Interest rates; underpayments and overpayments. The rates of interest determined under section 6621 of the Code for the calendar quarter beginning July 1, 2008, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent.

Interests in notional principal contracts. This ruling holds that certain interests in notional principal contracts, the returns on which are calculated by reference to an index based on data from a geographically and numerically broad range of United States real estate, are not United States real property interests under section 897(c)(1) of the Code.

This notice invites public comment relating to elections under section 864(f) of the Code to allocate and apportion interest expense on a worldwide affiliated group basis and under section 864(f)(5) to expand a financial institution group of a worldwide affiliated group.

This document contains corrections to Rev. Rul. 2008-17, 2008-12 I.R.B. 626, providing guidance to assist a foreign corporation engaged in the international operation of ships or aircraft, and its shareholders, in determining whether the foreign corporation is organized in a country that grants an “equivalent exemption” from tax for purposes of sections 883(a) and (c) of the Code. The ruling is also intended to assist a nonresident alien individual engaged in the international operation of ships or aircraft in determining whether a country grants an equivalent exemption from tax for purposes of section 872(b). As published, two footnotes were inadvertently omitted from Rev. Rul. 2008-17, Table II (Countries Granting Exemptions from Tax by Income Tax Convention), Column 9 (Cap Gains). Rev. Rul. 2008-17 modified.

Weighted average interest rate update; corporate bond indices; 30-year Treasury securities; segment rates. This notice contains updates for the corporate bond weighted average interest rate for plan years beginning in June 2008; the 24-month average segment rates; the funding transitional segment rates applicable for June 2008; and the minimum present value transitional rates for May 2008.

Employee stock ownership plans; dividends; section 404(k); reporting. This announcement provides for a change in the reporting of dividends on employer securities that are distributed from an employee stock ownership plan under section 404(k) of the Code. Announcement 85-168 revoked.

A list is provided of organizations now classified as private foundations.

These documents contain corrections to final regulations (T.D. 9398, 2008-24 I.R.B. 1143) providing rules for testing whether the economic effect of an allocation is substantial within the meaning of section 704(b) of the Code where partners are look-through entities or members of a consolidated group. The regulations clarify the application of section 704(b) to partnerships the interests of which are owned by look-through entities and members of consolidated groups and, through an example, reiterate the effect of other provisions of the Code on partnership allocations.

These documents contain corrections to final regulations (T.D. 9398, 2008-24 I.R.B. 1143) providing rules for testing whether the economic effect of an allocation is substantial within the meaning of section 704(b) of the Code where partners are look-through entities or members of a consolidated group. The regulations clarify the application of section 704(b) to partnerships the interests of which are owned by look-through entities and members of consolidated groups and, through an example, reiterate the effect of other provisions of the Code on partnership allocations.

Is an interest in a notional principal contract, the return on which is calculated by reference to an index described below referencing data from a geographically and numerically broad range of United States real estate a United States real property interest (“USRPI”) under section 897(c)(1) of the Code?

X maintains and widely publishes an index (the “Index”) that seeks to measure the appreciation and depreciation of residential or commercial real estate values within a metropolitan statistical area (“MSA”), a combined statistical area (“CSA”) (both as defined by the United States Office of Management and Budget), or a similarly large geographic area within the United States. The MSA, CSA or similarly large geographic area has a population exceeding one million people. The Index is calculated by reference to (1) sales prices (obtained from various public records), (2) appraisals and reported income, or (3) similar objective financial information, each with respect to a broad range of real property holdings of unrelated owners within the relevant geographic area during a relevant testing period. Using proprietary methods, this information is weighted, aggregated, and mathematically translated into the Index.

Because of the broad-based nature of the Index, an investor cannot, as a practical matter, directly or indirectly, own or lease a material percentage of the real estate, the values of which are reflected by the Index.

