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Bulletin No. 2008-2

January 14, 2008

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2008-1, page 248.

Foreign currency exchange traded notes.This rulingholds that a foreign currency exchange traded note is debt for U.S. federal tax purposes, even when the initial investment and re- payment are made in U.S. dollars and the investor may get back fewer U.S. dollars than it invested. A companion publica- tion to this ruling, Notice 2008-2, will ask for comments on prepaid forward contracts and similar arrangements that are not treated as debt for U.S. federal tax purposes.Rev. Rul. 2008-2, page 247. Low-income housing credit; satisfactory bond; "bond factor" amounts for the period January through March

2008.This ruling provides the monthly bond factor amounts

to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through

March 2008.Rev. Rul. 2008-3, page 249.

Section 1274A - Inflation adjusted numbers for 2008. This ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. Rev. Rul.

2007-4 supplemented and superseded.Notice 2008-1, page 251.

This notice provides rules under which a 2-percent shareholder- employee in an S corporation is entitled to the deduction under section 162(l) of the Code for accident and health insurance premiums that are paid or reimbursed by the S corporation and included in the 2-percent shareholder-employee's gross in- come.

Notice 2008-2, page 252.

This notice seeks comments on, among other things, whether the parties to a prepaid forward contract or similar arrange- ment (that is not otherwise indebtedness for U.S. federal tax purposes) should be required to accrue income/expense dur- ing the term of a contract and asks for comments on an ap- propriate method for accruing income or expense. The notice also asks for comments on various domestic and international issues (including character and source) that would need to be addressed if income/expense accruals were deemed appro- priate. This notice is a companion publication to Rev. Rul.

2008-1, which concludes that a prepaid forward contract on

foreign currency is treated as debt for federal tax purposes.Notice 2008-3, page 253. On January 1, 2008, the impuesto empresarial a tasa única (IETU), a single rate business tax adopted by Mexico, will be- comeeffective. Thisnoticeprovidesthat, pendingtheoutcome of a study to determine whether the IETU is a creditable income tax, the IRS will not challenge a taxpayer's position that the IETU is an income tax that is eligible for a credit under Article 24(1) of the U.S.-Mexico income tax treaty.Notice 2008-4, page 253. Thisnoticeprovidesinterim guidancetothepubliconhowtofile claims with the IRS Whistleblower Office for payment of awards to persons who detect and report underpayments of tax.

Notice 2008-5, page 256.This notice provides guidance under section152(d) ofthe Codefor determining whether an individual is a qualifying relativefor whom the taxpayer may claim a dependency exemptiondeduction under section 151(c).

(Continued on the next page)

Finding Lists begin on page ii.

EXEMPT ORGANIZATIONS

Rev. Proc. 2008-9, page 258.

Determination letters and rulings.Thisdocumentsetsforth procedures for issuing determination letters and rulings on the exempt status of organizations under sections 501 and 521 of the Code. The procedures also apply to the revocation and modification of determination letters or rulings, and provide guidance on the exhaustion of administrative remedies for pur- poses of declaratory judgment under section 7428. Rev. Proc.

2007-52 superseded.

Announcement 2008-3, page 269.

The IRS has revoked its determination that The Stevens Foun- dation of New York, NY; American Assistance Corporation of Plano, TX; Tri-State Community Development Resource Center, Inc., of Camden, NJ; Cytogenetics Foundation of Omaha, NE; Proyecto Esperanza of Los Angeles, CA; Community Fellow- ship for Battered Women of Silicon Valley, Inc., of San Jose, CA; Brooklyn Community Counseling Center, Inc., of Brooklyn, NY; Peace Parents and Elders of Africa for Common Efforts of Minneapolis, MN; The Healing Center of Children with Dis- abilities, Inc., of Macon, GA; Mahisekar Charitable Supporting Organization of Orland Park, IL; and Down Payment Assistance Foundation, Inc., of Glendora, CA, qualify as organizations de- scribed in sections 501(c)(3) and 170(c)(2) of the Code.

TAX CONVENTIONS

Notice 2008-3, page 253.

On January 1, 2008, the impuesto empresarial a tasa única (IETU), a single rate business tax adopted by Mexico, will be- comeeffective. Thisnoticeprovidesthat, pendingtheoutcome of a study to determine whether the IETU is a creditable income tax, the IRS will not challenge a taxpayer's position that the IETU is an income tax that is eligible for a credit under Article 24(1) of the U.S.-Mexico income tax treaty.

