be taken into account whether held by the taxpayer or a related person.

These temporary regulations first revise §1.861-9T(h)(4) by adding a new paragraph §1.861-9T(h)(4)(i) to provide for the valuation of related party debt. Prior to its revision by these temporary regulations, §1.861-9T(h)(4) provided for the valuation of the stock of a related person, but the regulations did not provide any explanation of how the related party debt is to be valued. As revised by these temporary regulations, §1.861-9T(h)(4)(i) provides that a related party debt obligation held by a taxpayer or another person related to the taxpayer has a value equal to the amount of the liability of the obligor related person. These temporary regulations also revise §1.861-9T(h)(4) by providing that the value of stock in a related person includes the taxpayer’s pro rata share of related party debt held by the related person. Finally, these temporary regulations provide a new example illustrating the changes made to §1.861-9T(h)(4).

These amendments make clear that related party debt is an asset in the hands of the creditor for purposes of applying the asset method and is included in the valuation of stock of a related person. Very broadly, these changes ensure that both the receivable and the payable sides of related party debt are included for valuation purposes under the FMV method, and that the value of each side is determined in a consistent manner. No inference is intended regarding the interpretation of prior regulations as a result of these modifications.

The interest expense of each member of an affiliated group is allocated and apportioned as if all members of such group were a single corporation. Section 864(e)(1). Prior to its amendment by the EJMAA, section 864(e)(5)(A) defined the term “affiliated group” by reference to the rules under section 1504 for determining whether corporations are eligible to file consolidated returns. The section 1504 rules generally exclude foreign corporations from an affiliated group. Section 1.861-11T(d)(6)(ii) provides that certain foreign corporations are nevertheless treated as affiliated corporations for purposes of allocating and apportioning interest expense if (1) at least 80 percent of either the vote or value of the corporation’s outstanding stock is owned directly or indirectly by members of an affiliated group, and (2) more than 50 percent of the corporation’s gross income for the taxable year is effectively connected with the conduct of a trade or business in the United States (effectively connected income).

In the case of a foreign corporation that is treated as an affiliated corporation for interest allocation and apportionment purposes, §1.861-11T(d)(6)(ii) provides that the percentage of assets and income that is taken into account for purposes of applying the affiliated group interest apportionment rules depends on the percentage of the corporation’s gross income that is effectively connected income. If 80 percent or more of the foreign corporation’s gross income is effectively connected income, then all of the corporation’s assets and interest expense are taken into account. If, instead, between 50 percent and 80 percent of the foreign corporation’s gross income is effectively connected income, then only the corporation’s assets that generate effectively connected income and a percentage of its interest expense equal to the percentage of its assets that generate effectively connected income are taken into account.

Section 864(e)(5)(A), as amended by the EJMAA, provides that a foreign corporation will be treated as a member of an affiliated group for interest allocation and apportionment purposes if (1) more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected income, and (2) at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group. In such event, all of the qualifying foreign corporation’s assets and interest expense are taken into account for purposes of applying the affiliated group interest apportionment rules. These temporary regulations revise §1.861-11T(d)(6) to reflect these statutory changes.

* * * * *

(e) * * *

(2) Corporate partners whose interest in the partnership is 10 percent or more. A corporate partner shall apportion its interest expense (including the partner’s distributive share of partnership interest expense) by reference to the partner’s assets, including the partner’s pro rata share of partnership assets, under the rules of paragraph (f) of this section if the corporate partner’s direct and indirect interest in the partnership (as determined under the attribution rules of section 318) is 10 percent or more. A corporation using the tax book value method or alternative tax book value method of apportionment shall use the partnership’s inside basis in its assets, including adjustments under sections 734(b) and 743(b), if any, and adjusted to the extent required under §1.861-10T(d)(2). * * *

(3) Individual partners who are general partners or who are limited partners with an interest in the partnership of 10 percent or more. * * * An individual using the tax book value or alternative tax book value method of apportionment shall use the partnership’s inside basis in its assets, including adjustments under sections 734(b) and 743(b), if any, and adjusted to the extent required under §1.861-10T(d)(2). * * *

* * * * *

(h) * * *

(4) Valuing related party debt and stock in related persons — (i) Related party debt. For purposes of this section, the value of a debt obligation of a related person held by the taxpayer or another person related to the taxpayer equals the amount of the liability of the obligor related person.

(ii) Stock in related persons. The value of stock in a related person held by the taxpayer or by another person related to the taxpayer equals the sum of the following amounts reduced by the taxpayer’s pro rata share of liabilities of such related person:

(A) The portion of the value of intangible assets of the taxpayer and related persons that is apportioned to such related person under paragraph (h)(2) of this section;

(B) The taxpayer’s pro rata share of tangible assets held by the related person (as determined under paragraph (h)(1)(ii) of this section);

(C) The taxpayer’s pro rata share of debt obligations of any related person held by the related person (as valued under paragraph (h)(4)(i) of this section); and

(D) The total value of stock in all related persons held by the related person as determined under this paragraph (h)(4).

(iii) Example. (A) Facts. USP, a domestic corporation, wholly owns CFC1 and owns 80% of CFC2, both foreign corporations. The aggregate trading value of USP’s stock traded on established securities markets at the end of Year 1 is $700 and the amount of USP’s liabilities to unrelated persons at the end of Year 1 is $400. Neither CFC1 nor CFC2 has liabilities to unrelated persons at the end of Year 1. USP owns plant and equipment valued at $500, CFC1 owns plant and equipment valued at $400, and CFC2 owns plant and equipment valued at $250. The value of these assets has been determined using generally accepted valuation techniques, as required by §1.861-9T(h)(1)(ii). There is an outstanding loan from CFC2 to CFC1 in an amount of $100. There is also an outstanding loan from USP to CFC1 in an amount of $200.

(B) Valuation of group assets. Pursuant to §1.861-9T(h)(1)(i), the aggregate value of USP’s assets is $1100 (the $700 trading value of USP’s stock increased by $400 of USP’s liabilities to unrelated persons).

(C) Valuation of tangible assets. Pursuant to §1.861-9T(h)(1)(ii), the value of USP’s tangible assets and pro rata share of assets held by CFC1 and CFC2 is $1100 (the plant and equipment held directly by USP, valued at $500, plus USP’s 100% pro rata share of the plant and equipment held by CFC1 valued at $400 and USP’s 80% pro rata share of the plant and equipment held by CFC 2 valued at $200 (80% of $250)).

(D) Computation of intangible asset value. Pursuant to §1.861-9T(h)(1)(iii), the value of the intangible assets of USP, CFC1, and CFC2 is $0 (total aggregate group asset value ($1100) determined in paragraph (B) less total tangible asset value ($1100) determined in paragraph (C)). Because the intangible asset value is zero, the provisions of §1.861-9T(h)(2) and (3) relating to the apportionment and characterization of intangible assets do not apply.

(E) Valuing related party debt obligations. Pursuant to §1.861-9T(h)(4)(i), the value of the debt obligation of CFC1 held by CFC2 is equal to the amount of the liability, $100. The value of the debt obligation of CFC1 held by USP is equal to the amount of the liability, $200.

(F) Valuing the stock of CFC1 and CFC2. Pursuant to §1.861-9T(h)(4)(ii), the value of the stock of CFC2 held by USP is $280 (USP’s 80% pro rata share of tangible assets of CFC2 included in paragraph (C) ($200) plus USP’s 80% pro rata share of the debt obligation of CFC1 held by CFC2 valued in paragraph (E) ($80). The value of the stock of CFC1 held by USP is $100 (USP’s 100% pro rata share of tangible assets of CFC1 included in paragraph (C) ($400) less USP’s 100% pro rata share of the liabilities of CFC1 to USP and CFC2 ($300)).

* * * * *

(k) * * * Paragraphs (e)(2) and (3) apply to taxable years beginning after January 17, 2012. See 26 CFR §1.861-9T(e)(2) and (3) (revised as of April 1, 2011) for rules applicable to taxable years beginning on or before January 17, 2012. Paragraph (h)(4) applies to taxable years ending on or after January 17, 2012. See §1.861-9T(h)(4) (revised as of April 1, 2011) for rules applicable to taxable years ending before January 17, 2012.* * *

(l) Expiration date. The applicability date of paragraphs (e)(2), (e)(3), and (h)(4) expires on January 13, 2015.

