Notice 2005-10

Bulletin No. 2011-16
April 18, 2011

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.

SPECIAL ANNOUNCEMENT

EXEMPT ORGANIZATIONS

Announcement 2011–22, page 672.

Notice 2011–20, page 652.

This document contains the annual report to the public concerning Advance Pricing Agreements (APAs) and the experience of the APA Program during calendar year 2010. This
document does not provide guidance regarding the application
of the arm’s length standard. Instead, it reports on the structure and activities of the APA Program.

This notice addresses the application of section 501(c)(3) of
the Code to tax-exempt organizations participating in the Medicare Shared Savings Program (MSSP) through an accountable
care organization (ACO) as described in section 3022 of the
Patient Protection and Affordable Care Act. In addition, the notice includes a request for public comments.

INCOME TAX

ADMINISTRATIVE

Notice 2011–29, page 663.

Notice 2011–28, page 656.

This notice provides that, pending the resolution of a number of
legal and factual issues, the IRS will not challenge a taxpayer’s
position that the Puerto Rican excise tax is a tax in lieu of an
income tax under section 903 of the Code.

This notice provides interim guidance to employers with respect to reporting the cost of coverage under an employersponsored group health plan on Form W-2, Wage and Tax Statement, pursuant to § 6051(a)(14) of the Code.

Rev. Proc. 2011–26, page 664.
This procedure provides guidance with respect to the 100–percent additional first year depreciation deduction under sections
168(k)(5) of the Code, and the extension of the 50–percent
bonus depreciation deduction for qualified property placed in
service in 2010. This procedure defines which property is eligible for the 100–percent bonus depreciation deduction and
provides guidance regarding the time and manner for making
certain elections under sections 168(k)(2) and (5). The procedure also provides a safe harbor method of accounting for
passenger automobiles that qualify for the 100–percent additional first year depreciation deduction and that are subject to
first-year limitations under section 280F. Rev. Proc. 2011–21
amplified.

Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-

force the 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 Conventions, 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 substantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent 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
the disposition of other cases. In applying published rulings and
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.—1986 Code.
This part includes rulings and decisions based on provisions of
the 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, Legislation 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 Rulings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and 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.

April 18, 2011

2011–16 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Notice Regarding
Participation in the MSSP
through an ACO
Notice 2011–20
The Internal Revenue Service (IRS) is
considering the application of the provisions of the Internal Revenue Code (Code)
governing tax-exempt organizations to
hospitals or other health care organizations
that are recognized as organizations described in § 501(c)(3) of the Code (referred
to herein as “tax-exempt organizations”)
participating in the Medicare Shared Savings Program (MSSP) described in § 3022
of the Patient Protection and Affordable
Care Act, Pub. L. 111–148, 124 Stat. 119
(Affordable Care Act), enacted March 23,
2010. Accordingly, the IRS is soliciting
comments as to whether existing guidance
relating to the Code provisions governing
tax-exempt organizations is sufficient for
those tax-exempt organizations planning
to participate in the MSSP through an
“accountable care organization” (ACO)
and, if not, what additional guidance is
needed. The IRS is also soliciting comments concerning whether guidance is
needed regarding the tax implications for
tax-exempt organizations participating in
activities unrelated to the MSSP, including
shared savings arrangements with commercial health insurance payers, through
ACOs.
BACKGROUND ON ACOS AND THE
MSSP