On January 1, Year 1, FC, a foreign corporation, enters into a notional principal contract (“NPC”), within the meaning of sections 1.446-3(c)(1) and 1.863-7(a)(1) of the Income Tax regulations, with unrelated counterparty DC, a domestic corporation. Neither FC nor DC is related to X. Pursuant to the NPC, FC profits if the Index appreciates (that is, to the extent the underlying United States real property in the particular geographic region appreciates in value) over certain levels. Conversely, FC suffers a loss if the Index depreciates (or fails to appreciate more than at a specified rate). During the term of the NPC, DC does not, directly or indirectly, own or lease a material percentage of the real property, the values of which are reflected by the Index.

Section 897(a) provides that gain or loss from the disposition of a USRPI of a nonresident alien individual or a foreign corporation shall be taken into account as effectively connected income under section 871(b)(1) or section 882(a)(1), respectively, as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.

A USRPI is generally defined under section 897(c)(1)(A) as either an interest in real property located in the United States or the Virgin Islands, or any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes that such corporation was at no time a USRPHC during certain periods.

The term “interest in real property” under section 897(c)(6)(A) includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.

Section 1.897-1(c)(1) of the regulations generally defines USRPIs to include any interest, other than an interest solely as a creditor, in real property located in the United States or the Virgin Islands. Section 1.897-1(d)(2)(i) provides that an interest in real property other than solely as a creditor includes a fee ownership, co-ownership, or leasehold interest in real property, a time sharing interest in real property, and a life estate, remainder, or reversionary interest in such real property. The term also includes any direct or indirect right to share in the appreciation in the value, or in the gross or net proceeds or profits generated by, the real property.

Because of the broad-based nature of the Index, the NPC does not represent a “direct or indirect right to share in the appreciation in the value ... [of] the real property” within the meaning of Treas. Reg. § 1.897-1(d)(2). Accordingly, FC’s interest in the NPC calculated by reference to the Index is not a USRPI under section 897(c)(1).

The principal author of this revenue ruling is Sean W. Mullaney of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling, contact Mr. Mullaney at (202) 622-3860 (not a toll-free call).

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments.Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of ¹/₂ of 1 percent, the rate is increased to the next highest full percent).

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of April 2008 is 2 percent. Accordingly, an overpayment rate of 5 percent (4 percent in the case of a corporation) and an underpayment rate of 5 percent are established for the calendar quarter beginning July 1, 2008. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning July 1, 2008, is 2.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning July 1, 2008, is 7 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 2.5 percent, 4 percent, 5 percent, and 7 percent are published in Tables 58, 61, 63, and 67 of Rev. Proc. 95-17, 1995-1 C.B. 556, 612, 615, 617, and 621.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

The principal author of this revenue ruling is Wendy Kribell of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Kribell at (202) 622-4570 (not a toll-free call).

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004-34 continues to apply in determining that rate. See Notice 2006-75, 2006-2 C.B. 366.

The composite corporate bond rate for May 2008 is 6.47 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

Generally for plan years beginning after 2007 (except for delayed effective dates for certain plans under sections 104, 105, and 106 of PPA), § 430 of the Code specifies the minimum funding requirements that apply to single employer plans pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates. For plan years beginning in 2008 and 2009, a transitional rule under § 430(h)(2)(G) provides that the segment rates are blended with the corporate bond weighted average as specified above. An election may be made under § 430(h)(2)(G)(iv) to use the segment rates without applying the transitional rule.

Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, the 24-month average corporate bond segment rates, and the funding transitional segment rates used to compute the target normal cost and the funding target. Pursuant to Notice 2007-81, the monthly corporate bond yield curve derived from May 2008 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of May 2008 are, respectively, 4.67, 6.36, and 6.77. The three 24-month average corporate bond segment rates applicable for June 2008 under the election of § 430(h)(2)(G)(iv) are as follows:

The transitional segment rates under § 430(h)(2)(G) applicable for June 2008, taking into account the corporate bond weighted average of 6.02 stated above, are as follows:

Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual rate of interest on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury securities for May 2008 is 4.60 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2038.

Generally for plan years beginning after 2007, § 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in § 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The following rates were determined for plan years beginning in the month shown below.