Par. 4. Sec 1.861-11T is amended by revising paragraphs (d)(6)(ii) and (h) and adding paragraph (i) to read as follows:

* * * * *

(6) * * *

(ii) Any foreign corporation if more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected with the conduct of a trade or business within the United States and at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence).

* * * * *

(h) Effective/applicability date. In general, the rules of this section apply for taxable years beginning after December 31, 1986. Paragraph (d)(6)(ii) applies to taxable years beginning after August 10, 2010. See 26 CFR §1.861-11T(d)(6)(ii) (revised as of April 1, 2010) for rules applicable to taxable years beginning on or before August 10, 2010.

(i) Expiration date. The applicability date of paragraph (d)(6)(ii) expires on January 13, 2015.

Approved December 6, 2011.

(a) Scope—(1) Introduction. [Reserved]. For further guidance, see §1.863-7T(a)(1).

* * * * *

Par. 3. Section 1.863-7T is added as follows:

(a) Scope—(1) Introduction. This section provides rules relating to the source and, in certain cases, the character of notional principal contract income. However, this section does not apply to income from a section 988 transaction within the meaning of section 988 and the regulations thereunder, relating to the treatment of certain nonfunctional currency transactions. Further, this section does not apply to a dividend equivalent as defined in section 871(m) or §1.871-15. Notional principal contract income is income attributable to a notional principal contract as defined in §1.446-3(c). An agreement between a taxpayer and a qualified business unit (as defined in section 989(a)) of the taxpayer, or among qualified business units of the same taxpayer, is not a notional principal contract, because a taxpayer cannot enter into a contract with itself.

(a)(2) through (e) [Reserved]. For further guidance, see §1.863-7(a)(2) through (e).

(f) Effective/applicability date. This section applies to payments made on or after January 23, 2012.

(g) Expiration date. This section expires January 16, 2015.

Par. 4. Section 1.871-15T is added and reserved to read as follows:

Par. 5. Section 1.871-16T is added to read as follows:

(a) [Reserved].

(b) Specified notional principal contracts between March 18, 2012 and January 1, 2013. With respect to payments made after March 18, 2012 and before January 1, 2013, the term specified notional principal contract means any notional principal contract (as defined in §1.446-3) if—

(1) In connection with entering into such contract, any long party to the contract transfers the underlying security to any short party to the contract;

(2) In connection with the termination of such contract, any short party to the contract transfers the underlying security to any long party to the contract;

(3) The underlying security is not readily tradable on an established securities market; or

(4) In connection with entering into such contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract.

(c) through (f) [Reserved].

(g) Effective/applicability date. This section applies to payments made on or after January 23, 2012.

(h) Expiration date. This section expires on January 16, 2015.

Par. 6. Section 1.881-2 is amended by adding paragraph (b)(3) to read as follows:

* * * * *

(b) * * *

(3) [Reserved]. For further guidance, see §1.881-2T(b)(3).

* * * * *

Par. 7. Section 1.881-2T is added as follows:

(a) through (b)(2) [Reserved]. For further guidance, see §1.881-2(a) through (b)(2).

(3) Dividend Equivalents. For rules applicable to a foreign corporation’s receipt of a dividend equivalent, see section 871(m) and §1.871-16T.

(c) through (e) [Reserved]. For further guidance, see §1.881-2(c) through (e).

(f) Effective/applicability date. This section applies on or after January 23, 2012.

(g) Expiration date. The applicability of this section expires on January 16, 2015.

Par. 8. Section 1.1441-2 is amended by adding paragraphs (b)(6) and (e)(7) to read as follows:

* * * * *

(b) * * *

(6) [Reserved]. For further guidance, see §1.1441-2T(b)(6).

* * * * *

(e) * * *

(7) [Reserved]. For further guidance, see §1.1441-2T(e)(7).

* * * * *

Par. 9. Section 1.1441-2T is added to read as follows:

(a) through (b)(5) [Reserved]. For further guidance, see §1.1441-2(a) through (b)(5).

(6) Dividend equivalents. Amounts subject to withholding include the payment of a dividend equivalent described in section 871(m). For this purpose, the term payment includes any gross amount that is used in computing any net amount that is transferred to or from the taxpayer under the terms of the contract.

(c) through (e)(6) [Reserved]. For further guidance, see §1.1441-2(c) through (e)(6).

(7) Rules for dividend equivalents. With respect to a dividend equivalent described in section 871(m), a payment is considered made to a person when any gross amount is used in computing any net amount that is transferred to or from the person under the terms of the contract pursuant to a transaction described in section 871(m)(2). When a dividend equivalent is used to determine a net payment, the person entitled to the gross dividend equivalent is considered to have received a payment even if that person receives no payment because the net payment equals zero or that person makes a net payment.

(f) [Reserved]. For further guidance, see §1.1441-2(f).

(g) Effective/applicability date. This section applies on or after January 23, 2012.

(h) Expiration date. The applicability of this section expires on January 16, 2015.

Par. 10. Section 1.1441-3 is amended by redesignating paragraph (h) as paragraph (j) and adding new paragraphs (h) and (i) to read as follows:

* * * * *

(h) [Reserved]. For further guidance, see §1.1441-3T(h).

(i) [Reserved]. For further guidance, see §1.1441-3T(i).

* * * * *

Par. 11. Section 1.1441-3T is added to read as follows:

(a) through (g) [Reserved]. For further guidance, see §1.1441-3(a) through (g).

(h) Dividend equivalents—(1) In general. The gross amount of a dividend equivalent described in section 871(m) is subject to withholding in an amount equal to the gross amount of the dividend equivalent used in computing any net amount that is transferred to or from the taxpayer.

(2) Procedures for withholding with respect to a dividend equivalent paid prior to a notional principal contract (NPC) becoming a specified NPC. [Reserved].

(i) Estimate or other determination of the portion of a distribution attributable to a dividend equivalent—(1) In general. In determining the amount subject to withholding as a dividend equivalent, a withholding agent may use a distributing corporation’s estimate or other determination with respect to the underlying security (as defined in section 871(m)(4)(C)) in applying the provisions of paragraphs (c)(2) through (c)(4) of this section. However, a withholding agent that elects to use any such estimate will be liable for the amount by which the actual amount required to be withheld exceeds the amount actually withheld and applicable penalties and interest resulting from its reliance on such estimate or determination. Failure of the withholding agent to withhold the required amount shall not be attributed to the distributing corporation.

(2) [Reserved]

(j) [Reserved]. For further guidance, see §1.1441-3(j).

(k) Effective/applicability date. This section applies on or after January 23, 2012.

(l) Expiration date. The applicability of this section expires on January 16, 2015.

Par. 12. Section 1.1441-4 is amended by revising paragraph (a)(3)(i) and adding paragraph (a)(3)(iii) to read as follows:

(a)* * *

(3) * * *

(i) [Reserved]. For further guidance, see §1.1441-4T(a)(3)(i).

* * * * *

(iii) [Reserved]. For further guidance, see §1.1441-4T(a)(3)(iii).

* * * * *

Par. 13. Section 1.1441-4T is added to read as follows:

(a)(1) through (a)(2) [Reserved]. For further guidance, see §1.1441-4(a)(1) through (a)(2).

(3) Income on notional principal contracts—(i) General rule. Except as otherwise provided in paragraph (a)(3)(iii) of this section, a withholding agent that pays amounts attributable to a notional principal contract described in §1.863-7T(a) or §1.988-2(e) shall have no obligation to withhold on the amounts paid under the terms of the notional principal contract regardless of whether a withholding certificate is provided. However, a withholding agent must file returns under §1.1461-1(b) and (c) reporting the income that it must treat as effectively connected with the conduct of a trade or business in the United States under the provisions of this paragraph (a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this section, a withholding agent must treat the income as effectively connected with the conduct of a U.S. trade or business if the income is paid to, or to the account of, a qualified business unit of a foreign person located in the United States or, if the payment is paid to, or to the account of, a qualified business unit of a foreign person located outside the United States, the withholding agent knows, or has reason to know, the payment is effectively connected with the conduct of a trade or business within the United States. Income on a notional principal contract does not include the amount characterized as interest under the provisions of §1.446-3(g)(4).

(ii) [Reserved]. For further guidance, see §1.1441-4(a)(3)(ii).

