income tax estate taxare effective on may 4, 2012. applicability dates: for dates of appli-cability,...

Bulletin No. 2012-23June 4, 2012

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2012–15, page 975.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for June 2012.

T.D. 9588, page 969.Final regulations under section 163 of the Code provide ruleson allocating prepaid qualified mortgage insurance premiumsto determine the amount of the prepaid premium that is treatedas qualified residence interest each taxable year.

T.D. 9589, page 971.REG–107548–11, page 977.Final, temporary, and proposed regulations under section 956of the Code provide that certain obligations of United Statespersons arising from upfront payments made by controlled for-eign corporations pursuant to contracts that are cleared by aderivatives clearing organization or clearing agency do not con-stitute United States property.

REG–119632–11, page 978.Proposed regulations under section 6103 of the Code was en-acted under the Patent Protection and Affordable Care Act,Public Law 111–48 (124 Stat. 119 (2010)) to permit the dis-closure of return information in order to determine a taxpayer’seligibility in certain health insurance affordability programs. Inaddition to items specifically enumerated in the statute, section6103(1)(21)(A)(iv) permits the disclosure of items prescribedby the Secretary by regulation as might indicate whether thetaxpayer is eligible for a tax credit under section 36B of theCode, or a cost-sharing reduction under section 1402 of theAffordable Act. The regulation contains detailing items of return

information that may be disclosed under section 6101(1)(21).A public hearing is scheduled for August 31, 2012.

ESTATE TAX

REG–119632–11, page 978.Proposed regulations under section 6103 of the Code was en-acted under the Patent Protection and Affordable Care Act,Public Law 111–48 (124 Stat. 119 (2010)) to permit the dis-closure of return information in order to determine a taxpayer’seligibility in certain health insurance affordability programs. Inaddition to items specifically enumerated in the statute, section6103(1)(21)(A)(iv) permits the disclosure of items prescribedby the Secretary by regulation as might indicate whether thetaxpayer is eligible for a tax credit under section 36B of theCode, or a cost-sharing reduction under section 1402 of theAffordable Act. The regulation contains detailing items of returninformation that may be disclosed under section 6101(1)(21).A public hearing is scheduled for August 31, 2012.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 982.Finding Lists begin on page ii.

GIFT TAX


EMPLOYMENT TAX


EXCISE TAX


ADMINISTRATIVE


June 4, 2012 2012–23 I.R.B.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2012–23 I.R.B. June 4, 2012

June 4, 2012 2012–23 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof June 2012. See Rev. Rul. 2012-15, page 975.

Section 163.—Interest26 CFR 1.163–11: Allocation of certain prepaidqualified mortgage insurance premiums.

T.D. 9588

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Allocation of MortgageInsurance Premiums

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations that explain how to allocateprepaid qualified mortgage insurance pre-miums to determine the amount of the pre-paid premium that is treated as qualifiedresidence interest each taxable year. Thefinal regulations reflect changes to the lawmade by the Tax Relief and Health CareAct of 2006, the Mortgage ForgivenessDebt Relief Act of 2007, and the Tax Re-lief, Unemployment Insurance Reautho-rization, and Job Creation Act of 2010.The regulations affect taxpayers who payprepaid qualified mortgage insurance pre-miums.

DATES: Effective Date: These regulationsare effective on May 4, 2012.

Applicability Dates: For dates of appli-cability, see §1.163–11(d).

FOR FURTHER INFORMATIONCONTACT: Charles Kim, (202) 622–5020(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 1. On May 7, 2009,the Treasury Department and IRS pub-lished temporary regulations (T.D. 9449,2009–22 I.R.B. 1044) under section 163of the Internal Revenue Code (Code) inthe Federal Register (74 FR 21256) thatexplain how to allocate prepaid qualifiedmortgage insurance premiums to deter-mine the amount of the prepaid premiumthat is treated as qualified residence inter-est each taxable year. On the same day,the Treasury Department and IRS pub-lished a notice of proposed rulemaking(REG–107271–08, 2009–22 I.R.B. 1051)cross-referencing the temporary regula-tions in the Federal Register (74 FR21295). No public hearing was requestedor held. No comments responding to thenotice of proposed rulemaking were re-ceived. The proposed regulations undersection 163 are adopted as amended by thisTreasury decision, and the correspondingtemporary regulations under section 163are removed.

T.D. 9449 also contained temporaryregulations under section 6050H(h) thatrequire persons who receive premiums,including prepaid premiums, for mort-gage insurance to make a return set-ting forth the amount of premiums re-ceived. A notice of proposed rulemaking(REG–107271–08) cross-referencing thetemporary regulations was published inthe Federal Register on the same day(74 FR 21295). Because the deductionfor mortgage insurance premiums cur-rently does not apply to amounts paidor accrued after December 31, 2011, theTreasury Department and the IRS arenot taking any action at this time withrespect to the temporary regulations orthe proposed regulations under section6050H(h). The temporary regulations willexpire on May 4, 2012.

Section 419 of the Tax Relief andHealth Care Act of 2006, Public Law109–432 (120 Stat. 2967) (2006), added

sections 163(h)(3)(E), (h)(4)(E), and(h)(4)(F) to the Code. Section 3 ofthe Mortgage Forgiveness Debt Re-lief Act of 2007, Public Law 110–142(121 Stat. 1803) (2007), amended section163(h)(3)(E)(iv). Section 759(a) of theTax Relief, Unemployment InsuranceReauthorization, and Job Creation Actof 2010, Public Law 111–312 (124Stat. 3296) (2010), further amendedsection 163(h)(3)(E)(iv). In general, thesenew provisions treat certain qualifiedmortgage insurance premiums as qualifiedresidence interest. This treatment onlyapplies to certain qualified mortgageinsurance premiums paid or accruedon or after January 1, 2007, and on orbefore December 31, 2011, on mortgageinsurance contracts issued on or afterJanuary 1, 2007.

Section 163(h)(3)(E)(i) provides thatpremiums paid or accrued for qualifiedmortgage insurance in connection withacquisition indebtedness for a qualifiedresidence are treated as qualified resi-dence interest for purposes of section163. Section 163(h)(4)(E) defines quali-fied mortgage insurance as (i) mortgageinsurance provided by the Veterans Ad-ministration (VA), the Federal HousingAdministration (FHA), or the Rural Hous-ing Administration (Rural Housing),1 and(ii) private mortgage insurance (as de-fined by section 2 of the HomeownersProtection Act of 1998 (12 U.S.C. 4901)as in effect on December 20, 2006). Theamount treated as qualified residence in-terest may be reduced or eliminated undersection 163(h)(3)(E)(ii), which providesthat the amount allowed as a deduction isphased out ratably by 10 percent for each$1,000 ($500 in the case of a married indi-vidual filing a separate return) (or fractionthereof) that the taxpayer’s adjusted grossincome exceeds $100,000 ($50,000 in thecase of a married individual filing a sepa-rate return).

Section 163(h)(4)(F) states that anyamount paid by the taxpayer for quali-fied mortgage insurance that is properlyallocable to any mortgage the paymentof which extends to periods that are af-

1 References in section 163(h)(4)(E)(i) to the Veterans Administration and Rural Housing Administration are interpreted to mean their respective successors, the Department of VeteransAffairs and Rural Housing Service.

2012–23 I.R.B. 969 June 4, 2012

ter the close of the taxable year in whichthe amount is paid shall be chargeableto capital account and shall be treated aspaid in the periods to which the amount isallocated. No deduction shall be allowedfor the unamortized balance of the accountif the mortgage is satisfied before the endof its term. Section 163(h)(4)(F) providesthat the allocation rules under section163(h)(4)(F) do not apply to amounts paidfor qualified mortgage insurance providedby the VA or Rural Housing. Additionally,section 163(h)(3)(E)(iv)(II) disallows adeduction for amounts allocable to anyperiod after December 31, 2011.