ADMINISTRATIVE

Notice 2008-4, page 253.

Thisnoticeprovidesinterim guidancetothepubliconhowtofile claims with the IRS Whistleblower Office for payment of awards to persons who detect and report underpayments of tax.

Announcement 2008-4, page 269.

This document contains notice of a public hearing on proposed regulations (REG-113891-07, 2007-42 I.R.B. 821) providing guidance regarding the use of certain funding balances main- tained for defined benefit pension plans and regarding bene- fit restrictions for certain underfunded defined benefit pension plans. A public hearing is scheduled for January 28, 2008.

January 14, 2008 2008-2 I.R.B.

The IRS Mission

ProvideAmerica'staxpayers topqualityservicebyhelping them understand an d meet their tax responsibilities and by applyingthe tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents 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 of the 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 internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulingsrepresent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in thedisposition ofothercases. In applyingpublishedrulingsand

procedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows:

Part I. - 19

86 Code.

This part i

ncludes rulings and decisions based on provisions of the Intern al 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 these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury's Office of the Assistant Secre- tary (Enforcement).

Part IV

. - Items of General Interest.

This par

t includes notices of proposed rulemakings, disbar- ment an d suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published 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.

2008-2 I.R.B. January 14, 2008

January 14, 2008 2008-2 I.R.B.

Part I. Rulingsand Decisions Under the Internal Revenue Code of 1986

Section 42. - Low-IncomeHousing Credit

Low-income housing credit; satis-

factory bond; "bond factor" amounts for the period January through March

2008.This ruling provides the monthly

bond factor amounts to be used by taxpay- ers who dispose of qualified low-income buildings or interests therein during the period January through March 2008.

Rev. Rul. 2008-2

In Rev. Rul. 90-60, 1990-2 C.B.

3, the Internal Revenue Service providedguidance to taxpayers concerning the gen-eral methodology used by the TreasuryDepartment in computing the bond factoramounts used in calculating the amount ofbond considered satisfactory by the Secre-

tary under § 42(j)(6) of the Internal Rev- enue Code. It further announced that the

Secretary would publishintheInternal

Revenue Bulletin a table of bond factor

amounts for dispositions occurring during each calendar month.

Rev. Proc. 99-11, 1999-1 C.B. 275,

established a collateral program as an al- ternative to providing a surety bond for taxpayers to avoid or defer recapture ofthe low-income housing tax credits under

§ 42(j)(6). Under this program, taxpayers

may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table

1 the bond factor amounts for calculating

theamountofbondconsideredsatisfactory under § 42(j)(6) or the amount of United

States Treasury securities to pledge in a

Treasury Direct Account under Rev. Proc.

99-11 for dispositions of qualified low-in-

come buildings or interests therein during the period January through March 2008.

Table 1

Rev. Rul. 2008-2

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year

Month of

Disposition1994

19951996 1997 1998 1999 2000 2001 2002 2003 2004

Jan '08 16.41 30.70 43.2354.1963.8165.42 67.3569.63 72.14 74.79 77.33 Feb '08 16.41 30.70 43.2354.1963.8165.2767.19 69.46 71.9674.5977.11 Mar '08 16.41 30.70 43.2354.1963.8165.1267.04 69.29 71.78 74.39 76.89

Table 1 (cont'd)

Rev. Rul. 2008-2

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year

Month of

Disposition2005

2006 2007 2008

Jan '0879.56 81.57 83.5983.98

Feb '08 79.31 81.30 83.27 83.98

Mar '08 79.0781.0582.99 83.98

For a list of bond factor amounts ap-

plicable to dispositions occurring during other calendar years, see: Rev. Rul. 98-3,

1998-1 C.B. 248; Rev. Rul. 2001-2,

2001-1 C.B. 255; Rev. Rul. 2001-53,

2001-2 C.B. 488; Rev. Rul. 2002-72,2002-2 C.B. 759; Rev. Rul. 2003-117,

2003-2 C.B. 1051; Rev. Rul. 2004-100,

2004-2 C.B. 718; Rev. Rul. 2005-67,

2005-2 C.B. 771; Rev. Rul. 2006-51,

2006-2 C.B. 632; and Rev. Rul. 2007-62,

2007-41 I.R.B. 767.DRAFTING INFORMATION

The principal author of this revenue

ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further in- formation regarding this revenue ruling,

2008-2 I.R.B. 247 January 14, 2008

contact Mr. McDonnell at (202) 622-3040 (not a toll-free call).