(iii) Exception for specified notional principal contracts. A withholding agent that makes a payment attributable to a specified notional principal contract described in section 871(m), or §1.871-16T that is not treated as effectively connected with the conduct of a trade or business within the United States shall have an obligation to withhold on the amount of such payment that is a dividend equivalent.

(b) through (g) [Reserved]. For further guidance, see §1.1441-4(b) through (g).

(h) Effective/applicability date. This section applies on or after January 23, 2012.

(i) Expiration date. The applicability of this section expires on January 16, 2015.

Par. 14. Section 1.1441-7 is amended by:

1. Redesignating paragraph (a)(2) as paragraph (a)(3) and revising newly designated paragraph (a)(3).

2. Adding a new paragraph (a)(2).

The revision and addition reads as follows:

(a) * * *

(2) [Reserved]. For further guidance, see §1.1441-7T(a)(2).

(3) Examples. The following examples illustrate the rules of paragraph (a) of this section:

* * * * *

Example 6. [Reserved]. For further guidance, see §1.1441-7T(a)(3) Example 6.

* * * * *

Par. 15. Section 1.1441-7T is added to read as follows:

(a)(1) [Reserved]. For further guidance, see §1.1441-7(a)(1).

(2) Withholding agent with respect to dividend equivalents. Each person that is a party to any contract or arrangement that provides for the payment of a dividend equivalent, as defined in section 871(m), shall be treated as having control and custody of such payment.

(3) Examples. The following examples illustrate the rules of paragraphs (a)(1) and (a)(2) of this section:

Example 1 through Example 5 [Reserved]. For further guidance, see §1.1441-7(a)(3), Example 1 through Example 5.

Example 6. FC, a foreign corporation, enters into a notional principal contract (NPC) with Bank X, a bank organized in the United States. The NPC is a specified NPC for purposes of section 871(m). FC is the long party to the contract and Bank X is the short party. The NPC references a specified number of shares of dividend-paying common stock issued by a domestic corporation. As the long party, FC receives payments from Bank X based on any appreciation in the value of the common stock and dividends paid with respect to the common stock. As the short party, Bank X receives payment from FC based on any depreciation in the value of the common stock and a payment based on LIBOR. Bank X is a withholding agent because Bank X is deemed to have control and custody of a dividend equivalent as a party to the NPC. If FC’s tax liability under section 881 has not been satisfied in full by Bank X as withholding agent, FC is required to file a return on Form 1120-F (U.S. Income Tax Return of a Foreign Corporation).

(b)(1) through (g) [Reserved]. For further guidance, see §1.1441-7(b)(1) through (g).

(h) Effective/applicability date. This section applies on or after January 23, 2012.

(i) Expiration date. The applicability of this section expires on January 16, 2015.

Par. 16. Section 1.1461-1 is amended by:

1. Redesignating paragraphs (c)(2)(i)(L) and (c)(2)(i)(M) as (c)(2)(i)(M) and (c)(2)(i)(N), respectively.

3. Adding a new paragraph (c)(2)(i)(L).

The addition reads as follows:

* * * * *

(c) * * *

(2) * * *

(i) * * *

(L) [Reserved]. For further guidance, see §1.1461-1T(c)(2)(L).

* * * * *

Par. 17. Section 1.1461-1T is added as follows:

(a) through (c)(2)(i)(K) [Reserved]. For further guidance, see §1.1461-1(a) through (c)(2)(i)(K).

(L) Dividend equivalents as defined in section 871(m) and the regulations thereunder;

(c)(2)(i)(M) through (i) [Reserved]. For further guidance, see §1.1461-1(c)(2)(i)(M) through (i).

(j) Effective/applicability date. This section applies on or after January 23, 2012.

(k) Expiration date. The applicability of this section expires on January 16, 2015.

Approved January 3, 2012.

On October 21, 2011, section 501 of the United States-Korea Free Trade Agreement Implementation Act, Public Law 112-41, 125 Stat 428, amended section 6695(g) of the Code by increasing the amount of the penalty from $100 to $500. To account for this change in the law, §1.6695-2(a) of the final regulations has been conformed to the statutory language of section 6695(g), as amended.

Two commenters stated that the proposed amendments to the due diligence standards in the NPRM were unnecessary in light of recent regulatory changes requiring tax return preparers to register with the IRS and comply with the ethical standards governing practice before the IRS (Circular 230), as well as the tax return preparer penalties under section 6694. They suggested that the IRS can apply these existing provisions to address misconduct by tax return preparers, including improper determination of eligibility for, and amount of, EIC by both individual tax return preparers and firms.

As reflected in section 6695(g), Congress has determined that noncompliance with the EIC rules poses a sufficiently significant problem to merit imposing unique due diligence requirements on tax return preparers involved in determining eligibility for, or amount of, the EIC. By recently quintupling the amount of the penalty for failure to comply with these requirements, Congress reaffirmed the need for specific rules to reduce EIC noncompliance. In order to address noncompliance with the EIC rules, the final regulations modify the due diligence requirements under section 6695(g) that have been in place for over a decade. Treasury and the IRS concluded that these regulations are consistent with section 6695(g), and no modification is made in the final regulations in response to these comments.

Section 1.6695-2(b)(1)(i) of the proposed regulations required that the Form 8867, “Paid Preparer’s Earned Income Credit Checklist,” be submitted to the IRS in the manner required by forms, instructions, or other appropriate guidance. One commenter noted, in part, that tax return preparers sometimes provide a paper copy of the completed tax return or claim for refund to the taxpayer for submission by the taxpayer. A tax return preparer’s ability to provide a paper copy, as opposed to filing the tax return electronically, is subject to the rules and limitations in §301.6011-7 and related guidance. Another commenter stated that the proposed regulations were unclear in how they apply to nonsigning tax return preparers. The due diligence requirements and the penalty for failure to comply with them apply to any tax return preparer, including a nonsigning tax return preparer, who determines eligibility for, or amount of, the EIC.

After consideration of these comments, Treasury and the IRS have concluded that the rules in the regulations should be clarified to provide how tax return preparers who prepare a tax return or claim for refund but do not submit it directly to the IRS can satisfy the requirement under proposed §1.6695-2(b)(1)(i) to submit the completed Form 8867 to the IRS. In response to these comments, §1.6695-2(b)(1)(i) of the final regulations provides that tax return preparers who prepare a tax return or claim for refund but do not submit it directly to the IRS may satisfy this aspect of their due diligence obligation by providing the form to the taxpayer or the signing tax return preparer, as appropriate, for submission with the tax return or claim for refund.

One commenter suggested that the Form 8867 be a stand-alone form that the taxpayer signs and submits as an affidavit of EIC eligibility. After consideration of this comment, Treasury and the IRS have concluded that imposing such an obligation on taxpayers, rather than on tax return preparers, would be contrary to the purpose of section 6695(g), which is to discourage tax return preparers from preparing EIC tax returns or claims for refund without performing basic due diligence. No modification is made in the final regulations in response to this comment.

Section 1.6695-2(b)(1)(i) of the proposed regulations required submission of Form 8867 to the IRS, and §1.6695-2(b)(4)(i)(C) of the proposed regulations required retention of a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to complete Form 8867 or the Earned Income Credit Worksheet. Two commenters suggested that these additional requirements increased a tax return preparer’s burden under the knowledge requirement of existing §1.6695-2(b)(3) because a tax return preparer would now be obligated to verify taxpayers’ responses to the eligibility questions and also to verify nonsigning tax return preparers’ (if any) completion of the Form 8867. The proposed regulations, however, do not expand tax return preparers’ obligation to verify information provided by taxpayers and other tax return preparers under existing §1.6695-2(b)(3).

Under §1.6695-2(b)(3) of the current regulations, tax return preparers are already required to complete Form 8867, prohibited from ignoring the implications of information provided, obligated to make reasonable inquiries if the information provided appears incorrect, inconsistent, or incomplete, and required to contemporaneously document their reasonable inquiries and the taxpayer’s responses. For purposes of §1.6695-2(b)(3), tax return preparers would not be held to a higher standard under the proposed regulations than they are under the existing regulations. A tax return preparer can generally rely on the information furnished by a taxpayer (or other tax return preparer who determines eligibility for, or amount of, the EIC) as long as the tax return preparer does not know, or have reason to know, that the information is incorrect, inconsistent, or incomplete. A signing tax return preparer who satisfies the knowledge requirement in §1.6695-2(b)(3), therefore, will ordinarily be able to rely on the information furnished to the signing tax return preparer by a taxpayer or nonsigning tax return preparer regarding the EIC. The additional requirements in proposed §1.6695-2(b)(1)(i) and (b)(4)(i)(C) are not unduly burdensome and will improve the IRS’ ability to determine whether a tax return preparer has complied with the EIC due diligence requirements that already exist. No modification is made in the final regulations in response to these comments.