Explanation of Provisions

These final regulations provide rules re-garding the allocation of prepaid quali-fied mortgage insurance premiums to de-termine the amount of the prepaid pre-mium that is treated as qualified residenceinterest each taxable year under section163(h)(4)(F).

These final regulations apply to prepaidqualified mortgage insurance premiumspaid or accrued on or after January 1, 2011.The treatment of mortgage insurancepremiums as interest described in thesefinal regulations is limited to prepaidqualified mortgage insurance premiumsthat are paid or accrued on or afterJanuary 1, 2011, and during periods towhich section 163(h)(3)(E) is applicable.The temporary regulations are applicableto prepaid qualified mortgage insurancepremiums paid or accrued on or afterJanuary 1, 2008, and on or beforeDecember 31, 2010.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause the regulations do not impose acollection of information on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant to sec-tion 7805(f) of the Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counsel

for Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business, and no comments were re-ceived.

Drafting Information

The principal author of these regula-tions is Charles Kim, Office of the Asso-ciate Chief Counsel (Income Tax and Ac-counting). However, other personnel fromthe IRS and the Treasury Department par-ticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.163–11 is added to

read as follows:

§1.163–11 Allocation of certain prepaidqualified mortgage insurance premiums.

(a) Allocation—(1) In general. As pro-vided in section 163(h)(3)(E), premiumspaid or accrued for qualified mortgage in-surance during the taxable year in connec-tion with acquisition indebtedness with re-spect to a qualified residence (as definedin section 163(h)(4)(A)) of the taxpayershall be treated as qualified residence in-terest (as defined in section 163(h)(3)(A)).If an individual taxpayer pays such a pre-mium that is properly allocable to a mort-gage the payment of which extends to pe-riods beyond the close of the taxable yearin which the premium is paid, the taxpayermust allocate the premium to determinethe amount treated as qualified residenceinterest for each taxable year. The pre-mium must be allocated ratably over theshorter of—

(i) The stated term of the mortgage; or(ii) A period of 84 months, beginning

with the month in which the insurance wasobtained.

(2) Limitation. If a mortgage is satis-fied before the end of its stated term, no de-duction as qualified residence interest shall

be allowed for any amount of the premiumthat is allocable to periods after the mort-gage is satisfied.

(b) Scope. The allocation requirementin paragraph (a) of this section appliesonly to mortgage insurance provided bythe Federal Housing Administration or pri-vate mortgage insurance (as defined bysection 2 of the Homeowners ProtectionAct of 1998 (12 U.S.C. 4901) as in effecton December 20, 2006). It does not ap-ply to mortgage insurance provided by theDepartment of Veterans Affairs or the Ru-ral Housing Service. Paragraph (a) of thissection applies whether the qualified mort-gage insurance premiums are paid in cashor are financed, without regard to source.

(c) Limitation on the treatment of mort-gage insurance premiums as interest.This section applies to prepaid qualifiedmortgage insurance premiums describedin paragraph (a) of this section that arepaid or accrued on or after January 1,2011, and during periods to which section163(h)(3)(E) is applicable. This sectiondoes not apply to any amount of prepaidqualified mortgage insurance premiumsthat are allocable to any periods to whichsection 163(h)(3)(E) is not applicable.

(d) Effective/applicability date.This section is applicable on and af-ter January 1, 2011. For regulationsapplicable before January 1, 2011, see§1.163–11T in effect prior to January 1,2011 (§1.163–11T as contained in 26 CFRpart 1 edition revised as of April 1, 2011).

§1.163–11T [Removed]

Par. 3. Section 1.163–11T is removed.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved April 24, 2012.

Emily S. McMahon,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 4, 2012,8:45 a.m., and published in the issue of the Federal Registerfor May 7, 2012, 77 F.R. 26698)

June 4, 2012 970 2012–23 I.R.B.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of June 2012. See Rev.Rul. 2012-15, page 975.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rates isset forth for the month of June 2012. See Rev. Rul.2012-15, page 975.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 956.—Investmentof Earnings in UnitedStates Property26 CFR 1.956–2: Definition of United States prop-erty.

T.D. 9589

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Modifications to Definition ofUnited States Property


ACTION: Final and temporary regula-tions.

SUMMARY: This document contains fi-nal and temporary regulations relating tothe treatment of upfront payments madepursuant to certain notional principalcontracts for U.S. federal income tax pur-poses. The temporary regulations providethat certain obligations of United Statespersons arising from upfront paymentsmade by controlled foreign corporationspursuant to contracts that are cleared by aderivatives clearing organization or clear-ing agency do not constitute United Statesproperty. These regulations affect United

States shareholders of controlled foreigncorporations that make such payments.The text of the temporary regulations alsoserves as the text of the proposed regula-tions set forth in the notice of proposedrulemaking (REG–107548–11) on thissubject in this issue of the Bulletin.

DATES: Effective Date: These regulationsare effective on May 11, 2012.

Applicability Date: These regula-tions apply to payments described in§1.956–2T(b)(1)(xi) made on or afterMay 11, 2012.

FOR FURTHER INFORMATIONCONTACT: Kristine A. Crabtree at (202)622–3840 (not a toll-free number).


Background

A. Section 956

Section 956 was enacted to require anincome inclusion by United States share-holders (as defined in section 951(b)) of acontrolled foreign corporation (as definedin section 957(a)) that invests certain earn-ings and profits in United States property(U.S. property) “on the grounds that [theinvestment] is substantially the equiva-lent of a dividend being paid to them.”S. Rep. No. 87–1881, 1962–3 C.B. 703,794 (1962). Under section 951(a)(1)(B),each United States shareholder (U.S.shareholder) of a controlled foreigncorporation (CFC) is generally requiredto currently include in its gross incomethe amount determined under section 956with respect to such shareholder.

The amount determined under section956 with respect to a U.S. shareholder ofa CFC for any taxable year is the lesserof: (1) the excess, if any, of the share-holder’s pro rata share of the average ofthe amounts of U.S. property held (di-rectly or indirectly) by the CFC as ofthe close of each quarter of such taxableyear, over the amount of earnings andprofits of the CFC described in section959(c)(1)(A) with respect to such share-holder; or (2) the shareholder’s pro ratashare of the applicable earnings of theCFC. In general, the amount taken into ac-count with respect to any U.S. property forthis purpose is the adjusted basis of such

2012–23 I.R.B. 971 June 4, 2012

property as determined for purposes ofcomputing earnings and profits, reducedby any liability to which the property issubject. Earnings and profits describedin section 959(c)(1)(A) are attributableto amounts previously included in grossincome by the U.S. shareholder undersection 951(a)(1)(B) (or which wouldhave been included except for section959(a)(2)).

Section 956(c)(1) defines U.S. propertyto generally include stock of a domesticcorporation and an obligation of a UnitedStates person (U.S. person). Section956(c)(2), however, generally excludesfrom the definition of U.S. property thestock or obligations of a domestic corpo-ration that is neither a U.S. shareholder ofthe CFC nor a domestic corporation, 25percent or more of the total combined vot-ing power of which, immediately after theCFC’s acquisition of stock in such domes-tic corporation, is owned, or is consideredas being owned, by U.S. shareholders ofthe CFC. Under §1.956–2T(d)(2), subjectto certain exceptions not relevant here, theterm “obligation” includes any bond, note,debenture, certificate, bill receivable, ac-count receivable, note receivable, openaccount, or other indebtedness, whether ornot issued at a discount and whether or notbearing interest.