criteria specified by HHS are eligible to
participate as ACOs under the program.
Section 1899(b)(1) of the SSA provides
examples of groups of service providers
and suppliers that may form an ACO,
including (i) physicians and other health
care practitioners (ACO professionals)
in a group practice, (ii) a network of individual practices, (iii) a partnership or
joint venture arrangement between hospitals and ACO professionals, and (iv) a
hospital employing ACO professionals.
ACOs eligible to participate in the MSSP
will manage and coordinate care for their
assigned Medicare fee-for-service beneficiaries. Health care service providers
and suppliers participating in an ACO will
continue to receive Medicare fee-for-service payments in the same manner as such
payments would otherwise be made. In
addition, an ACO that meets quality performance standards established by HHS
and demonstrates that it has achieved savings against an appropriate benchmark
of expected average per capita Medicare
fee-for-service expenditures will be eligible to receive payments for Medicare
shared savings (MSSP payments) under
§ 1899(d)(2) of the SSA. Section 1899(i)
of the SSA also authorizes the use of other
payment models that the HHS Secretary
determines will improve the quality and
efficiency of items and services for Medicare.
Section 1899(b)(2) of the SSA establishes the following requirements for an
ACO to participate in the program:
1.

Section 3022 of the Affordable Care
Act amends Title XVIII of the Social Security Act (SSA) (42 U.S.C. 1395 et seq.)
by adding a new § 1899, which directs
the Secretary of the Department of Health
and Human Services (HHS) to establish
a Medicare shared savings program that
promotes accountability for care of Medicare beneficiaries, improves the coordination of Medicare fee-for-service items and
services, and encourages investment in infrastructure and redesigned care processes
for high quality and efficient service delivery. Under § 1899(b)(1) of the SSA,
groups of health care service providers and
suppliers that have established a mechanism for shared governance and that meet

2011–16 I.R.B.

2.

3.

4.

The ACO shall be willing to become
accountable for the quality, cost, and
overall care of the Medicare fee-forservice beneficiaries assigned to it.
The ACO shall enter into an agreement with the HHS Secretary to participate in the program for not less
than a 3-year period (the MSSP agreement period).
The ACO shall have a formal legal structure that would allow the
organization to receive and distribute payments for shared savings
under § 1899(d)(2) to participating
providers of services and suppliers.
The ACO shall include primary care
ACO professionals that are sufficient
for the number of Medicare fee-for-

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5.

6.

7.

8.

service beneficiaries assigned to the
ACO under § 1899(c). At a minimum, the ACO shall have at least
5,000 such beneficiaries assigned to it
under § 1899(c) in order to be eligible
to participate in the MSSP.
The ACO shall provide the HHS Secretary with such information regarding ACO professionals participating
in the ACO as the Secretary determines necessary to support the assignment of Medicare fee-for-service beneficiaries to an ACO, the implementation of quality and the other reporting requirements under § 1899(b)(3),
and the determination of payments for
shared savings under § 1899(d)(2).
The ACO shall have in place a leadership and management structure that
includes clinical and administrative
systems.
The ACO shall define processes to
promote evidence-based medicine
and patient engagement, report on
quality and cost measures, and coordinate care, such as through the use of
telehealth, remote patient monitoring,
and other such enabling technologies.
The ACO shall demonstrate to the
HHS Secretary that it meets patient-centeredness criteria specified
by the Secretary, such as the use of
patient and caregiver assessments or
the use of individualized care plans.

Section 1899(b)(3) of the SSA requires
the HHS Secretary to establish quality performance standards to assess the quality
of care furnished by ACOs and requires
ACOs to report data, in a form and manner
specified by the HHS Secretary, on measures the Secretary determines necessary
to evaluate the quality of care furnished
by the ACO. Section 1899(d)(3) of the
SSA requires the HHS Secretary to monitor ACOs for avoidance of at-risk patients.
If the HHS Secretary determines that an
ACO has taken steps to avoid at-risk patients to reduce the likelihood of increasing
costs to the ACO, the Secretary may impose appropriate sanctions, including termination from the MSSP.
On March 31, 2011, the Centers for
Medicare & Medicaid Services (CMS),
the agency within HHS that administers