Two commenters expressed concern that expanding the due diligence requirements and penalty to nonsigning tax return preparers would subject individuals to the section 6695(g) penalty who are beyond the intended scope of these rules. The commenters provided the example of individuals hired by tax preparation software companies to answer discrete questions for taxpayers who are using tax preparation software to prepare their own tax return or claim for refund. These individuals provide general resource information for the taxpayers who are preparing their own tax return or claim for refund, and they do not know all of the specific facts relating to the taxpayer’s tax return or claim for refund. The commenters reasoned that these individuals might be nonsigning tax return preparers and would arguably be subject to these due diligence requirements and related penalty.

The term “nonsigning tax return preparer” is specifically defined in §301.7701-15(b)(2) and is limited to those who prepare all or a substantial portion of a tax return or claim for refund within the meaning of §301.7701-15(b)(3). Under §301.7701-15(b)(3), a person who renders tax advice on a position that is directly relevant to the existence or amount of an entry on a tax return or claim for refund is regarded as having prepared that entry. Section 301.7701-15(b)(3) further provides that whether a schedule, entry, or other portion of a tax return or claim for refund is a substantial portion is determined based upon whether the person knows or reasonably should know that the tax attributable to the schedule, entry, or other portion of a tax return or claim for refund is a substantial portion of the tax required to be shown on the tax return or claim for refund. Also, §301.7701-15(f)(1)(viii) provides an exception from the definition of tax return preparer for any individual providing only typing, reproduction, or other mechanical assistance in the preparation of a tax return or claim for refund.

Treasury and the IRS have concluded that, in the routine situation described by these commenters, the individuals employed at the tax preparation software companies as described in the comments are not nonsigning tax return preparers as long as they either (i) fall within the mechanical exception because they are not exercising independent judgment on the taxpayer’s underlying tax positions, or (ii) do not know (and reasonably should not know) that any generic advice provided relating to the EIC is a substantial portion of the tax required to be shown. On the other hand, in rare instances when any such individual is both exercising independent judgment and knows or reasonably should know that specific advice provided to a taxpayer relating to EIC is a substantial portion of the tax return or claim for refund within the meaning of §301.7701-15(b)(3), the individual is a nonsigning tax return preparer subject to the due diligence rules. No modification is made to the final regulations in response to this comment.

By replacing “signing tax return preparer” with “tax return preparer,” §1.6695-2(a) of the proposed regulations effectively provided that a firm that employs a person to prepare for compensation a tax return or claim for refund may be subject to the penalty for its employee’s failure to comply with the due diligence requirements. Two commenters questioned the proposed application of the due diligence requirements and penalty to firms. Section 6695(g) imposes a penalty on “[a]ny person who is a tax return preparer” that fails to comply with the due diligence requirements “with respect to determining eligibility for, or the amount of, the credit allowable by section 32.” Under section 7701(a)(36), a “tax return preparer” is “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by title or any claim for refund of tax imposed by this title.” After consideration of these comments, Treasury and the IRS have concluded that it is appropriate to apply the due diligence requirements to firms as provided in the proposed regulations. This position is consistent with the long-standing application of the section 6694 tax return preparer penalties to firms under the rules provided in §§1.6694-2(a)(2) and 1.6694-3(a)(2). No modification is made to the final regulations in response to these comments.

Proposed §1.6695-2(c) provided generally that a firm cannot be subject to a penalty under section 6695(g) unless one of the following three conditions is satisfied: (1) a member of the principal management of the firm knew of the failure to comply with the due diligence requirements; (2) the firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or (3) the firm failed to comply with its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference. Two commenters expressed concern with the conditions required for application of the penalty to a firm, as set forth in proposed §1.6695-2(c).

One of these commenters noted that, if management became aware through the firm’s reasonable and appropriate compliance procedures that an employee failed to comply with the due diligence requirements, then the firm would be subject to a penalty under proposed §1.6695-2(c)(1) because management knew of the failure. The commenter suggested that the final regulations provide that the penalty not apply to the firm if management knew and took reasonable action to resolve the problem before the penalty is assessed. After consideration of this comment, Treasury and the IRS have concluded that, if management knows of the failure to comply prior to the date the tax return or claim for refund is filed, the only acceptable remedial action would be to satisfy the due diligence requirements prior to filing, in which case there would be no penalty. If, on the other hand, management does not know of the failure to comply until after the tax return or claim for refund is filed, the appropriate analysis is whether the firm had reasonable and appropriate compliance procedures and disregarded those procedures through willfulness, recklessness, or gross indifference, as described in §1.6695-2(c)(3), and management’s knowledge is relevant only insofar as it is a factor in that analysis. In response to this comment, the final regulations provide that a firm is only subject to a penalty under §1.6695-2(c)(1) if the manager knew of an employee’s failure to comply with the due diligence requirements prior to the date the tax return or claim for refund was filed.

The other commenter suggested that the IRS might determine under proposed §1.6695-2(c)(3) that a single failure to submit Form 8867 with a tax return by an otherwise compliant firm qualifies as disregard of reasonable and appropriate compliance procedures through gross indifference. Section 1.6695-2(c)(3) of the proposed regulations established a heightened standard, in part, by imposing liability for the penalty against a firm that disregarded its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference. A single, accidental failure to submit Form 8867 with a tax return by an otherwise compliant firm would not constitute disregard of compliance procedures through willfulness, recklessness, or gross indifference, and the firm would not be subject to the penalty in that situation. After consideration of this comment, Treasury and the IRS have concluded that the heightened standards in proposed §1.6695-2(c)(3) would adequately protect firms against isolated and inadvertent instances of disregard of their compliance procedures. No modification is made to the final regulations in response to this comment.

Proposed §1.6695-2(b)(4)(ii) required that a tax return preparer must retain the records described in §1.6695-2(b)(4)(i) for the period ending three years after the later of the date the tax return or claim for refund was due or the date it was filed. One commenter stated that the record retention date should not be tied to the date the tax return or claim for refund was filed because, if the tax return preparer who prepares the tax return or claim for refund is not the individual who files it, that tax return preparer might not know when it is filed and when the retention period expires. In response to the comment, the final regulations require a tax return preparer to retain the records described in §1.6695-2(b)(4)(i) for the period ending three years after the later of the date the tax return or claim for refund was due or the date it was transferred in final form by the tax return preparer to the next person in the course of the filing process. In the case of a signing tax return preparer who electronically files the tax return or claim for refund, the next step in the filing process will be to electronically file the tax return or claim for refund, so the relevant date is the date the tax return or claim for refund is filed. In the case of a signing tax return preparer who does not electronically file the tax return or claim for refund, the next person in the course of the filing process will be the taxpayer, so the relevant date is the date the tax return or claim for refund is presented to the taxpayer for signature. In the case of a nonsigning tax return preparer, the next person in the course of the filing process will be the signing tax return preparer, so the relevant date is the date the nonsigning tax return preparer submitted to the signing tax return preparer that portion of the tax return or claim for refund for which the nonsigning tax return preparer was responsible.

The record retention date under the final regulations will be the same for nonsigning tax return preparers supervised by a signing tax return preparer in the same firm and nonsigning tax return preparers who are employed by a different firm than the signing tax return preparer. In both cases, the records must be retained until three years from the later of the due date of the tax return or the date the tax return or claim for refund is submitted in final form to the signing tax return preparer. As a practical matter, however, a supervised nonsigning tax return preparer and the supervising signing tax return preparer can satisfy both of their record retention obligations under the final regulations by retaining a single paper or electronic copy of the records described in §1.6695-2(b)(4)(i). The supervised nonsigning tax return preparer’s record retention period may, nevertheless, expire before the signing tax return preparer’s record retention period. In such cases, the supervising signing tax return preparer is required to retain the records until the expiration of his or her record retention period under §1.6695-2(b)(4)(ii), regardless of when the supervised nonsigning tax return preparer’s record retention period expires.