B. NPCs with Nonperiodic (Upfront)Payments

When a notional principal contract(within the meaning of §1.446–3(c)(1))(NPC) includes a significant nonperiodicpayment, the contract is generally treatedas two separate transactions. One transac-tion is an on-market, level payment swap;the other is a loan. For purposes of sec-tion 956, the Commissioner may treat anynonperiodic payment in connection withan NPC, whether or not it is significant,as one or more loans. See §1.446–3(g)(4).If a party to an NPC makes below-marketperiodic payments or receives above-mar-ket periodic payments under the terms ofthe contract, typically that party will makea nonperiodic payment, such as an upfrontpayment, to the counterparty in order tocompensate for the off-market couponpayments specified in the contract.

For example, if A and B enter into anoff-market interest rate swap the terms ofwhich require A to make periodic below-

market fixed rate payments to B and re-quire B to make periodic on-market float-ing rate payments to A, then A typicallywill compensate B (for receiving the be-low-market fixed rate payments) by mak-ing a nonperiodic payment at the outset ofthe interest rate swap (henceforth, an up-front payment) so that the present value ofthe fixed rate leg of the swap will equal thepresent value of the floating rate leg of theswap.

Recently, certain contracts (clearedcontracts), including some credit de-fault swaps and interest rate swaps, havebegun to be cleared through U.S.-regis-tered derivatives clearing organizations orclearing agencies (collectively, U.S.-reg-istered clearinghouses). Contracts clearedthrough a U.S.-registered clearinghousegenerally are required to have standardizedterms. For example, credit default swapsthat are cleared through a U.S.-registeredclearinghouse have common documenta-tion and standardized coupons (currently100 or 500 basis points). Consequently,except for the rare instance when themarket coupon rate for a particular creditdefault swap is exactly 100 or 500 ba-sis points, a credit default swap with astandardized coupon will be off-marketand will require an upfront payment toequalize the present value of the paymentobligations under the contract.

The volume of contracts cleared byU.S.-registered clearinghouses is expectedto increase substantially as a result ofthe Dodd-Frank Wall Street Reform andConsumer Protection Act of 2010, Pub-lic Law No. 111–203, 124 Stat. 1376(the Dodd-Frank Act). Title VII of theDodd-Frank Act, among other things: (1)provides for the registration and com-prehensive regulation of swap dealersand major swap participants; (2) imposesclearing and trade execution requirementson many swap contracts; and (3) createsrigorous recordkeeping and real-time re-porting regimes.

C. Clearinghouse Margin Requirementsto Manage Credit Risk

U.S.-registered clearinghouses managecredit risk (the risk of counterparty default)in part by requiring that each party to acleared contract provide various types ofmargin, including initial variation marginand daily variation margin (both of which

are discussed in this section of the pre-amble). Cash margin payments (as wellas other payments made pursuant to theterms of a cleared contract) to and froma U.S.-registered clearinghouse are madeto or through a clearing member (that is,a futures commission merchant, broker, ordealer who is a member of the clearing-house) which, in turn, makes correspond-ing payments to or receives correspondingpayments from a counterparty.

(1) Initial Variation Margin Required toOffset Upfront Payment

The party that makes an upfront pay-ment pursuant to a cleared contract (thefirst party) has credit risk with respect tothat payment because, if the clearinghouse(or the first party’s clearing member)were to default, the first party would notreceive the full benefit it paid for (thebenefit of making below-market fixedrate payments or receiving above-marketpayments for the term of the contract).When the U.S.-registered clearinghousemakes the upfront payment to the otherparty to the cleared contract (the secondparty), the U.S.-registered clearinghousesimilarly has credit risk with respect tothat second party (or its clearing member).The second party (the ultimate recipientof the upfront payment) is thus required tomake a payment in the nature of variationmargin (initial variation margin) to theU.S.-registered clearinghouse, generallyno later than the end of the business dayon which the upfront payment is made,in an amount that is equal to the upfrontpayment.

In some instances, the total amount ofmargin posted by the second party on theday that it is required to post initial vari-ation margin may not equal the amount ofthe first party’s upfront payment, due to ei-ther: (1) the netting of the second party’snotional exposure to the first party, or tothe clearinghouse, as a result of other trans-actions; or (2) changes in the value of thecontract between the time the contract isentered into and the time when the requiredmargin is paid, requiring daily variationmargin to be added to or subtracted fromthe second party’s initial variation marginpayment, as the case may be. However,on a transaction-by-transaction basis, thepayment of initial variation margin by thesecond party should equal the first party’s

June 4, 2012 972 2012–23 I.R.B.

upfront payment when any daily variationmargin is treated as separate from the ini-tial variation margin posted on that day.

After receiving the second party’s ini-tial variation margin payment, the U.S.-registered clearinghouse will pay the sameamount to the first party. In each case, un-less the first party and the second party areclearing members of the U.S.-registeredclearinghouse, the payment will be madeto or through each party’s clearing mem-ber, which may be an affiliate of that party.

Assume that D (a dealer under sec-tion 475) and C (a customer) enter into acontract that is accepted for clearing by aU.S.-registered clearinghouse, the termsof which require D to make below-mar-ket periodic payments to C. D is requiredunder the contract to make an upfrontpayment of $25,000 to compensate C forthe below-market coupon payments thatC will receive. D (not a clearing member)makes that upfront payment to its clearingmember, who then pays the U.S.-regis-tered clearinghouse an identical amount.The U.S.-registered clearinghouse in turnpays that amount to the clearing memberfor C, which makes the upfront paymentto C. C, on the same business day, makesan initial variation margin payment of$25,000 to its clearing member, who thenpays that amount to the U.S.-registeredclearinghouse; the U.S.-registered clear-inghouse makes the initial variation mar-gin payment to D’s clearing member; andD’s clearing member makes the paymentto D. Thus, the upfront payment from D isimmediately offset by an initial variationmargin payment in the same amount fromC.

(2) Daily Variation Margin Required toAccount for Daily Market Fluctuation

In addition to initial variation margin,U.S.-registered clearinghouses managecredit risk by requiring that each party toa cleared contract provide daily variationmargin (also referred to as mark-to-marketor maintenance margin). Daily variationmargin is a cash margin payment made ona daily or intraday basis between the coun-terparties to a contract to protect againstthe risk of counterparty default. The rulesof U.S.-registered clearinghouses gener-ally require that daily variation margin bepaid in an amount equal to the change inthe fair market value of the contract.

Explanation of Provisions

The text of these temporary regulationsalso serves as the text of the proposed reg-ulations set forth in the notice of proposedrulemaking on this subject in this issue ofthe Bulletin. These temporary regulationsestablish an exception to the definition ofU.S. property for obligations of U.S. per-sons arising from upfront payments madewith respect to certain cleared contractsthat are properly classified as NPCs. Thetemporary regulations provide that obliga-tions of U.S. persons arising from such up-front payments by a CFC that is a dealerin securities or commodities (within themeaning of section 475) do not consti-tute U.S. property for purposes of section956(a).

To qualify for this exception: (1) theupfront payment must be required undera contract that is cleared by a derivativesclearing organization (as such term is de-fined in section 1a of the Commodity Ex-change Act (7 U.S.C. 1a)) or a clearingagency (as such term is defined in sec-tion 3 of the Securities Exchange Act of1934 (15 U.S.C. 78c)) that is registered as aderivatives clearing organization under theCommodity Exchange Act or as a clearingagency under the Securities Exchange Actof 1934, respectively; (2) the CFC mustmake the upfront payment to or througha United States person that is a clearingmember of the derivatives clearing organi-zation or clearing agency, or directly to thederivatives clearing organization or clear-ing agency if the CFC is a clearing mem-ber of such derivatives clearing organiza-tion or clearing agency; (3) the upfrontpayment must be made, directly or indi-rectly, to the counterparty to the contract;(4) the counterparty to the contract mustbe required to make a payment in the na-ture of initial variation margin that is equal(before taking into account any change inthe value of the contract between the timethe contract is entered into and the time atwhich the payment is made) to the amountof the upfront payment made by the CFC;and (5) such payment in the nature of ini-tial variation margin must be paid, directlyor indirectly, to the CFC.