Generally for plan years beginning after December 31, 2007, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. For plan years beginning in 2008 through 2011, the applicable interest rate is the monthly spot segment rate blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value transitional segment rates determined for May 2008, taking into account the May 2008 30-year Treasury rate of 4.60 stated above, are as follows:

The principal author of this notice is Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. Mr. Montanaro may be e-mailed at RetirementPlanQuestions@irs.gov.

The purpose of this notice is to request public comments regarding the elections under section 864(f)(6) of the Internal Revenue Code (Code) to allocate and apportion interest expense on a worldwide affiliated group basis and under section 864(f)(5) to expand a financial institution group of a worldwide affiliated group.

Section 864(f) was added to the Code by the American Jobs Creation Act of 2004, P.L. 108-357, 118 Stat. 1418 (October 22, 2004). Section 864(f)(6) permits taxpayers to make a one-time election to allocate and apportion interest expense on a worldwide affiliated group basis. In general, if the election is made, the domestic members of the worldwide affiliated group determine their foreign source taxable income by allocating and apportioning their interest expense to such income in an amount equal to the excess (if any) of the worldwide affiliated group’s total interest expense multiplied by a fraction with a numerator consisting of the worldwide affiliated group’s foreign assets and a denominator consisting of the worldwide affiliated group’s total assets, over the amount of interest expense of all foreign corporations that are members of the worldwide affiliated group that would have been allocated and apportioned to foreign source income of such foreign members of the worldwide affiliated group if the rules of section 864(f) were applied to a group consisting solely of all such foreign members. Section 864(f)(5) permits a one-time election to expand the financial institution group of a worldwide affiliated group that has made the election under section 864(f) to allocate interest expense on a worldwide affiliated group basis. The elections under section 864(f) may be made only for the first taxable year beginning after December 31, 2008, in which the taxpayer is eligible to make the election, and are revocable only with the consent of the Secretary.

The IRS and Treasury Department request comments on guidance needed regarding the elections to allocate and apportion interest expense on a worldwide affiliated group basis and to expand the financial institution group of a worldwide affiliated group. Specifically, comments are requested on any substantive issues that need to be addressed in advance of the date of making such elections, which is generally expected to be the due date (including extensions) of an eligible taxpayer’s return for its first taxable year beginning after December 31, 2008. Further, comments are requested on whether it is necessary and appropriate to prescribe regulations providing for the direct allocation and apportionment of interest expense for purposes of section 864(f), preventing assets or interest expense from being taken into account more than once, and addressing changes in the status of members of a worldwide affiliated group or financial institution group (through acquisitions or otherwise). In addition, comments are requested regarding the treatment of loans between members of the worldwide affiliated group or financial institution group (or from a member of one group to a member of the other group), as well as appropriate foreign currency translation conventions relating to asset bases or interest expense. Comments are also requested on the extent to which regulations should provide that bank holding companies, financial holding companies, and subsidiaries of a financial institution (described in section 581 or section 591) or of a bank or financial holding company, should be treated as includible corporations for purposes of section 1504 for purposes of applying section 864(f) separately to such corporations. Finally, comments are requested regarding the standards the IRS should apply to determine whether to grant taxpayers consent to revoke an election under section 864(f)(6) or section 864(f)(5).

Comments should be submitted on or before September 8, 2008, and should include a reference to Notice 2008-54. Send submissions to CC:PA:LPD:PR (Notice 2008-54), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2008-54), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2008-54” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.

The principal author of this notice is Jeffrey L. Parry of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Jeffrey L. Parry at (202) 622-3850 (not a toll-free call).

This announcement provides for a change in the reporting of dividends on employer securities that are distributed from an employee stock ownership plan (“ESOP”) under § 404(k) of the Internal Revenue Code (“§ 404(k) dividends”).