One commenter stated that the 30-day comment period provided under the proposed regulations was inadequate. Numerous substantive comments were, in fact, received addressing the proposed regulations. Treasury and the IRS have concluded that the duration of the comment period provided in the proposed regulations was in compliance with all of the applicable procedural rules and requirements governing regulations.

Three commenters stated that the proposed effective date of the regulations would not provide tax return preparers and computer software providers sufficient time to adjust their procedures and products to reflect the proposed amendments. The proposed regulations provided that they will apply to tax returns and claims for refund for tax years ending on or after December 31, 2011. The IRS publicly announced in Spring 2011 that the IRS was exploring the implementation of a new requirement for tax return preparers to submit the Form 8867 with a taxpayer’s tax return or claim for refund. Treasury and the IRS have concluded that implementation of these rules for the upcoming filing season is consistent with the best interests of tax administration.

(a) Penalty for failure to meet due diligence requirements. A person who is a tax return preparer of a tax return or claim for refund under the Internal Revenue Code with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $500 for each such failure.

(b) * * *

(1) Completion and submission of Form 8867—(i) The tax return preparer must complete Form 8867, “Paid Preparer’s Earned Income Credit Checklist,” or such other form and such other information as may be prescribed by the Internal Revenue Service (IRS), and—

(A) In the case of a signing tax return preparer electronically filing the tax return or claim for refund, must electronically file the completed Form 8867 (or successor form) with the tax return or claim for refund;

(B) In the case of a signing tax return preparer not electronically filing the tax return or claim for refund, must provide the taxpayer with the completed Form 8867 (or successor form) for inclusion with the filed tax return or claim for refund; or

(C) In the case of a nonsigning tax return preparer, must provide the signing tax return preparer with the completed Form 8867 (or successor form), in either electronic or non-electronic format, for inclusion with the filed tax return or claim for refund.

(ii) The tax return preparer’s completion of Form 8867 (or successor form) must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.

(2) Computation of credit—(i) The tax return preparer must either—

(A) Complete the Earned Income Credit Worksheet in the Form 1040 instructions or such other form and such other information as may be prescribed by the IRS; or

(B) Otherwise record in one or more documents in the tax return preparer’s paper or electronic files the tax return preparer’s EIC computation, including the method and information used to make the computation.

(ii) The tax return preparer’s completion of the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section) must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.

* * * * *

(4) Retention of records—(i) The tax return preparer must retain—

(A) A copy of the completed Form 8867 (or successor form);

(B) A copy of the completed Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section); and

(C) A record of how and when the information used to complete Form 8867 (or successor form) and the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section) was obtained by the tax return preparer, including the identity of any person furnishing the information, as well as a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to complete Form 8867 (or successor form) or the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section).

(ii) The items in paragraph (b)(4)(i) of this section must be retained for three years from the latest of the following dates, as applicable:

(A) The due date of the tax return (determined without regard to any extension of time for filing);

(B) In the case of a signing tax return preparer electronically filing the tax return or claim for refund, the date the tax return or claim for refund was filed;

(C) In the case of a signing tax return preparer not electronically filing the tax return or claim for refund, the date the tax return or claim for refund was presented to the taxpayer for signature; or

(D) In the case of a nonsigning tax return preparer, the date the nonsigning tax return preparer submitted to the signing tax return preparer that portion of the tax return or claim for refund for which the nonsigning tax return preparer was responsible.

(iii) The items in paragraph (b)(4)(i) of this section may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance (see §601.601(d)(2) of this chapter).

(c) Special rule for firms. A firm that employs a tax return preparer subject to a penalty under section 6695(g) is also subject to penalty if, and only if—

(1) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or, prior to the time the return was filed, knew of the failure to comply with the due diligence requirements of this section;

(2) The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements of this section; or

(3) The firm disregarded its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the preparation of the tax return or claim for refund with respect to which the penalty is imposed.

(d) Exception to penalty. The section 6695(g) penalty will not be applied with respect to a particular tax return or claim for refund if the tax return preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circumstances, the tax return preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular tax return or claim for refund was isolated and inadvertent. The preceding sentence does not apply to a firm that is subject to the penalty as a result of paragraph (c) of this section.

(e) Effective/applicability date. This section applies to tax returns and claims for refund for tax years ending on or after December 31, 2011.

Approved December 14, 2011.

* * * * *

(e) * * *

(2) and (3) [The text of the proposed amendments to §1.861-9(e)(2) and §1.861-9(e)(3) is the same as the text of §1.861-9T(e)(2) and §1.861-9T(e)(3) published elsewhere in this issue of the Bulletin.]

* * * * *

(h) * * *

(4) [The text of the proposed amendment to §1.861-9(h)(4) is the same as the text of §1.861-9T(h)(4) published elsewhere in this issue of the Bulletin.]

* * * * *

(k) [The text of the proposed amendment to §1.861-9(k) is the same as the text of §1.861-9T(k) published elsewhere in this issue of the Bulletin.]

Par. 3. In §1.861-11, paragraphs (d)(6)(ii) and (h) are revised to read as follows:

* * * * *

(d) * * *

(6)(ii) [The text of proposed §1.861-11(d)(6)(ii) is the same as the text of §1.861-11T(d)(6)(ii) published elsewhere in this issue of the Bulletin.]

* * * * *

(h) [The text of the proposed amendment to §1.861-11(h) is the same as the text of §1.861-11T(h) published elsewhere in this issue of the Bulletin.]

(a) Scope—(1) Introduction. [The text of the proposed amendments to §1.863-7(a)(1) is the same as the text for §1.863-7T(a)(1) published elsewhere in this issue of the Bulletin].

* * * * *

Par. 3. Section 1.871-15 is added to read as follows:

(a) In general. A dividend equivalent as defined in paragraph (b) of this section shall be treated as a dividend from sources within the United States for purposes of sections 871(a), 881, and 4948(a), and chapters 3 and 4 of subtitle A of the Code and the regulations thereunder.

(b) Dividend equivalent—(1) Definition. The term dividend equivalent means—

(i) Any substitute dividend made pursuant to a securities lending transaction, a sale-repurchase transaction, or a substantially similar transaction that (directly or indirectly) is contingent upon or determined by reference to the payment of a dividend (including payments pursuant to a redemption of stock that gives rise to a dividend under section 301) from sources within the United States;

(ii) Any payment made pursuant to a specified notional principal contract (specified NPC) described in section 871(m) or §1.871-16 that (directly or indirectly) is contingent upon or determined by reference to the payment of a dividend (including payments pursuant to a redemption of stock that gives rise to a dividend under section 301) from sources within the United States; and

(iii) Any substantially similar payment as defined in paragraph (d) of this section.

(2) Exception—(i) In general. The term dividend equivalent does not include any payment made pursuant to a specified NPC, or any substantially similar payment as defined in §1.871-15(d), if such payment is contingent upon or determined by reference to an estimate of expected dividends and the estimate of an expected dividend is not adjusted in any way for the amount of an actual dividend.

(ii) Expected dividends. For purposes of this section, an expected dividend is not considered an estimate of expected dividends on or after the date that the corporate issuer announces a dividend. A dividend announcement occurs on the earliest date on which the corporation declares, announces, or agrees to the amount or payment of such dividend.

(c) Payments determined on gross basis. A payment includes any gross amount that is used in computing any net amount that is transferred to or from the taxpayer under the terms of the contract. For example, a dividend equivalent includes a gross amount determined by reference to a dividend that is used in computing a net payment even if the taxpayer makes a net payment or no payment is made because the net amount is zero.

(d) Substantially similar payments—(1) In general. For purposes of section 871(m), the following payments are considered payments substantially similar to payments described in paragraph (b)(1)(i) or (b)(1)(ii) of this section and are therefore dividend equivalents:

(i) Any payment of a beneficial owner’s tax liability with respect to a dividend equivalent made by a withholding agent is a dividend equivalent received by the beneficial owner in an amount determined under the gross-up formula provided in §1.1441-3(f)(1).

(ii) Any payment, including the payment of the purchase price or an adjustment to the purchase price, is a dividend equivalent if made pursuant to an equity-linked instrument that is contingent upon or determined by reference to a dividend (including payments pursuant to a redemption of stock that gives rise to a dividend under section 301) from sources within the United States.

(2) Rules regarding equity-linked instruments—(i) In general. An equity-linked instrument is a financial instrument or combination of financial instruments that references one or more underlying securities to determine its value, including a futures contract, forward contract, option, or other contractual arrangement.