The IRS and the Treasury Departmentdo not believe that an obligation of a U.S.person created by an upfront payment re-sulting from a cleared contract that satis-fies the requirements listed in this regu-

lation is the type of transaction intendedto be covered by section 956, whether ornot the payment is treated as a loan underthe NPC rules under section 446. Whilethe section 956 exception in these tem-porary regulations currently is limited tocleared contracts, the IRS and the TreasuryDepartment continue to study, and requestcomments on, whether and under what cir-cumstances it would be appropriate to ex-tend the exception to contracts that are notcleared by a U.S.-registered clearinghouse,but that would otherwise meet the criteriaset forth in these temporary regulations.

Effective/Applicability Date

These regulations apply to paymentsdescribed in §1.956–2T(b)(1)(xi) made onor after May 11, 2012. However, taxpay-ers may apply the rules of these regula-tions retroactively to payments made priorto May 11, 2012.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Adminis-trative Procedure Act (5 U.S.C. chapter 5)does not apply to these regulations. For theapplicability of the Regulatory FlexibilityAct (5 U.S.C. chapter 6), refer to the cross-reference notice of proposed rulemakingpublished in the proposed rules section inthis issue of the Bulletin. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,these regulations have been submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on their impact on small entities.


The principal author of these regula-tions is Kristine A. Crabtree of the Of-fice of Associate Chief Counsel (Interna-tional). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:

2012–23 I.R.B. 973 June 4, 2012

PART 1— INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.956–2T(b)(1)(xi) also issued

under 26 U.S.C. 956(e). * * *Par. 2. Section 1.956–2 is amended by

adding a new paragraph (b)(1)(xi) to readas follows:

§1.956–2 Definition of United Statesproperty.

* * * * *(b) * * *(1) * * *(xi) [Reserved]. For further guidance,

see §1.956–2T(b)(1)(xi).

* * * * *Par. 3. Section 1.956–2T is amended

by:1. Revising paragraphs (a) through

(d)(1).2. Adding new paragraphs (f) and (g).The revisions and additions read as fol-

lows:

§1.956–2T Definition of United Statesproperty (temporary).

(a) through (b)(1)(x) [Reserved]. Forfurther guidance, see §1.956–2(a) through(b)(1)(x).

(xi) An obligation of a United Statesperson arising from an upfront payment bya controlled foreign corporation (withinthe meaning of section 957(a)) with re-spect to a notional principal contract(within the meaning of §1.446–3(c)(1))where the following conditions are satis-fied—

(A) The controlled foreign corporationthat makes the upfront payment is a dealerin securities or commodities (within themeaning of section 475(c)(1) or (e)(1));

(B) The upfront payment is required un-der a contract that is cleared by a deriva-tives clearing organization (as such termis defined in section 1a of the Commod-ity Exchange Act (7 U.S.C. 1a)) or a clear-ing agency (as such term is defined in sec-tion 3 of the Securities Exchange Act of1934 (15 U.S.C. 78c)) that is registered as aderivatives clearing organization under the

Commodity Exchange Act or as a clearingagency under the Securities Exchange Actof 1934, respectively;

(C) The controlled foreign corporationmakes the upfront payment:

(1) To or through a United States personthat is a clearing member of a derivativesclearing organization or clearing agency,or

(2) Directly to the derivatives clearingorganization or clearing agency if the con-trolled foreign corporation is a clearingmember of such derivatives clearing or-ganization or clearing agency;

(D) The upfront payment is made by thederivatives clearing organization or clear-ing agency, directly or indirectly, to theoriginal counterparty to the contract;

(E) The original counterparty to thecontract that receives the upfront payment,as described in paragraph (b)(1)(xi)(D) ofthis section, is required by the derivativesclearing organization or clearing agencyto make, by the end of the business day onwhich the upfront payment is made by thecontrolled foreign corporation, a paymentin the nature of initial variation marginthat is equal (before taking into accountany change in the value of the contractbetween the time the contract is enteredinto and the time at which the payment ismade) to the amount of the upfront pay-ment and such payment is made, directlyor indirectly, to the derivatives clearingorganization or clearing agency; and

(F) The payment in the nature of initialvariation margin is paid by the derivativesclearing organization or clearing agency,directly or indirectly, to the controlled for-eign corporation.

(G) Examples. The following examplesillustrate the application of this paragraph(b)(1)(xi):

Example 1. CFC is a controlled foreign corpora-tion that is wholly owned by USP, a domestic cor-poration. CFC is a dealer in securities under sec-tion 475(c)(1). CFC enters into a credit default swap(that it treats as a notional principal contract for U.S.federal income tax purposes) with unrelated coun-terparty B. The credit default swap is accepted forclearing by a U.S.-registered derivatives clearing or-ganization (DCO). CFC is not a member of DCO.CFC uses a U.S. affiliate (CM), which is a memberof DCO, as its clearing member to submit the creditdefault swap to be cleared. CM is a domestic cor-poration that is wholly owned by USP. The standard-ized terms of the credit default swap provide that, fora term of X years, CFC will pay B a fixed coupon

of 100 basis points per year on a notional amount of$Y. At the time CFC and B enter into the credit de-fault swap, the market coupon for similar credit de-fault swaps is 175 basis points per year. To compen-sate B for the below-market annual coupon paymentsthat B will receive, the contract requires CFC to makean upfront payment through CM to DCO. DCO thenmakes the upfront payment to B through B’s clearingmember. DCO also requires B to post initial variationmargin in an amount equal to the upfront payment. Bpays the initial variation margin through its clearingmember to DCO. DCO then pays the initial variationmargin through CM to CFC. Because the conditionsset out in this paragraph (b)(1)(xi) are satisfied, theobligation of CM arising from the upfront paymentby CFC does not constitute United States property forpurposes of section 956.

Example 2. Assume the same facts as in Example1, except that counterparty B is, like CM, a domesticcorporation that is wholly owned by USP. Becausethe conditions set out in this paragraph (b)(1)(xi) aresatisfied, the obligations of CM and B arising fromthe upfront payment by CFC do not constitute UnitedStates property for purposes of section 956.

Example 3. Assume the same facts as in Example2, except that CFC uses an unrelated person as itsclearing member. Because the conditions set out inthis paragraph (b)(1)(xi) are satisfied, the obligationof B arising from the upfront payment by CFC doesnot constitute United States property for purposes ofsection 956.

(b)(2) through (d)(1) [Reserved]. Forfurther guidance, see §1.956–2(b)(2)through (d)(1).

* * * * *(f) Effective/applicability date. Para-

graph (b)(1)(xi) applies to payments de-scribed in §1.956–2T(b)(1)(xi) made on orafter May 11, 2012. Taxpayers may applythe rules of paragraph (b)(1)(xi) to pay-ments described in §1.956–2T(b)(1)(xi)made prior to May 11, 2012.

(g) Expiration date. The applicabilityof paragraph (b)(1)(xi) expires on May 8,2015.


Approved May 1, 2012.

Emily S. McMahon,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 10, 2012,8:45 a.m., and published in the issue of the Federal Registerfor May 11, 2012, 77 F.R. 27612)

June 4, 2012 974 2012–23 I.R.B.

Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for June 2012.

Rev. Rul. 2012–15

This revenue ruling provides variousprescribed rates for federal income tax pur-

poses for June 2012 (the current month).Table 1 contains the short-term, mid-term,and long-term applicable federal rates(AFR) for the current month for purposesof section 1274(d) of the Internal RevenueCode. Table 2 contains the short-term,mid-term, and long-term adjusted appli-cable federal rates (adjusted AFR) forthe current month for purposes of section1288(b). Table 3 sets forth the adjustedfederal long-term rate and the long-termtax-exempt rate described in section382(f). Table 4 contains the appropriatepercentages for determining the low-in-come housing credit described in section42(b)(1) for buildings placed in serviceduring the current month. However, under

section 42(b)(2), the applicable percentagefor non-federally subsidized new build-ings placed in service after July 30, 2008,and before December 31, 2013, shall notbe less than 9%. Finally, Table 5 containsthe federal rate for determining the presentvalue of an annuity, an interest for lifeor for a term of years, or a remainder ora reversionary interest for purposes ofsection 7520.