Section 162. - Trade orBusiness Expenses

A notice provides rules under which a 2-percent

shareholder-employee in an S corporation is entitled to the deduction under section 162(l) of the Internal Revenue Code for accident and health insurance pre- miums that are paid or reimbursed by the S corpo- ration and included in the 2-percent shareholder-em- ployee's gross income. SeeNotice2008-1,page251. Section 483. - Interest onCertain Deferred Payments A ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. See Rev. Rul. 2008-3, page 249. Section 988. - Treatment ofCertain Foreign CurrencyTransactions

26 CFR 1.988-1: Certain definitions and special

rules. (Also § 1.988-2.)

Foreign currency exchange traded

notes.This ruling holds that a foreign currency exchange traded note is debt for

U.S. federal tax purposes, even when the

initial investment and repayment are made in U.S. dollars and the investor may get back fewer U.S. dollars than it invested.

A companion publication to this ruling,

Notice 2008-2, will ask for comments

on prepaid forward contracts and similar arrangements that are not treated as debt for U.S. federal tax purposes.

Rev. Rul. 2008-1

ISSUE

What is the characterization for U.S.

federal tax purposes of an instrument (de- scribedfurtherbelow)thatisissuedandre- deemed for U.S. dollars, but that provides an economic return that is determined by reference to the euro and market interest rates in respect of the euro? FACTS

Assume that on January 1, 2007, the

spot rate of exchange of U.S. dollars foreuros was $1 =€0.75. On January 1,

2007, Holder delivered $100 to Issuer in

exchange for the Issuer's obligation (the "Instrument") to deliver to Holder, on Jan- uary 1, 2010, the U.S. dollar equivalent of an amount of euros (the "U.S. Dol- lar Equivalent Amount"). The U.S. Dol- lar Equivalent Amount is determinable on

January 1, 2010, and is the sum of the fol-

lowing amounts translated into U.S. dol- lars at the spot rate on January 1, 2010: (i)€75, and (ii) an amount of euros cal- culated by reference to a compound stated rate of return applied to€75 from January

1, 2007, until January 1, 2010. The com-

poundstatedrateofreturnistheexcessofa rate based on euro interest rates over a rate labeled as a "fee" for the benefit of the Is- suer. (The U.S. Dollar Equivalent Amount tobepaidbyIssuertoHolderonJanuary1,

2010,mayalsobedeterminedbyreference

to a mathematical formula that generates the same substantive effect as the method- ology described above.)

HolderandIssuerexpectthatIssuerwill

pay the U.S. Dollar Equivalent Amount on January 1, 2010. The legal remedies provided in the Instrument are not mate- rially different than legal remedies associ- ated with instruments that are debt for fed- eral tax purposes.

The U.S. dollar is the functional cur-

rency of Holder.

Thereisasignificantpossibilitythatthe

U.S. Dollar Equivalent Amount payable

by Issuer to Holder on January 1, 2010, may be significantly less than $100.

ANALYSIS

An instrument that requires payments

to be made in a foreign currency (that is, nonfunctional currency) can be debt for U.S. federal income tax purposes.

See, e.g., section 988(c)(1)(B)(i) of the

Internal Revenue Code. Thus, although

nonfunctional currency is considered to be "property" for U.S. federal tax purposes (see, e.g.,PhilipMorrisInc.v.Com- missioner, 71 F.3d 1040 (2d Cir. 1995), aff'g104 T.C. 61 (1995);National-Stan- dard Company v. Commissioner,749

F.2d 369 (6th Cir. 1984),aff'g80 T.C.