(ii) Equity-linked instruments treated as a notional principal contract. An equity-linked instrument that provides for a payment that is a substantially similar payment within the meaning of paragraph (d) of this section is treated as a notional principal contract for purposes of section 871(m)(3), this section, and §1.871-16.

(e) Anti-abuse rule. If a taxpayer enters into a transaction or transactions with a principal purpose of avoiding the application of this section or §1.871-16, payments made with respect to such transaction or transactions may be treated as a dividend equivalent to the extent necessary to prevent the avoidance of these rules.

(f) Effective/applicability date. The rules of this section apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 4. Section 1.871-16 is added to read as follows:

(a) Purpose and scope. This section provides guidance with respect to the definition of a “specified notional principal contract” (specified NPC). Paragraph (b) of this section provides the definition of a specified NPC for payments made after March 18, 2012, through December 31, 2012. Paragraph (c) of this section provides the definition of a specified NPC for payments made after December 31, 2012. Paragraph (d) of this section provides rules with respect to a notional principal contract that becomes a specified NPC during the term of the contract. Paragraph (e) of this section provides rules with respect to the treatment of a specified NPC entered into by related parties. For purposes of section 871(m) and this section, the term notional principal contract (NPC) means an NPC as defined in §1.446-3(c)(1) and an equity-linked instrument as provided in §1.871-15(d).

(b) [The text of the proposed amendment to §1.871-16(b) is the same as the text for §1.871-16T(b) found elsewhere in this issue of the Bulletin].

(c) Specified NPCs after December 31, 2012. With respect to payments made after December 31, 2012, the term specified NPC means any NPC described in any of the paragraphs (c)(1) through (7) of this section.

(1) Contemporaneous transfers of the underlying securities. An NPC is described in this paragraph (c)(1) if the long party to the NPC is “in the market” with respect to the underlying security on the same day or days that the parties price the NPC or on the same day or days that the NPC terminates.

(i) Determining when a long party is in the market. The long party is “in the market” with respect to the underlying security if the long party—

(A) Sells or otherwise disposes of the underlying security on the same day or days that the parties price the NPC;

(B) Purchases or otherwise acquires the underlying security on the same day or days that the NPC terminates; or

(C) Either purchases or disposes of the underlying security at a price that is set or calculated in such a way as to be substantially identical to or determined by reference to an amount used to price or terminate the NPC.

(ii) De minimis exception. The long party will not be deemed to be in the market with respect to the underlying security if the amount of the underlying securities disposed of on a pricing date or acquired on a termination date is less than ten percent of the notional principal amount of the NPC.

(2) Underlying security is not regularly traded. An NPC is described in this paragraph (c)(2) if the underlying security in the NPC is not regularly traded.

(i) Definition of regularly traded—(A) In general. For purposes of this paragraph (c)(2), an underlying security is regularly traded if such security is listed on one or more qualified exchanges at the time the NPC is priced and the underlying security was traded on at least 15 trading days during the 30 trading days prior to the date the parties price the NPC.

(B) Special rule for first 30 days following a public offering. When a corporation initiates a public offering of a security, such security is regularly traded if such security is traded during at least 15 trading days on one or more qualified exchanges during the 30 trading days subsequent to the initial offering.

(C) Days on which a security is considered traded. The underlying securities will be considered traded only on those days in which the underlying securities are traded in quantities that exceed ten percent of the 30-day average daily trading volume.

(ii) Qualified exchange. For purposes of paragraph (c)(2)(i) of this section, the term qualified exchange means a national securities exchange that is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities Exchange Act of 1934 (15 U.S.C. 78f).

(3) Underlying security posted as collateral. An NPC is described in this paragraph (c)(3) if the short party to the NPC posts the underlying security with the long party as collateral and the underlying security posted as collateral represents more than ten percent of the total fair market value of all the collateral posted by the short party on any date that the NPC is outstanding.

(4) The NPC has a term of fewer than 90 days—(i) In general. An NPC is described in this paragraph (c)(4) if the NPC has a term of fewer than 90 days.

(ii) Term of an NPC. For purposes of this section, the term of any NPC is the number of days that the contract is actually outstanding, including the date on which the NPC is terminated, but not the date that the NPC was entered into. For purposes of determining whether a contract is a specified NPC, an NPC is treated as terminated, in whole or in part, on the date that a long party enters into any position within the meaning of §1.246-5(b)(3) to the extent that the position offsets a portion of the long party’s position with respect to an underlying security in the NPC.

(5) Long party controls short party’s hedge. An NPC is described in this paragraph (c)(5) if—

(i) The long party controls contractually or by conduct the short party’s hedge of the short position; or

(ii) The long party enters into an NPC using an underlying equity control program (as defined in paragraph (f)(2) of this section).

(6) Notional principal amount represents a significant percentage of trading volume—(i) In general. An NPC is described in this paragraph (c)(6) if the notional principal amount of the underlying security in the NPC is greater than—

(A) Five percent of the total public float of that class of security; or

(B) Twenty percent of the 30-day average daily trading volume determined as of the close of the business day immediately preceding the first day in the term of an NPC.

(ii) Aggregating certain NPCs. When determining whether the notional principal amount of an NPC represents a significant percentage of the trading volume, a taxpayer must aggregate the notional principal amounts of all NPCs for which the taxpayer is the long party that reference the same underlying security.

(7) NPC provides for the payment of a special dividend. An NPC is described in this paragraph (c)(7) if the NPC is entered into on or after the announcement of a special dividend and prior to the ex-dividend date. An announcement of a special dividend occurs on the earliest date on which the corporation declares, announces, or agrees to the amount or payment of such special dividend.

(d) Specified NPC status arising during the term of the contract—(1) In general. This section provides rules for determining the timing and amount of a dividend equivalent when an NPC is not a specified NPC on the date the parties enter into the NPC and subsequently becomes a specified NPC during the term of the transaction. If an NPC that is not a specified NPC on the date the parties enter into the contract subsequently becomes a specified NPC, any payment made during the term of the contract (including any payment during the period between the date the contract is entered into and the date the contract becomes a specified NPC) that is contingent upon or determined by reference to the payment of a dividend from sources within the United States is a dividend equivalent.

(2) Determination of dividend equivalent—(i) In general. For purposes of sections 871(a), 881, 4948(a), and chapters 3 and 4 of subtitle A of the Code, when an NPC becomes a specified NPC during the term of the contract, any tax owed with respect to a dividend equivalent made prior to the NPC becoming a specified NPC is payable when the next payment as described in §1.871-15(c), including a termination payment, is made pursuant to the contract.

(ii) Payment to include amount equal to dividend equivalent with respect to current and prior payments. In computing the amount of tax owed with respect to the termination of the specified NPC or the first payment that occurs after the NPC becomes a specified NPC, the dividend equivalent equals the sum of all the dividend equivalents with respect to the NPC arising before the date the NPC became a specified NPC and the amount of any dividend equivalent arising upon the termination or payment.

(3) Example. The rules of this paragraph (d) are illustrated by the following example:

Example. (i) Facts. Party A is a foreign corporation organized in a jurisdiction that does not have an income tax treaty with the United States. Party B is a domestic corporation and a dealer in NPCs. Party A and Party B enter into an NPC on Day 1 whereby Party A will pay Party B an amount equal to LIBOR multiplied by the notional value of a specified number of shares of Corporation X, a domestic corporation, plus any depreciation on the same number of shares of Corporation X upon settlement of the contract. In return, Party B will pay Party A an amount equal to any dividends paid on the same specified number of shares of Corporation X, plus any appreciation on those shares upon settlement of the contract. On Day 1, the NPC is not a specified NPC. On Day 30, Party B determines that it owes Party A $25 based on a dividend paid on the underlying security and that Party A owes Party B $125 on the LIBOR leg of the contract. Party A therefore makes a net payment of $100 to Party B. On Day 120, the NPC becomes a specified NPC within the meaning of section 871(m), §§1.871-15, and 1.871-16. On Day 120, Party A terminates the contract and makes a net termination payment to Party B. In calculating the net payment, Party B determined that it owes Party A $25 based on a dividend paid with respect to the shares of Corporation X and that Party A owes it $125 attributable to interest and the decrease in the value of the shares of Corporation X.