REV. RUL. 2012–15 TABLE 1

Applicable Federal Rates (AFR) for June 2012

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .23% .23% .23% .23%110% AFR .25% .25% .25% .25%120% AFR .28% .28% .28% .28%130% AFR .30% .30% .30% .30%

Mid-term

AFR 1.07% 1.07% 1.07% 1.07%110% AFR 1.18% 1.18% 1.18% 1.18%120% AFR 1.28% 1.28% 1.28% 1.28%130% AFR 1.39% 1.39% 1.39% 1.39%150% AFR 1.62% 1.61% 1.61% 1.60%175% AFR 1.88% 1.87% 1.87% 1.86%

Long-term

AFR 2.64% 2.62% 2.61% 2.61%110% AFR 2.90% 2.88% 2.87% 2.86%120% AFR 3.16% 3.14% 3.13% 3.12%130% AFR 3.44% 3.41% 3.40% 3.39%


Adjusted AFR for June 2012

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

.26% .26% .26% .26%

Mid-term adjusted AFR 1.16% 1.16% 1.16% 1.16%

Long-term adjustedAFR

3.06% 3.04% 3.03% 3.02%

2012–23 I.R.B. 975 June 4, 2012


Rates Under Section 382 for June 2012

Adjusted federal long-term rate for the current month 3.06%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 3.26%


Appropriate Percentages Under Section 42(b)(1) for June 2012

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service afterJuly 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.43%

Appropriate percentage for the 30% present value low-income housing credit 3.18%


Rate Under Section 7520 for June 2012

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 1.2%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


June 4, 2012 976 2012–23 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulations

Modifications to Definition ofUnited States Property

REG–107548–11


ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: In this issue of the Bulletin,the IRS and the Treasury Department areissuing temporary regulations (T.D. 9589)relating to the treatment of upfront pay-ments made pursuant to certain notionalprincipal contracts. The temporary reg-ulations provide that certain obligationsof United States persons arising from up-front payments made by controlled foreigncorporations pursuant to contracts that arecleared by a derivatives clearing organiza-tion or clearing agency do not constituteUnited States property. The text of thetemporary regulations also serves as thetext of these proposed regulations.

DATES: Comments and requests fora public hearing must be received byAugust 9, 2012.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–107548–11), room5205, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–107548–11),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronically,via the Federal eRulemaking Portalat http://www.regulations.gov (IRSREG–107548–11).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Kristine A. Crabtree, (202)

622–3840; concerning submissions ofcomments or a request for a public hearing,Oluwafunmilayo Taylor, (202) 622–7180(not toll-free numbers).


Background and Explanation ofProvisions

The temporary regulations published inthis issue of the Bulletin establish an ex-ception to the definition of United Statesproperty (within the meaning of section956(c)) for obligations of United Statespersons arising from certain upfront pay-ments made with respect to certain con-tracts that are properly classified as no-tional principal contracts for U.S. Federalincome tax purposes and that are clearedby a derivatives clearing organization orclearing agency. The text of those tempo-rary regulations also serves as the text ofthese proposed regulations. The preambleto the temporary regulations explains thetemporary regulations and these proposedregulations.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations, and becausethese regulations do not impose a collec-tion of information on small entities, theRequlatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to section7805(f) of the Internal Revenue Code, thisnotice of proposed rulemaking has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small enti-ties.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that are sub-mitted timely to the IRS as prescribed in

this preamble under "Addresses.” In ad-dition to the specific requests for com-ments made elsewhere in this preamble orthe preamble to the temporary regulations,the IRS and the Treasury Department re-quest comments on all aspects of the pro-posed rules. All comments will be avail-able at www.regulations.gov or upon re-quest. A public hearing will be scheduledif requested in writing by any person whotimely submitted written comments. If apublic hearing is scheduled, notice of thedate, time, and place of the hearing will bepublished in the Federal Register.


The principal author of these regu-lations is Kristine A. Crabtree of theOffice of Associate Chief Counsel(International). However, other personnelfrom the IRS and the Treasury Departmentparticipated in their development.

* * * * *

Proposed Amendment to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.956–2(b)(1)(xi) also issued

under 26 U.S.C. 956(e).* * *Par. 2. Section 1.956–2 is amended by

adding new paragraphs (b)(1)(xi) and (f) toread as follows:

§1.956–2 Definition of United Statesproperty.

* * * * *(b)(1)(xi) [The text of this proposed

amendment is the same as the text of§1.956–2T(b)(1)(xi) published elsewherein this issue of the Bulletin].

* * * * *(f) [The text of this proposed

amendment is the same as the text of§1.956–2T(f) published elsewhere in thisissue of the Bulletin].

2012–23 I.R.B. 977 June 4, 2012


(Filed by the Office of the Federal Register on April 27, 2012,8:45 a.m., and published in the issue of the Federal Registerfor April 30, 2012, 77 F.R. 25378)

Notice of ProposedRulemaking and Notice ofPublic Hearing

Regulations Pertaining tothe Disclosure of ReturnInformation to Carry OutEligibility Requirements forHealth Insurance AffordabilityPrograms

REG–119632–11


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations relating to the disclo-sure of return information under section6103(l)(21) of the Internal Revenue Code,as enacted by the Patient Protection andAffordable Care Act and the Health Careand Education Reconciliation Act of 2010.The regulations define certain terms andprescribe certain items of return informa-tion in addition to those items prescribedby statute that will be disclosed, upon writ-ten request, under section 6103(l)(21) ofthe Internal Revenue Code.

DATES: Written (including electronic)comments must be received by July 30,2012. Outlines of topics to be discussedat the public hearing scheduled for Friday,August 31, 2012, must be received byJuly 30, 2012.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–119632–11),Room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–119632–11),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,

Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–119632–11). The public hearingwill be held in the IRS Auditorium,Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, Steven Karon, (202) 622–4570;concerning the submission of comments,the public hearing, and to be placed on thebuilding access list to attend the publichearing, Olumafunmilayo Taylor, (202)622–7180 (not toll-free numbers).


Background

Beginning in 2014, under the PatientProtection and Affordable Care Act, Pub-lic Law 111–148 (124 Stat. 119 (2010)),and the Health Care and Education Recon-ciliation Act of 2010, Public Law 111–152(124 Stat. 1029 (2010)) (collectively, theAffordable Care Act), Affordable Insur-ance Exchanges (Exchanges) will providecompetitive marketplaces for individualsand small employers to directly compareavailable private health insurance options(qualified health plans, or QHPs) on thebasis of price, quality, and other factors,and to purchase such coverage. A Feder-ally-facilitated Exchange will operate onbehalf of States electing not to pursue aState-based Exchange. In general, a QHPis a health plan offered by a health insur-ance issuer that meets minimum standardsin the law and set by an Exchange.

Qualified individuals and small em-ployers will be able to purchase privatehealth insurance through Exchanges. Cer-tain individuals who choose to obtaincoverage through an Exchange will beeligible to qualify for a new premiumtax credit and/or cost-sharing reductionsestablished to help make the purchase ofinsurance more affordable.

Section 1401 of the Affordable CareAct amended the Internal Revenue Codeto add section 36B, providing for the pre-mium tax credit to help eligible individualsand families afford health insurance cover-age. Section 1402 of the Affordable CareAct provides reduced cost-sharing for cer-tain individuals enrolled in qualified health

plans through the Exchange, decreasingthe individual’s out-of-pocket limits, de-ductibles, co-insurance, and co-paymentsin certain situations.