April 18, 2011

the Medicare program, released a Notice of Proposed Rulemaking (NPRM)
addressing § 1899 of the SSA and soliciting comments. The NPRM contains
specific, proposed eligibility criteria (including patient and program safeguards)
that entities would have to meet to qualify
as ACOs under the MSSP, and describes
proposed quality measures, reporting requirements, and monitoring by CMS. Consistent with the eligibility requirements
under §1899(b), the NPRM proposes requiring an ACO to be an organization that
is recognized under applicable State law
and that has a governing body with adequate authority to execute the statutory
functions of an ACO. The NPRM also
proposes requiring an ACO’s governing
body to include ACO participants (or their
designated representatives) and to include
Medicare patients who are served by the
ACO and do not have a financial connection to the ACO.
In the NPRM, CMS proposes to require
potential ACOs seeking to participate in
the MSSP to submit written applications
to CMS and to describe in their applications how they plan to use and distribute
any MSSP payments, and how that plan
would contribute to achieving the specific
goals of the MSSP and the general aims of
better care for individuals, better health for
populations, and lower growth in expenditures. The NPRM proposes that CMS
would evaluate the ACO’s proposal in determining its eligibility to participate in the
program.
The NPRM further proposes that CMS
will monitor and assess the performance of
ACOs and their participants by making site
visits, analyzing beneficiary and provider
complaints, conducting audits, and analyzing specific financial and quality measurement data reported by the ACO, as
well as aggregated annual and quarterly
reports. CMS will use these methods to
monitor such matters as the ACOs’ avoidance of at-risk beneficiaries and its compliance with quality performance standards
and eligibility requirements.
In addition, the NPRM proposes to require participating ACOs to comply with
public reporting and transparency requirements. For example, each participating
ACO would be required to publicly report information about its participating
providers of services and suppliers, leadership, quality performance, and shared

April 18, 2011

savings, including MSSP payments (if
any) received by the ACO and the total
proportion of shared savings distributed
among ACO participants and the total
proportion used to support quality performance and program goals.
Finally, consistent with the language
in § 1899(i) of the SSA that authorizes
the use of alternative payment models, the
NPRM proposes a “two-sided model,” under which participating ACOs would not
only be eligible to share in cost savings
at higher rates but would also have to repay losses resulting from spending that
exceeds a benchmark of expected average per capita Medicare fee-for-service
expenditures (MSSP losses). ACOs will
be able to elect to participate in the twosided model during the first two years of
their initial MSSP agreement period, with
all ACOs operating under the two-sided
model by the third year of their initial
MSSP agreement period, and during any
subsequent MSSP agreement period.
LAW
Exemption under § 501(c)(3) of the Code
Section 501(c)(3) of the Code provides,
in part, for the exemption from federal income tax of corporations organized and
operated exclusively for charitable, scientific, or educational purposes, provided no
part of the organization’s net earnings inures to the benefit of any private shareholder or individual.
Treas. Reg. § 1.501(c)(3)–1(c)(1)
states that an organization will be regarded
as operated exclusively for one or more
exempt purposes only if it engages primarily in activities that accomplish one or
more of such exempt purposes specified in
§ 501(c)(3). An organization will not be
so regarded if more than an insubstantial
part of its activities is not in furtherance of
an exempt purpose.
Treas. Reg. § 1.501(c)(3)–1(c)(2)
states that an organization is not operated
exclusively for charitable purposes if its
net earnings inure in whole or in part to the
benefit of private shareholders or individuals. Courts have interpreted the term “net
earnings” as referring to an “advantage,
profit, fruit, privilege, gain [or] interest”
derived from the organization. Harding
Hospital v. United States, 505 F.2d 1068,
1072 (6th Cir. 1964); Retired Teachers