Section 404(k)(1) provides that, in the case of a C corporation, there is allowed as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation during the taxable year with respect to applicable employer securities held by an ESOP maintained by the corporation or by a related corporation within the meaning of § 409(l)(4). Section 404(k)(2)(A) provides, in relevant part, that the term “applicable dividend” means any dividend which, in accordance with plan provisions, is paid directly to plan participants or their beneficiaries; is paid to the plan and is distributed in cash to plan participants or their beneficiaries not later than 90 days after the close of the plan year in which paid; or is, at the election of plan participants or their beneficiaries, paid to such participants or their beneficiaries or paid to the plan and distributed in cash to such participants or their beneficiaries not later than 90 days after the close of the plan year in which paid.

Plan distributions that are § 404(k) dividends are not subject to the 10% additional tax under § 72 (see § 72(t)(2)(A)(vi)), are not eligible rollover distributions (see § 1.402(c)-2 of the Income Tax Regulations, Q&A-4(e)), are not subject to withholding under § 3405 (see § 3405(e)(1)(B)(iv)), and are not taken into account in determining if required minimum distributions have been made (see § 1.401(a)(9)-5, Q&A-9(b)(5)). For purposes of § 72, such distributions are treated as plan distributions paid from a contract that is separate from any other contract under the plan (see § 1.404(k)-1T, Q&A-3). In addition, backup withholding under § 3406 does not apply to distributions that are § 404(k) dividends because they are reportable under § 6047 and not reportable under § 6041 or 6042.

Announcement 85-168, 1985-48 I.R.B. 40, provides that “to allow taxpayers using short Form 1040A to report this § 404(k) dividend income,” a plan must use Form 1099-DIV. At the time of the announcement, payments reported on Form 1099-R and its predecessor forms could not be reported on Form 1040A. The announcement further provided that if § 404(k) dividends were distributed in the same year as a total qualified distribution, the entire amount should be reported on Form 1099-R.

Distributions from a plan that are made in 2009 or later years and that are § 404(k) dividends must be reported on a Form 1099-R that does not report any other distributions, in accordance with the instructions to the form. Accordingly, if there are other distributions from the plan in such years that are not § 404(k) dividends, they must be reported on a separate Form 1099-R. It is anticipated that the instructions will require a special code in box 7 of the form to indicate the special tax treatment and rollover restrictions applicable to § 404(k) dividends. Payments of § 404(k) dividends made directly from the corporation to the plan participants or their beneficiaries are reported on Form 1099-DIV in accordance with the instructions to that form.

Announcement 85-168 is revoked.

This document contains a correction to Rev. Rul. 2008-17, 2008-12 I.R.B. 626, which was published in the Internal Revenue Bulletin on March 24, 2008.

The revenue ruling ( Rev. Rul. 2008-17 ) that is the subject of this correction provides guidance to assist a foreign corporation engaged in the international operation of ships or aircraft, and its shareholders, in determining whether the foreign corporation is organized in a country that grants an “equivalent exemption” from tax for purposes of sections 883(a) and (c) of the Internal Revenue Code (Code). It also assists a nonresident alien individual engaged in the international operation of ships or aircraft in determining whether a country grants an equivalent exemption from tax for purposes of section 872(b) of the Code.

Part A of Table I of this revenue ruling provides a list of countries that grant an equivalent exemption as evidenced by a diplomatic note exchanged with the United States. Part B of Table I provides a list of countries that grant an equivalent exemption to U.S. corporations by statute or decree, or by not imposing tax on income from the international operation of ships or aircraft. Table II of this revenue ruling provides a list of countries that have entered into income tax conventions with the United States that include a shipping and air transport article or a gains article.

As published, in Rev. Rul. 2008-17, Table II (Countries Granting Exemptions from Tax by Income Tax Convention), Column 9 (Cap Gains), two footnotes were inadvertently omitted. Footnote 26 applies to Cap Gains for India and footnote 18 applies to Cap Gains for New Zealand.

Accordingly, the publication of the revenue ruling ( Rev. Rul. 2008-17 ) is corrected as follows: On page 631 of Bulletin No. 2008-12 , Table II is corrected by adding footnote 26 to the Cap Gains column for India and footnote 18 to the Cap Gains column for New Zealand as follows:

Rev. Rul. 2008-17, 2008-12 I.R.B. 626, is modified.