Section 1411(a) of the AffordableCare Act directs the Secretary of the De-partment of Health and Human Services(HHS) to establish a program under whichExchanges will determine whether in-dividuals are eligible to enroll in QHPsthrough the Exchange, and whether theyare eligible for advance payments of thepremium tax credit and cost-sharing re-ductions. Section 1412 of the AffordableCare Act directs the Secretary of HHSto establish a program for determiningeligibility for advance payments of thepremium tax credit and cost-sharing re-ductions that may be paid directly to aninsurance company on behalf of a tax-payer. Eligibility for advance payments,like eligibility for the premium tax credititself, is based in part on the householdincome of the individual who will claimthe credit. Household income is defined insection 36B(d)(2) as the total of the modi-fied adjusted gross incomes (MAGI) of thetaxpayer claiming the premium tax creditand those other individuals for whom thetaxpayer was allowed a deduction undersection 151 and who were required to filea tax return.

Section 1413(a) of the Affordable CareAct directs the Secretary of HHS to es-tablish a system under which an individ-ual may submit a single, streamlined appli-cation to apply for specified insurance af-fordability programs (that is, the premiumtax credit under section 36B, cost-shar-ing reductions under section 1402 of theAffordable Care Act, Medicaid, the Chil-dren’s Health Insurance Program (CHIP),and a State’s basic health program, if ap-plicable, under section 1331 of the Afford-able Care Act). The system must be com-patible with the processes set up to deter-mine eligibility for advance payments ofthe premium tax credit and cost-sharingreductions. Where an individual seekingeligibility for any of these insurance af-fordability programs is found to be eligi-ble for Medicaid or CHIP, the individual isenrolled in that program. If an individualis not eligible for one of these programs,the Exchange will make the determination(or provide for HHS to make the deter-mination) as to the individual’s eligibilityfor advance payments of the premium tax

June 4, 2012 978 2012–23 I.R.B.

credit under section 36B and for cost-shar-ing reductions, and the amount of any ad-vance payments. Under section 1412(c)(2)of the Affordable Care Act, advance pay-ments are made monthly (or on another pe-riodic basis as HHS may provide) directlyto the issuer of the qualified health plan inwhich the individual enrolls.

Section 1411(b)(3) of the AffordableCare Act requires that individuals seek-ing an eligibility determination for ad-vance payments of the premium tax creditor for cost-sharing reductions providethe Exchange with information regard-ing their household income and familysize to demonstrate that they meet theincome-based eligibility requirements.However, section 1411(c)(4)(B) of theAffordable Care Act grants the Secretaryof HHS authority to modify the methodsused for the verification of informationif the Secretary of HHS determines thosemodifications would reduce the adminis-trative costs and burdens on individualsseeking coverage through an Exchange.The section explicitly gives the Secretaryof HHS authority to change the mannerin which Exchanges determine eligibilityfor advance payments of the premium taxcredit or for cost-sharing reductions, solong as any applicable requirements un-der section 6103 of the Internal RevenueCode with respect to the confidentiality,disclosure, maintenance and use of returninformation would still be met. Section1411(g) of the Affordable Care Act furtherprovides that individuals will be requiredto provide only the minimum amount ofinformation needed to authenticate an in-dividual’s identity and to determine theindividual’s eligibility for, and amountof, advance payments of the premium taxcredit or cost-sharing reductions.

In proposing regulations in the Fed-eral Register on August 17, 2011, theSecretary of HHS concluded that a lessburdensome and more reasonable eli-gibility process would not require anindividual to provide an Exchange withspecific income-related information, suchas the individual’s MAGI (76 FR 51202at 51214). Accordingly, the Secretaryof HHS promulgated final regulationspublished in the Federal Register onMarch 27, 2012 (77 FR 18310), limitingthe information an individual needs toprovide to an Exchange for purposesof income verification and allowing the

Exchange to solicit information fromthe IRS through HHS with respect tothe individual and his family memberswhose names and social security numbers,or adoption taxpayer identificationnumbers, are provided. The regulationsalso provide guidance on the eligibilitydetermination process for enrollment in aQHP, advance payments of the premiumtax credit and cost-sharing reductions, andother insurance affordability programs.Additionally, the Secretary of HHSpromulgated final regulations publishedin the Federal Register on March 23,2012 (77 FR 17144) that providerevised eligibility rules for Medicaid.The Treasury Department and the IRSproposed regulations in the FederalRegister on August 17, 2011 (76 FR51202) to implement the new premium taxcredit.

Section 6103(l)(21) permits the disclo-sure of return information to assist Ex-changes in performing certain functionsset forth in section 1311 of the Afford-able Care Act for which income verifi-cation is required (including determina-tions of eligibility for the insurance af-fordability programs described in the Af-fordable Care Act), as well as to assistState agencies administering a State Med-icaid program under title XIX of the So-cial Security Act, CHIP under title XXI ofthe Social Security Act, or a basic healthprogram under section 1331 of the Af-fordable Care Act (if applicable). Sec-tion 6103(l)(21) identifies specific items ofreturn information that will be disclosedand permits the disclosure of such otheritems prescribed by regulation that mightindicate whether an individual is eligiblefor the premium tax credit under section36B or cost-sharing reductions under sec-tion 1402, and the amount thereof. Afteran individual submits an application for fi-nancial assistance in obtaining health cov-erage provided pursuant to Title I, subtitleE, of the Affordable Care Act (“the appli-cation”) to an Exchange or State agency,the IRS will disclose the available itemsof return information described under sec-tion 6103(l)(21)(A) to HHS. Pursuant tosection 6103(l)(21)(B), HHS will then dis-close the information to the Exchange orState agency that is processing the appli-cation.

As a condition for receiving return in-formation under section 6103(l)(21)(A)

and (B), each receiving entity (that is,HHS, the Exchanges, and State agenciesthat administer Medicaid, CHIP, or basichealth plans, and their respective contrac-tors) is required to adhere to the safeguardsestablished under section 6103(p)(4). Fi-nal HHS regulations published in theFederal Register on March 27, 2012(77 FR at 18446, 18450) state that tobe certified by HHS an Exchange mustdemonstrate readiness to meet the section6103 confidentiality requirements withrespect to the items of return informationthe Exchange will receive. As describedin section 6103(l)(21)(C), each receivingentity may then use the return informationreceived under sections 6103(l)(21)(A)and (B) only for the purposes of, and tothe extent necessary in, establishing eli-gibility for participation in the Exchange,verifying the appropriate amount of anyadvance payments of the premium taxcredit or cost-sharing reductions, and de-termining eligibility for participation in aState Medicaid program, CHIP, or basichealth program under section 1331 of theAffordable Care Act.

Under section 6103(l)(21)(A), the IRSwill disclose to HHS (including its con-tractor(s)) certain items of return informa-tion, as enumerated in the statute or byregulation, for any relevant taxpayer. Forpurposes of these regulations, a relevanttaxpayer is defined to be any individuallisted, by name and social security numberor adoption taxpayer identification number(“taxpayer identity information”), on theapplication whose income may bear upona determination of the eligibility of an in-dividual for an insurance affordability pro-gram. For each relevant taxpayer, section6103(l)(21) explicitly authorizes the dis-closure of the following items of returninformation from the reference tax year:taxpayer identity information, filing sta-tus, the number of individuals for which adeduction under section 151 was allowed(“family size”), MAGI, and the taxableyear to which any such information relatesor, alternatively, that such information isnot available. The “reference tax year”is the first calendar year or, where no re-turn information is available in that yearthe second calendar year, prior to the sub-mission of the application. MAGI is de-fined under section 36B as the taxpayer’sadjusted gross income defined under sec-tion 62, increased by three components:

2012–23 I.R.B. 979 June 4, 2012

(1) any amount excluded from gross in-come under section 911, (2) any amountof interest received or accrued by the tax-payer during the taxable year that is ex-empt from tax, and (3) the amount of socialsecurity benefits of the taxpayer excludedfrom gross income under section 86 for thetax year.