(ii) Analysis. On Day 120, Party A is treated as having received a dividend equivalent of $50. This dividend equivalent consists of the $25 payment made on Day 120 that is based on a dividend payment made with respect to the shares of Corporation X and the $25 dividend equivalent made prior to the contract being considered a specified NPC.

(e) Related persons and parties to an NPC—(1) In general. For purposes of this section, a related person is considered a party to an NPC. A related person is a person that is related within the meaning of section 267(b) or 707(b)(1) to one of the parties to the NPC.

(2) NPC entered into between related dealers. An NPC entered into between related persons is not a specified NPC when the NPC hedges another NPC (whether or not a specified NPC) entered into with an unrelated party and both NPCs were entered into by the related persons in the ordinary course of their business as a dealer in securities or commodities derivatives.

(f) Definitions—(1) Underlying security. For purposes of this section, the term underlying security means, for any NPC, the security with respect to which the dividend referred to in §1.871-15(b)(1)(ii) is paid. If an NPC references more than one security or a customized index, each security or component of such customized index is treated as an underlying security in a separate NPC for purposes of section 871(m), §1.871-15, and this section.

(2) Underlying equity control program—(i) In general. The term underlying equity control program means any system or procedure that permits—

(A) A long party to an NPC to direct how a short party hedges its risk under such NPC; or

(B) A long party to acquire, or cause the short party to acquire, an underlying security in a transaction with a short party and to instruct the short party to execute such acquisition in the form of an NPC after acquiring such underlying security.

(ii) Electronic trading—(A) In general. The term underlying equity control program does not include an electronic trading platform that allows customers electronically to place an order to enter into an NPC with a dealer and through which the dealer determines whether and how to hedge its position.

(B) Example. Customer, a foreign corporation, and Dealer have entered into a master agreement that governs NPCs entered into between Customer and Dealer. Customer places an order with Dealer via Dealer’s electronic trading platform to enter into an NPC with a long position in 100 shares of Corporation ABC, a domestic corporation. Dealer’s electronic trading platform allows Customer to place an order using Dealer’s computer program. Dealer’s computer system confirms that Corporation ABC is not on its restricted list upon receipt of the order. Dealer’s computer system automatically determines whether it has an internal hedge available to offset the risk of a short position in 100 shares of Corporation ABC. To the extent that an internal hedge is unavailable, Dealer’s computer program automatically seeks to acquire the stock as a hedge in a market transaction. After obtaining its hedge, Dealer sends a confirmation that memorializes the NPC. The notional amount on the confirmation reflects the price of Dealer’s hedge plus a market standard spread. Customer did not enter into the NPC using an underlying equity control program solely by placing the order through Dealer’s electronic trading platform because Customer did not direct how Dealer hedged its position under the NPC.

(3) Customized index—(i) In general. For purposes of this section, the term customized index means any index, as determined on the date that the long party and short party enter into an NPC, that is—

(A) A narrow-based index; or

(B) Any other index unless futures contracts or option contracts on such index trade on a qualified board or exchange, as defined in section 1256(g)(7).

(ii) Narrow-based index. The term narrow-based index means an index—

(A) That has nine or fewer component securities;

(B) In which a component security comprises more than 30 percent of the index’s weighting;

(C) In which the five highest weighted component securities in the aggregate comprise more than 60 percent of the index’s weighting; or

(D) In which the lowest weighted component securities comprising, in the aggregate, 25 percent of the index’s weighting have an aggregate dollar value of average daily trading volume of less than $50,000,000 (or in the case of an index with 15 or more component securities, $30,000,000), except that if there are two or more securities with equal weighting that could be included in the calculation of the lowest weighted component securities comprising, in the aggregate, 25 percent of the index’s weighting, such securities shall be ranked from lowest to highest dollar value of average daily trading volume and shall be included in the calculation based on their ranking starting with the lowest ranked security.

(iii) Aggregate dollar value of average daily trading volume. For purposes of determining whether an index is a narrow-based index, the method for determining the aggregate dollar value of average daily trading volume is the method described in Rule 3a55-1(b)(1), 17 CFR 240.3a55-1(b)(1), under the Securities Exchange Act of 1934, as in effect on January 23, 2012.

(4) Long party. The long party is the party with respect to an NPC entitled to receive any payment pursuant to such contract that is contingent upon or determined by reference to the payment of a dividend from sources within the United States on an underlying security.

(5) Short party. The short party is any party to an NPC who is not a long party.

(6) Special dividend. For purposes of this section, the term special dividend means a nonrecurring payment to shareholders of corporate assets that is in addition to a recurring dividend payment, if any (even if paid in conjunction with a recurring dividend).

(g) Effective/applicability date. The rules of this section apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 5. In §1.881-2, paragraph (b)(3) is added and paragraph (e) is revised to read as follows:

* * * * *

(b) * * *

(3) [The text of the proposed amendments to §1.881-2(b)(3) is the same as the text for §1.881-2T(b)(3) published elsewhere in this issue of the Bulletin].

* * * * *

(e) Effective/applicability date. Except as otherwise provided in this paragraph (e), this section applies for taxable years beginning after December 31, 1966. Paragraph (b)(2) of this section is applicable to payments made after November 13, 1997. Paragraph (b)(3) of this section applies to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register. For corresponding rules applicable to taxable years beginning before January 1, 1967, see 26 CFR 1.881-2 (Revised as of January 1, 1971).

Par. 6. Section 1.892-3 is added to read as follows:

(a)(1) through (a)(5) [Reserved]. For further information, see §1.892-3T(a)(1) through (a)(5).

(6) Dividend Equivalents. Income from investments in stocks includes the payment of a dividend equivalent described in section 871(m) and §1.871-15.

(b) [Reserved]. For further information, see §1.892-3T(b).

(c) Effective/applicability date. Paragraph (a)(6) of this section applies to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register. See §1.892-3T(a) for the rules that apply before the date the regulations are published as final regulations in the Federal Register.

Par. 7. Section 1.894-1 is amended by redesignating paragraph (c) as (c)(1), adding paragraph (c)(2), and revising paragraph (e) to read as follows:

* * * * *

(c) * * *

(2) Dividend equivalents. The provisions of an income tax convention relating to dividends paid to or derived by a foreign person apply to a dividend equivalent under section 871(m) and §1.871-15.

* * * * *

(e) Effective/applicability date. Paragraphs (a) and (b) of this section apply for taxable years beginning after December 31, 1966. For corresponding rules applicable to taxable years beginning before January 1, 1967, (see 26 CFR part 1 revised April 1, 1971). Except as otherwise provided in this paragraph, paragraph (c) of this section is applicable to payments made after November 1, 1997. Paragraph (c)(2) of this section applies to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register. See paragraph (d)(6) of this section for applicability dates for paragraph (d) of this section.

Par. 8. Section 1.1441-2 is amended by adding paragraphs (b)(6) and (e)(7), and revising paragraph (f) to read as follows:

* * * * *

(b) * * *

(6) [The text of the proposed amendments to §1.1441-2(b)(6) is the same as the text for §1.1441-2T(b)(6)) published elsewhere in this issue of the Bulletin].

* * * * *

(e) * * *

(7) [The text of the proposed amendments to §1.1441-2(e)(7) is the same as the text for §1.1441-2T(e)(7)) published elsewhere in this issue of the Bulletin].

(f) Effective/applicability date. Except as otherwise provided in this paragraph (f), this section applies to payments made after December 31, 2000. Paragraphs (b)(5) and (d)(4) of this section apply to payments made after August 1, 2006. Paragraphs (b)(6) and (e)(7) of this section apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

Par. 9. Section 1.1441-3 is amended by:

1. Redesignating paragraph (h) as paragraph (j), and revising newly designated paragraph (j).

2. Adding new paragraphs (h) and (i).

The revision and addition read as follows:

* * * * *

(h) Dividend equivalents—(1) In general. [The text of the proposed amendments to §1.1441-3(h)(1) is the same as the text for §1.1441-3T(h)(1) published elsewhere in this issue of the Bulletin].