The principal author of this announcement is Patricia A. Bray of the Office of Associate Chief Counsel (International). For further information regarding this announcement, contact Patricia A. Bray at (202) 622-3880 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final regulations; Correction.

This document contains a correction to final regulations (T.D. 9398, 2008-24 I.R.B. 1143) that were published in the Federal Register on Monday, May 19, 2008 (73 FR 28699) providing rules for testing whether the economic effect of an allocation is substantial within the meaning of section 704(b) where partners are look-through entities or members of a consolidated group. The final regulations clarify the application of section 704(b) to partnerships the interests of which are owned by look-through entities and members of consolidated groups and, through an example, reiterate the effect of other provisions of the Internal Revenue Code on partnership allocations.

This correction is effective June 12, 2008 and is applicable on May 19, 2008.

Jonathan E. Cornwell and Kevin I. Babitz at (202) 622-3050 (not a toll-free number).

The final regulations that are the subject of this document are under section 704 of the Internal Revenue Code.

As published, final regulations (T.D. 9398) contain an error that may prove to be misleading and is in need of clarification.

Accordingly, the publication of the final regulations (T.D. 9398), which were the subject of FR Doc. E8-11176, is corrected as follows:

On page 28701, column 2, in the preamble, under the paragraph heading “B. The Baseline for Comparison in § 1.704-1(b)(2)(iii)”, line 2 from the bottom of the second paragraph, the language “and (2) and the conclusions reached by” is corrected to read “and (2) and the conclusions reached by”.

Internal Revenue Service (IRS), Treasury.

Correcting amendments.

This document contains corrections to final regulations (T.D. 9398, 2008-24 I.R.B. 1143) that were published in the Federal Register on Monday, May 19, 2008 (73 FR 28699) providing rules for testing whether the economic effect of an allocation is substantial within the meaning of section 704(b) where partners are look-through entities or members of a consolidated group. The final regulations clarify the application of section 704(b) to partnerships the interests of which are owned by look-through entities and members of consolidated groups and, through an example, reiterate the effect of other provisions of the Internal Revenue Code on partnership allocations.

This correction is effective June 12, 2008, and is applicable on May 19, 2008.

Jonathan E. Cornwell and Kevin I. Babitz at (202) 622-3050 (not a toll-free number).

The final regulations that are the subject of this document are under section 704 of the Internal Revenue Code.

As published, final regulations (T.D. 9398) contain errors that may prove to be misleading and are in need of clarification.

* * * * *

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

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

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.704-1 is amended as follows:

1. In paragraph (b)(2)(iii)(d)(3), the last sentence, the language “In the case of a controlled foreign corporation that is a look-through entity, the tax attributes to be taken into account are those of any person that is a United States shareholder (as defined in paragraph (b)(2)(iii)(d)(5) of this section) of the controlled foreign corporation, or, if the United States shareholder is a look-through entity, a United States person that owns an interest in such shareholder directly or indirectly through one or more look-through entities.” is removed and the language “In the case of a controlled foreign corporation that is a look-through entity, the tax attributes to be taken into account are those of any person that is a United States shareholder (as defined in paragraph (b)(2)(iii)(d)(5) of this section) of the controlled foreign corporation, or, if the United States shareholder is a look-through entity, a United States person that owns an interest in such shareholder directly or indirectly through one or more look-through entities.” is added in its place.

2. In paragraph (b)(5) Example 29., the fourth sentence, the language “C is a partnership with two partners, E, an individual, and F, a corporation that is member of a consolidated group within the meaning of § 1.1502-1(h).” is removed and the language “C is a partnership with two partners, E, an individual, and F, a corporation that is a member of a consolidated group within the meaning of § 1.1502-1(h).” is added in its place.

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

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

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

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

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

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

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

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

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

Disciplinary sanctions are described in these terms:

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

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

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

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

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

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

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