In some situations, the IRS will beunable to calculate MAGI. While un-common, for certain relevant taxpayerswho receive nontaxable social securitybenefits, the IRS may not have completeinformation from which to determine theamount of those benefits. If the IRS hasinformation indicating that a relevant tax-payer received nontaxable social securitybenefits, but is unable to determine theamount of those benefits, the IRS willprovide the aggregate amount of the othercomponents used to calculate the relevanttaxpayer’s MAGI, as well as informationindicating that the amount of nontaxablesocial security benefits must still be takeninto account to determine MAGI. Simi-larly, where MAGI is not available, theIRS will disclose the adjusted gross in-come, as well as information indicatingthat the other components of MAGI muststill be taken into account to determineMAGI. Because the Affordable Care Actand HHS’s final regulations (77 FR at18456–18458) require that Exchanges usealternative means to verify income whereinformation is not available from the IRS,these explanatory items may assist anExchange in determining an individual’seligibility for, and amount of, any advancepayment of the premium tax credit orcost-sharing reductions.

The proposed regulations further pro-vide that, in certain instances, where someor all of the items of return informationprescribed by statute or regulation is un-available, the IRS will provide informationindicating why the particular item of returninformation is not available. Where an in-dividual jointly filed with a spouse who isnot a relevant taxpayer (that is, that spouseis not included on the application), the IRSwill not disclose MAGI from the joint re-turn because it cannot be appropriately al-located between the two spouses. Instead,the IRS will disclose that a joint returnhad been filed. This additional informa-tion may help individuals correct any er-rors or understand why they need to pursue

alternative routes to verify their income.This information, therefore, also can assistExchanges in determining whether an in-dividual is eligible for advance paymentsof the premium tax credit or cost-sharingreductions.

Additionally, the IRS may have infor-mation in its records indicating that a rele-vant taxpayer had been a victim of iden-tity theft or that a relevant taxpayer hasbeen reported as deceased. The proposedregulations provide that the IRS will dis-close that, although a return for that tax-payer is on file, the information describedunder section 6103(l)(21) is not being pro-vided because IRS records suggest that theExchange should take additional steps toauthenticate the identities of the relevanttaxpayers and may need to use alternatemeans for income verification.

Where an individual who is listed as adependent on the application (for the taxyear in which the premium tax credit willbe claimed) filed a return in the referencetax year but did not have a tax filing re-quirement for that year (based upon thereturn filed), the IRS will provide infor-mation indicating the dependent listed didnot have a filing requirement because theinformation is relevant to the Exchange’scomputation of household income.

The final regulations issued by HHSprovide that advance payments of thepremium tax credit will not be permittedwhere the relevant taxpayer has receivedadvance payments in the reference taxyear and failed to file a return reconcil-ing the advance payments with the actualpremium tax credit. (77 FR at 18453).Therefore, these proposed regulations pro-vide that the IRS will disclose to HHS thata relevant taxpayer who received an ad-vance payment of a premium tax credit inthe reference tax year did not file a returnreconciling the advance payments withany premium tax credit available.

Special Analyses

It has been determined that this Noticeof Proposed RuleMaking is not a signifi-cant regulatory action as defined in Execu-tive Order 12866, as supplemented by Ex-ecutive Order 13563. Therefore, a regu-latory assessment is not required. It hasalso been determined that, because the reg-ulations proposed do not impose a collec-tion of information on small entities, the

Regulatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to section7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

The Treasury Department and the IRSrequest comments on all aspects of theproposed rules. A public hearing hasbeen scheduled for August 31, 2012, at10:00 a.m., in the IRS Auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, NW, Washington, DC. Due tobuilding security procedures, visitorsmust enter at the Constitution Avenueentrance. In addition, all visitors mustpresent photo identification to enter thebuilding. Because of access restrictions,visitors will not be admitted beyond theimmediate entrance area more than 30minutes before the hearing starts. Forinformation about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHERINFORMATION CONTACT” section ofthis preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments andan outline of the topics to be discussedand the time to be devoted to each topic(a signed original and eight (8) copies) byJuly 30, 2012. A period of 10 minutes willbe allotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal author of the regulationsis Steven L. Karon of the Office of theAssociate Chief Counsel, Procedure andAdministration.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:

June 4, 2012 980 2012–23 I.R.B.

PART 301 — PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding the entry for§301.6103(l)(21) to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6103(l)(21)–(1) also issued

under 26 U.S.C. 6103(l)(21) and 6103(q).* * * * *Par. 2. Add §301.6103(l)(21)–1 to read

as follows:

§301.6103(l)(21)–1 Disclosure of returninformation to the Department ofHealth and Human Services to carryout eligibility requirements for healthinsurance affordability programs.

(a) General rule. Pursuant to the pro-visions of section 6103(l)(21)(A) of theInternal Revenue Code, officers and em-ployees of the Internal Revenue Servicewill disclose, upon written request, foreach relevant taxpayer on a single applica-tion those items of return information thatare described under section 6103(l)(21)(A)and paragraphs (a)(1) through (6) of thissection, for the reference tax year, asapplicable, to officers, employees and con-tractors of the Department of Health andHuman Services, solely for purposes of,and to the extent necessary in, establishingan individual’s eligibility for participa-tion in an Exchange established under thePatient Protection and Affordable CareAct, including eligibility for, and deter-mining the appropriate amount of, anypremium tax credit under section 36B orcost-sharing reduction under section 1402of the Patient Protection and AffordableCare Act, or determining eligibility forthe State programs described in section6103(l)(21)(A).

(1) With respect to each relevant taxpayerfor the reference tax year where theamount of social security benefits notincluded in gross income under sec-tion 86 of the Internal Revenue Codeof that relevant taxpayer is unavail-able:(i) The aggregate amount of the fol-

lowing items of return informa-tion —(A) Adjusted gross income, as de-

fined by section 62 of the In-ternal Revenue Code;

(B) Any amount excluded fromgross income under section911 of the Internal RevenueCode; and

(C) Any amount of interest re-ceived or accrued by the tax-payer during the taxable yearwhich is exempt from tax.

(ii) Information indicating that theamount of social security bene-fits not included in gross incomeunder section 86 of the InternalRevenue Code is unavailable.

(2) Adjusted gross income, as defined bysection 62 of the Internal RevenueCode, of a relevant taxpayer for thereference tax year, in circumstanceswhere the modified adjusted gross in-come (MAGI), as defined by section36B(d)(2)(B) of the Internal Rev-enue Code, of that relevant taxpayeris unavailable, as well as informa-tion indicating that the componentsof MAGI other than adjusted grossincome must be taken into account todetermine MAGI;

(3) Information indicating that certainreturn information of a relevant tax-payer is unavailable for the referencetax year because the relevant taxpayerjointly filed a U.S. Individual IncomeTax Return for that year with a spousewho is not a relevant taxpayer listedon the same application;

(4) Information indicating that, although areturn for an individual identified onthe application as a relevant taxpayerfor the reference tax year is available,return information is not being pro-vided because of possible authentica-tion issues with respect to the identityof the relevant taxpayer;

(5) Information indicating that a relevanttaxpayer who is identified as a depen-dent for the tax year in which the pre-mium tax credit under section 36B ofthe Internal Revenue Code would beclaimed, did not have a filing require-ment for the reference tax year basedupon the U.S. Individual Income TaxReturn the relevant taxpayer filed forthe reference tax year; and

(6) Information indicating that a relevanttaxpayer who received advance pay-ments of the premium tax credit in thereference tax year did not file a taxreturn for the reference tax year rec-onciling the advance payments of thepremium tax credit with any premiumtax credit under section 36B of the In-ternal Revenue Code available for thatyear.