653

Legal Defense Fund v. Commissioner, 78
T.C. 280, 286 (1982).
Treas. Reg. § 1.501(a)–1(c) defines
“private shareholder or individual” as referring to persons having a personal and
private interest in the activities of the organization. Such persons are commonly
referred to as “insiders.”
Treas. Reg. § 1.501(c)(3)–1(d)(1)(ii)
states that an organization is not organized
exclusively for any of the purposes specified in § 501(c)(3) unless it serves public,
rather than private interests. Thus, an organization applying for tax exemption under § 501(c)(3) must establish that it is not
organized or operated for the benefit of private interests.
Treas. Reg. § 1.501(c)(3)–1(d)(2) provides that the term “charitable” is used
in § 501(c)(3) in its generally accepted
legal sense and includes such purposes
as relief of the poor and distressed or
of the underprivileged; advancement of
religion; advancement of education or
science; and lessening of the burdens of
Government. A determination of whether
an organization is lessening the burdens
of government requires consideration of
whether the organization’s activities are
ones that a government unit considers to
be its burden, and whether such activities actually lessen that burden, based
on all the facts and circumstances. See
Rev. Rul. 85–1 (organization that assists
a county’s law enforcement agencies in
policing illegal narcotics traffic lessens
burdens of government); Rev. Rul. 85–2
(organization that provides legal counsel
and training to volunteers who serve as
guardians ad litum in a juvenile court dependency program lessens the burdens of
government).
Rev. Rul. 81–276, 1981–2 C.B. 128,
describes a professional standards review
organization established pursuant to a
federal statute to review health care practitioners’ and institutions’ provision of
health care services and items for which
payment is made under Medicare and
Medicaid, and determine whether the
quality of services met professionally recognized standards of care. The IRS ruled
that by taking on the government’s burden of reviewing the quality of services
provided under Medicare and Medicaid,
the organization lessened the burdens of
government within the meaning of Treas.
Reg. § 1.501(c)(3)–1(d)(2). Any benefit

2011–16 I.R.B.

to members of the medical profession from
such activities was incidental to the benefit the organization provided in lessening
the burdens of government. Therefore,
the organization qualified for exemption
under § 501(c)(3) of the Code.
The “promotion of health has long been
recognized as a charitable purpose.” Rev.
Rul. 98–15, 1998–1 C.B. 718; see also
Rev. Rul. 69–545, 1969–2 C.B. 117 (noting that “[i]n the general law of charity,
the promotion of health is considered to
be a charitable purpose”). However, not
every activity that promotes health supports tax exemption under § 501(c)(3).
For example, selling prescription pharmaceuticals promotes health, but pharmacies
cannot qualify for recognition of exemption under § 501(c)(3) on that basis alone.
Federation Pharmacy Services, Inc. v.
Commissioner, 72 T.C. 687 (1979), aff’d,
625 F.2d 804 (8th Cir. 1980); see also
IHC Health Plans Inc. v. Commissioner,
325 F.3d 1188, 1197 (10th Cir. 2003)
(noting that “engaging in an activity that
promotes health, standing alone, offers
an insufficient indicium of an organization’s purpose,” as “[n]umerous for-profit
enterprises offer products or services that
promote health”). Furthermore, “an institution for the promotion of health is not
a charitable institution if it is privately
owned and is run for the profit of the owners.” Rev. Rul. 98–15.
In Rev. Rul. 98–15, the IRS recognized that the activities of a limited liability company (LLC) “treated as a partnership for federal income tax purposes are
considered to be the activities of a nonprofit organization that is an owner of the
LLC when evaluating whether the nonprofit organization is operated exclusively
for exempt purposes within the meaning of
§ 501(c)(3).” See also Rev. Rul. 2004–51,
2004–1 C.B. 974 (noting that the activities of an LLC treated as a partnership for
tax purposes are attributed to a university
that owns 50 percent of the LLC for purposes of determining whether the university “operates exclusively for educational
purposes and therefore continues to qualify for exemption under § 501(c)(3)”).
Tax on Unrelated Business Income
Section 511(a) of the Code, in part, provides for the imposition of tax on the unrelated business taxable income (as defined

2011–16 I.R.B.