551 (1983)), it is treated like money for

purposes of determining the amount and timing of interest that accrues on debt.See

§1.988-2(b)(2) of the Income Tax Reg-

ulations; S. Rep. No. 313, 99 th

Cong.,2d Sess., 1986-3 (Vol. 3) C.B. 461-463

(1986). Section 988 and regulations there- under also provide that the acquisition of a debt instrument or becoming the obligor under a debt instrument is a section 988 transaction if the amount that a taxpayer is entitled to receive or is required to pay is determined by reference to the value of a nonfunctional currency.See, e.g., section 988(c)(1); §§ 1.988-1(a)(1) (flush language), 1.988-2(b)(2)(i)(B)(2). These provisions indicate that a financial in- strument all the payments of which are determined by reference to a single cur- rency can be debt, notwithstanding the fact that (i) all actual payments due un- der the instrument are made in a different payment currency, and (ii) the amount of the different payment currency that the issuer pays at maturity may be less than the amount of the different payment cur- rency that was initially advanced. Indeed, section 988 was adopted, in part, to negate suggestions "that U.S. tax consequences can be manipulated by arranging to repay a foreign-currency denominated loan in

U.S. dollars equivalent in value at repay-

ment to the foreign currency borrowed."

S. Rep. No. 313, 99

th

Cong., 2d Sess.,

1986-3 (Vol. 3) C.B. 451 (1986).See also

H.R. Rep. No. 426, 99

th

Cong. 1

st Sess.

1986-3 (Vol. 2) C.B. 466 (1985) and Gen-

eral Explanation of the Tax Reform Act of

1986, 100

th

Cong., 1

st

Sess., 1087 (1987).

The Instrument, in form, resembles a

U.S. dollar denominated derivative con-

tract in which the Holder prepays its obli- gations under the contract, and is entitled to receive a return based exclusively on the value of property at maturity. (SeeNo- tice2008-2, 2008-2I.R.B.252, datedJan- uary 14, 2008, requesting comments with respect to these types of derivative con- tracts.) However, the U.S. Dollar Equiv- alent Amount that is payable at maturity by the Issuer under the terms of the In- strument is determined exclusively by ref- erence to (i) the U.S. dollar value of the euros at issuance and at maturity, and (ii) market interest rates in respect of the euro.

At inception (on January 1, 2007), the

Holder delivers the U.S. dollar equivalent

of€75, and at maturity (on January 1,

2010) the Issuer is required to pay the U.S.

dollar equivalent of€75, plus the U.S. dollar value at maturity of a return based on euro interest rates. The fact that in- tervening currency fluctuations may cause

January 14, 2008 248 2008-2 I.R.B.

the amount of U.S. dollars that Holder re- ceives at maturity (on January 1, 2010) to be less than the amount of U.S. dollars that the Holderpaid for the Instrument(on Jan- uary 1, 2007) does not affect the character- ization of the Instrument as debt, which is basedonananalysisofpaymentswithre- spect to the euro. The Issuer's translation of U.S. dollars into euros (on January 1,

2007) and euros into U.S. dollars (on Jan-

uary 1, 2010) is not relevant to the Instru- ment's characterization.

HOLDING

For U.S. federal tax purposes, the

Instrument is euro-denominated indebted-

ness of Issuer. This result is not affected if the Instrument is (i)privately offered, (ii) publicly offered, or (iii) traded on an exchange.

DRAFTING INFORMATION

The principal authors of this revenue

ruling are John W. Rogers III of the

Office of the Associate Chief Counsel

(Financial Institutions & Products) and

Margaret Harris of the Office of Associate

Chief Counsel (International). For further

information regarding this revenue ruling, contact Mr. Rogers at (202) 622-3950 or

Ms. Harris at 202-622-3870 (not toll-free

calls).

Section 1274. - Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property

A ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. See Rev. Rul. 2008-3, page 249. Section 1274A. - SpecialRules for CertainTransactions Where StatedPrincipal Amount Does Not

Exceed $2,800,000

26 CFR 1.1274A-1: Special rules for certain trans-

actions where stated principal amount does not ex- ceed $2,800,000. (Also§§483,1274.)

Section 1274A - Inflation adjusted

numbers for 2008.This ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2007-4 supple- mented and superseded.

Rev. Rul. 2008-3

This revenue ruling provides the dollar

amounts, increased by the 2008 inflation adjustment, for § 1274A of the Internal

Revenue Code.

BACKGROUND

In general, §§ 483 and 1274 determine

the principal amount of a debt instrument given in consideration for the sale or ex- change of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account un- der the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments.

In the case of a "qualified debt instru-

ment," the discount rate used for purposes of §§ 483 and 1274 may not exceed 9 per- cent, compounded semiannually. Section

1274A(b) defines a qualified debt instru-

ment as any debt instrument given in con- sideration forthesaleorexchangeofprop- erty (other than new § 38 property within the meaning of § 48(b), as in effect on thequotesdbs_dbs14.pdfusesText_20