(b) Relevant taxpayer defined. For pur-poses of paragraph (a) of this section, arelevant taxpayer is defined to be any in-dividual listed, by name and social secu-rity number or adoption taxpayer identifi-cation number, on an application submit-ted pursuant to Title I, Subtitle E, of the Pa-tient Protection and Affordable Care Act,whose income may bear upon a determi-nation of any advance payment of any pre-mium tax credit under section 36B of theInternal Revenue Code, cost-sharing re-duction under section 1402 of the PatientProtection and Affordable Care Act, or el-igibility for any program described in sec-tion 6103(l)(21)(A) of the Internal Rev-enue Code.

(c) Reference tax year defined. For pur-poses of section 6103(l)(21)(A) of the In-ternal Revenue Code and this section, thereference tax year is the first calendar yearor, where no return information is avail-able in that year, the second calendar year,prior to the submission of an applicationpursuant to Title I, Subtitle E, of the Pa-tient Protection and Affordable Care Act.

(d) Effective/applicability date. Thissection applies to disclosures to the De-partment of Health and Human Serviceson or after these proposed regulations arepublished as final regulations in the Fed-eral Register.


(Filed by the Office of the Federal Register on April 27, 2012,8:45 a.m., and published in the issue of the Federal Registerfor April 30, 2012, 77 F.R. 25378)

2012–23 I.R.B. 981 June 4, 2012

Announcement of Disciplinary Sanctions From the Officeof Professional ResponsibilityAnnouncement 2012-24

The Office of Professional Responsi-bility (OPR) announces recent disciplinarysanctions involving attorneys, certifiedpublic accountants, enrolled agents, en-rolled actuaries, enrolled retirement planagents, and appraisers. These individualsare subject to the regulations governingpractice before the Internal Revenue Ser-vice (IRS), which are set out in Title 31,Code of Federal Regulations, Part 10, andwhich are published in pamphlet form asTreasury Department Circular No. 230.The regulations prescribe the duties andrestrictions relating to such practice andprescribe the disciplinary sanctions forviolating the regulations.

The disciplinary sanctions to be im-posed for violation of the regulations are:

Disbarred from practice before theIRS—An individual who is disbarred isnot eligible to represent taxpayers beforethe IRS.

Suspended from practice before theIRS—An individual who is suspended isnot eligible to represent taxpayers beforethe IRS during the term of the suspension.

Censured in practice before theIRS—Censure is a public reprimand. Un-like disbarment or suspension, censuredoes not affect an individual’s eligibilityto represent taxpayers before the IRS, butOPR may subject the individual’s futurerepresentations to conditions designed topromote high standards of conduct.

Monetary penalty—A monetarypenalty be imposed on an individual whoengages in conduct subject to sanctionor on an employer, firm, or entity if theindividual was acting on its behalf and if itknew, or reasonably should have known,of the individual’s conduct.

Disqualification of appraiser—Anappraiser who is disqualified is barredfrom presenting evidence or testimony inany administrative proceeding before theDepartment of the Treasury or the IRS.

Under the regulations, attorneys, cer-tified public accountants, enrolled agents,enrolled actuaries, and enrolled retirement

plan agents may not assist, or accept assis-tance from, individuals who are suspendedor disbarred with respect to matters consti-tuting practice (i.e., representation) beforethe IRS, and they may not aid or abet sus-pended or disbarred individuals to practicebefore the IRS.

Disciplinary sanctions are described inthese terms:

Disbarred by decision after hearing,Suspended by decision after hearing,Censured by decision after hearing,Monetary penalty imposed after hear-ing, and Disqualified after hearing—Anadministrative law judge (ALJ) conductedan evidentiary hearing upon OPR’s com-plaint alleging violation of the regulationsand issued a decision imposing one ofthese sanctions. After 30 days from theissuance of the decision, in the absence ofan appeal, the ALJ’s decision became thefinal agency decision.

Disbarred by default decision, Sus-pended by default decision, Censured bydefault decision, Monetary penalty im-posed by default decision, and Disqual-ified by default decision—An ALJ, afterfinding that no answer to OPR’s complainthad been filed, granted OPR’s motion for adefault judgment and issued a decision im-posing one of these sanctions.

Disbarment by decision on appeal,Suspended by decision on appeal, Cen-sured by decision on appeal, Monetarypenalty imposed by decision on ap-peal, and Disqualified by decision onappeal—The decision of the ALJ wasappealed to the agency appeal authority,acting as the delegate of the Secretaryof the Treasury, and the appeal authorityissued a decision imposing one of thesesanctions.

Disbarred by consent, Suspended byconsent, Censured by consent, Mone-tary penalty imposed by consent, andDisqualified by consent—In lieu of adisciplinary proceeding being institutedor continued, an individual offered a con-sent to one of these sanctions and OPR

accepted the offer. Typically, an offerof consent will provide for: suspensionfor an indefinite term; conditions that theindividual must observe during the sus-pension; and the individual’s opportunity,after a stated number of months, to filewith OPR a petition for reinstatement af-firming compliance with the terms of theconsent and affirming current eligibilityto practice (i.e., an active professional li-cense or active enrolled agent status). Anenrolled agent or an enrolled retirementplan agent may also offer to resign in orderto avoid a disciplinary proceeding.

Suspended by decision in expeditedproceeding, Suspended by default de-cision in expedited proceeding, Sus-pended by consent in expedited pro-ceeding—OPR instituted an expeditedproceeding for suspension (based on cer-tain limited grounds, including loss of aprofessional license and criminal convic-tions).

OPR has authority to disclose thegrounds for disciplinary sanctions in thesesituations: (1) an ALJ or the Secretary’sdelegate on appeal has issued a decisionon or after September 26, 2007, which wasthe effective date of amendments to theregulations that permit making such deci-sions publicly available; (2) the individualhas settled a disciplinary case by signingOPR’s “consent to sanction” form, whichrequires consenting individuals to admit toone or more violations of the regulationsand to consent to the disclosure of the in-dividual’s own return information relatedto the admitted violations (for example,failure to file Federal income tax returns);or (3) OPR has issued a decision in anexpedited proceeding for suspension.

Announcements of disciplinary sanc-tions appear in the Internal Revenue Bul-letin at the earliest practicable date. Thesanctions announced below are alphabet-ized first by the names of states and sec-ond by the last names of individuals. Un-less otherwise indicated, section numbers(e.g., § 10.51) refer to the regulations.

June 4, 2012 982 2012–23 I.R.B.

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

Colorado

Castle Rock Baca, Cesar A. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)

Indefinite fromDecember 6, 2011

Florida

Miami Freeman, Lewis B. CPA Suspended by decisionin expedited proceedingunder § 10.82 (convictionunder 18 U.S.C. § 1349,conspiracy to commitmail fraud)

Indefinite fromJanuary 29, 2012

Massachusetts

Dover Barrett, Donal B. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Lynn Beato, Pedro L. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Michigan

Detroit Ross, Mark E. Attorney uspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license)


Missouri

Baca, Cesar A.,See Colorado

New Jersey

Hamilton Carlin, Kevin J. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Howell Mueller, Erik Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


2012–23 I.R.B. 983 June 4, 2012

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

New Jersey (Continued)

Scotch Plains Schetelich, Timothy CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(conviction under26 U.S.C. § 7206(2),preparation of falseincome tax returns)


Woodbury Williams, Richard F. CPA Suspended by consentfor admitted violationof § 10.51(willfullycounseled or suggested toclients to violate Federaltax law)

Indefinite fromNovember 29, 2011

New York

Barrett, Donal B.,See Massachusetts

Halesite Donner, Andrew S. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Buffalo Goods, Robert R. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarmentand conviction under18 U.S.C. § 1344, schemeto defraud a bank)


Mueller, Erik,See New Jersey

West Hampton Beach Price, Peter R. At