(2) Procedures for withholding with respect to a dividend equivalent paid prior to a notional principal contract (NPC) becoming a specified NPC. In the event that an NPC becomes a specified NPC (as defined in §1.871-16) after the date that the parties enter into the NPC, the term dividend equivalent includes any payment that is made prior to the date the NPC becomes a specified NPC and that was (directly or indirectly) contingent upon or determined by reference to the payment of a dividend (including payments pursuant to a redemption of stock that gives rise to a dividend under section 301) from sources within the United States. The withholding agent is required to withhold with respect to a dividend equivalent made prior to the NPC becoming a specified NPC when the next payment as described in §1.871-15(c), including a termination payment, is made pursuant to the contract. For purposes of section 6601 and the regulations thereunder, the last date prescribed for payment of tax imposed with respect to a dividend equivalent made prior to an NPC becoming a specified NPC is determined based on the date of the next payment as described in §1.871-15(c), including a termination payment, made pursuant to the contract. For further guidance regarding liability for penalties and interest, see §§1.1441-1(b)(7)(iii) and 1.1461-1(a)(2).

(3) Effective/applicability date. The rules of this paragraph (h)(2) apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

(i) [The text of the proposed amendments to §1.1441-3(i)(1) is the same as the text for §1.1441-3T(i)(1) published elsewhere in this issue of the Bulletin].

(j) Effective/applicability date. Except as otherwise provided in paragraphs (g), (h), and (i) of this section, this section applies to payments made after December 31, 2000.

Par. 10. Section 1.1441-4 is amended by:

1. Revising paragraph (a)(3)(i).

2. Adding paragraph (a)(3)(iii).

3. Revising paragraph (g)(1).

The revisions and addition read as follows:

(a)* * *

(3)(i) [The text of the proposed amendments to §1.1441-4(a)(3)(i) is the same as the text for §1.1441-4T(a)(3)(i) published elsewhere in this issue of the Bulletin].

(ii) * * *

(iii) [The text of the proposed amendments to §1.1441-4(a)(3)(iii) is the same as the text for §1.1441-4T(a)(3)(iii) published elsewhere in this issue of the Bulletin].

* * * * *

(g) Effective/applicability date—(1) General rule. Except as otherwise provided in this paragraph (g)(1), this section applies to payments made after December 31, 2000. The rules of paragraph (a)(3)(iii) of this section apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

* * * * *

Par. 11. Section 1.1441-6 is amended by:

1. Revising paragraph (c)(2).

2. Redesignating paragraph (h) as paragraph (i) and revising newly designated paragraph (i).

3. Adding a new paragraph (h).

The revision and addition read as follows:

* * * * *

(c) * * *

(2) Income to which special rules apply. The income to which paragraph (c)(1) of this section applies is dividends and interest from stocks and debt obligations that are actively traded, dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the Securities and Exchange Commission under the Securities Act of 1933 (15 U.S.C. 77a), and amounts paid with respect to loans of securities described in this paragraph (c)(2). With respect to a dividend equivalent as defined in section 871(m) and §1.871-15, this paragraph (c)(2) applies to the extent that the underlying security as defined in §1.871-16(f)(1) satisfies the requirements of this paragraph (c)(2). For purposes of this paragraph (c)(2), a stock or debt obligation is actively traded if it is actively traded within the meaning of section 1092(d) and §1.1092(d)-1 when documentation is provided.

* * * * *

(h) Dividend equivalents. The rate of withholding on a dividend equivalent may be reduced to the extent provided under an income tax treaty in effect between the United States and a foreign country. For this purpose, a dividend equivalent is treated as a dividend from sources within the United States. To receive a reduced rate of withholding with respect to a dividend equivalent, a foreign person must satisfy the other requirements described in this section.

(i) Effective/applicability dates—(1) General rule. This section applies to payments made after December 31, 2000, except for paragraph (g) of this section which applies to payments made after December 31, 2001, and paragraph (h) of this section which applies to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

(2) [Reserved]

Par. 12. Section 1.1441-7 is amended by:

1. Redesignating paragraph (a)(2) as paragraph (a)(3) and revising newly designated paragraph (a)(3).

2. Adding a new paragraph (a)(2).

3. Adding an entry for Example 6 in paragraph (a)(3).

4. Revising paragraph (g).

The revision and addition read as follows:

(a) * * *

(2) [The text of the proposed amendments to §1.1441-7(a)(2) is the same as the text for §1.1441-7T(a)(2) published elsewhere in this issue of the Bulletin].

(3) [The text of the proposed amendments to §1.1441-7(a)(3) is the same as the text for §1.1441-7T(a)(3) published elsewhere in this issue of the Bulletin].

* * * * *

Example 6. [The text of the proposed amendments to §1.1441-7(a)(3), Example 6 is the same as the text for §1.1441-7T(a)(3), Example 6 published elsewhere in this issue of the Bulletin].

* * * * *

(g) Effective/applicability date. Except as otherwise provided in paragraph (f)(3) of this section and as otherwise provided in this paragraph (g), this section applies to payments made after December 31, 2000. Paragraph (a)(2) applies to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

Par. 13. Section 1.1461-1 is amended by:

1. Redesignating paragraph (c)(2)(i)(L) and (M) as paragraphs (c)(2)(i)(M) and (N) respectively.

2. Adding a new paragraph (c)(2)(i)(L).

3. Revising paragraph (i).

The addition reads as follows:

* * * * *

(c) * * *

(2) * * *

(i) * * *

(L) [The text of the proposed amendments to §1.1461-1(c)(2)(i)(L) is the same as the text for §1.1461-1T(c)(2)(i)(L) published elsewhere in this issue of the Bulletin].

* * * * *

(i) Effective/applicability date. Unless otherwise provided in this section and as otherwise provided in this paragraph (i), this section shall apply to returns required for payments made after December 31, 2000. The rules of paragraph (c)(2)(i)(L) of this section apply to returns for payments made on or after the date of publication of the Treasury decision adopting these rules as final regulation in the Federal Register.

* * * * *

(g)* * *

(2)* * *

(v)* * *

(B)* * *

(2) [The text of the proposed amendment to §1.482-7(g)(2)(v)(B)(2) is the same as the text of §1.482-7T(g)(2)(v)(B)(2) published elsewhere in this issue of the Bulletin].

* * * * *

(4)* * *

(v) Application of income method using differential income stream. In some cases, the present value of an arm’s length PCT Payment may be determined as the present value, discounted at the appropriate rate, of the PCT Payor’s reasonably anticipated stream of additional positive or negative income over the duration of the CSA Activity that would result (before PCT Payments) from undertaking the cost sharing alternative rather than the licensing alternative (differential income stream). See Example 9 of paragraph (g)(4)(viii) of this section.

* * * * *

(vi)* * *

(F)* * *

(2) [The text of the proposed amendment to §1.482-7(g)(4)(vi)(F)(2) is the same as the text of §1.482-7T(g)(4)(vi)(F)(2) published elsewhere in this issue of the Bulletin.]

* * * * *

(viii) * * *

Example 8 [The text of the proposed amendment to §1.482-7(g)(4)(viii) (Example 8) is the same as the text of §1.482-7T(g)(4)(viii) (Example 8) published elsewhere in this issue of the Bulletin.]

Example 9. The facts are the same as in Example 1, except that additional data on discount rates are available that were not available in Example 1. The Commissioner determines the arm’s length charge for the PCT Payment by discounting at an appropriate rate the differential income stream associated with the rights contributed by USP in the PCT (that is, the stream of income in column (11) of Example 1). Based on an analysis of a set of public companies whose resources, capabilities, and rights consist primarily of resources, capabilities, and rights similar to those contributed by USP in the PCT, the Commissioner determines that 15% to 17% is an appropriate range of discount rates to use to assess the value of the differential income stream associated with the rights contributed by USP in the PCT. The Commissioner determines that applying a discount rate of 17% to the differential income stream associated with the rights contributed by USP in the PCT yields a present value of $446 million, while applying a discount rate of 15% to the differential income stream associated with the rights contributed by USP in the PCT yields a present value of $510 million. Because the taxpayer’s result, $464 million, is within the interquartile range determined by the Commissioner, no adjustments are warranted. See paragraphs (g)(2)(v)(B)(2), (g)(4)(v), and (g)(4)(vi)(F)(1) of this section.

* * * * *

(l) Effective/Applicability Dates. Treas. Reg. §1.482-7(g)(2)(v)(B)(2), (g)(4)(vi)(F)(2) and (g)(4)(viii), Example 8 apply to taxable years beginning on or after December 19, 2011. Treas. Reg. §1.482-7(g)(4)(v) and (viii), Example 9 apply to taxable years beginning on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.

* * * * *