in § 512) of organizations described in
§ 501(c)(3).
Section 512(a)(1) of the Code defines
“unrelated business taxable income” as the
gross income derived by any organization
from any unrelated trade or business (as
defined in § 513) regularly carried on by
it less the deductions allowed, both computed with the modifications provided in
§ 512(b).
Section 512(c) of the Code provides
that, if a trade or business regularly carried
on by a partnership of which an organization is a member is an unrelated trade or
business with respect to the organization,
in computing its unrelated business taxable
income, the organization shall, subject to
the exceptions, additions, and limitations
contained in § 512(b), include its share
(whether or not distributed) of the gross income of the partnership from the unrelated
trade or business and its share of the partnership deductions directly connected with
the gross income.
Section 513(a) of the Code defines the
term “unrelated trade or business” as any
trade or business the conduct of which is
not substantially related (aside from the
need of the organization for income or
funds or the use it makes of the profits derived) to the exercise or performance by
the organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under
§ 501.
Treas. Reg. § 1.513–1(d)(2) provides
that a trade or business is “related” to an
organization’s exempt purposes only if
the conduct of the business activities has
a causal relationship to the achievement
of exempt purposes (other than through
the production of income). A trade or
business is “substantially related” for
purposes of § 513, only if the causal relationship is a substantial one. Thus, to
be substantially related, the activity “must
contribute importantly to the accomplishment of [exempt] purposes.” Treas. Reg.
§ 1.513–1(d)(2).
Rev.
Rul.
2004–51 describes a
§ 501(c)(3) university that, together with
a video technology company, formed an
LLC with the sole purpose of offering
teacher training seminars at off-campus
locations using interactive video technology. The university and the company each
held a 50 percent ownership interest in the
LLC, which was proportionate to the value

654

of their respective capital contributions
to the LLC. In addition, the governing
documents of the LLC provided that (1)
all returns of capital, allocations and distributions were to be made in proportion
to the members’ respective ownership interests; (2) the LLC would be managed
by a governing board comprised of three
directors chosen by the university and
three directors chosen by the company;
(3) the university had the exclusive right
to approve the curriculum, training materials, and instructors, and to determine the
standards for successful completion of the
seminars; and (4) the terms of all contracts
and transactions entered into by the LLC
with the university and the company and
any other parties had to be at arm’s length
and all contract and transaction prices had
to be at fair market value. The IRS noted
that because the LLC was treated as a
partnership for federal tax purposes, its
activities were attributed to the university
for purposes of determining whether the
university was engaged in an unrelated
trade or business. Under these facts and
circumstances, the IRS ruled that the university’s activities conducted through the
LLC constituted a trade or business that
was substantially related to the exercise
and performance of the university’s exempt purposes.
DISCUSSION
Participation in the MSSP Through ACOs
by Tax-Exempt Organizations
The IRS anticipates that tax-exempt organizations typically will be participating
in the MSSP through an ACO along with
private parties, including some that might
be considered insiders with respect to the
tax-exempt organization. The IRS further anticipates that a tax-exempt organization’s participation may take a variety
of forms, including membership in a nonprofit membership corporation, ownership
of shares in a corporation, ownership of
a partnership interest in a partnership (or
a membership interest in an LLC), and
contractual arrangements with the ACO
and/or its other participants.
To avoid adverse tax consequences, the
tax-exempt organization must ensure that
its participation in the MSSP through an
ACO is structured so as not to result in
its net earnings inuring to the benefit of

April 18, 2011

its insiders or in its being operated for the
benefit of private parties participating in
the ACO. The IRS must determine whether
prohibited inurement or impermissible private benefit has occurred on a case-by-case
basis, based on all the facts and circumstances. Because of CMS regulation and
oversight of the MSSP, as a general matter, the IRS expects that it will not consider a tax-exempt organization’s participation in the MSSP through an ACO to result in inurement or impermissible private
benefit to the private party ACO participants where:

•

•
•

•

•

The terms of the tax-exempt organization’s participation in the MSSP
through the ACO (including its share
of MSSP payments or losses and expenses) are set forth in advance in a
written agreement negotiated at arm’s
length.
CMS has accepted the ACO into, and
has not terminated the ACO from, the
MSSP.
The tax-exempt organization’s share
of economic benefits derived from the
ACO (including its share of MSSP
payments) is proportional to the benefits or contributions the tax-exempt
organization provides to the ACO. If
the tax-exempt organization receives
an ownership interest in the ACO, the
ownership interest received is proportional and equal in value to its capital
contributions to the ACO and all ACO
returns of capital, allocations and distributions are made in proportion to
ownership interests.
The tax-exempt organization’s share of
the ACO’s losses (including its share
of MSSP losses) does not exceed the
share of ACO economic benefits to
which the tax-exempt organization is
entitled.
All contracts and transactions entered
into by the tax-exempt organization
with the ACO and the ACO’s participants, and by the ACO with the ACO’s
participants and any other parties, are
at fair market value.

An additional issue raised by the participation of tax exempt organizations in
ACOs is whether the share of the MSSP
payments received by a tax-exempt organization will be subject to unrelated
business income tax (UBIT) under § 511.

April 18, 2011

Whether the MSSP payments will be
subject to UBIT depends on whether the
activities generating the MSSP payments
are substantially related to the exercise or
performance of the tax-exempt organization’s charitable purposes constituting the
basis for its exemption under § 501.
The IRS expects that, absent inurement or impermissible private benefit, any
MSSP payments received by a tax-exempt
organization from an ACO would derive
from activities that are substantially related to the performance of the charitable
purpose of lessening the burdens of government within the meaning of Treas. Reg.
§ 1.501(c)(3)–1(d)(2), as long as the ACO
meets all of the eligibility requirements
established by CMS for participation in
the MSSP. See, e.g., Rev. Rul. 81–276
(recognizing that the federal government
considers the provision of Medicare to
be its burden). Congress established the
MSSP to be conducted through ACOs in
order to promote quality improvements
and cost savings, thereby lessening the
government’s burden associated with providing Medicare benefits.
The IRS is soliciting comments regarding what additional guidance, if any, is
needed to facilitate participation by tax-exempt organizations in the MSSP through
ACOs. If additional guidance is needed,
the IRS is soliciting comments regarding
what criteria or requirements should be analyzed in determining whether participation by a tax-exempt organization in the
MSSP through an ACO is consistent with
tax-exempt status under § 501(c)(3) and
whether the tax-exempt organization is receiving unrelated business income.
ACO’s Conduct of Activities Unrelated to
the MSSP
The IRS understands that some tax-exempt organizations might participate in
ACOs conducting activities unrelated to
the MSSP, including entering into and
operating under shared savings arrangements with other types of health insurance
payers (non-MSSP activities). The IRS
anticipates that, in contrast to activities
conducted as part of the MSSP, many
non-MSSP activities conducted by or
through an ACO are unlikely to lessen the
burdens of government within the meaning of Treas. Reg. § 1.501(c)(3)–1(d)(2).
For example, negotiating with private

655

health insurers on behalf of unrelated
parties generally is not a charitable activity, regardless of whether the agreement
negotiated involves a program aimed at
achieving cost savings in health care delivery. However, the IRS recognizes that
certain non-MSSP activities may further
or be substantially related to an exempt
purpose. For example, the NPRM released
by CMS anticipates that ACOs may also
participate in shared savings arrangements
with Medicaid, which may further the
charitable purpose of relieving the poor
and distressed or the underprivileged.
See Treas. Reg. § 1.501(c)(3)–1(d)(2).
This notice does not address whether and
under what circumstances a tax-exempt
organization’s participation in non-MSSP
activities through an ACO will be consistent with an organization’s tax-exemption
under § 501(c)(3) or not result in UBIT.
However, the IRS requests comments regarding what guidance, if any, is necessary
or appropriate regarding a tax-exempt organization’s participation in non-MSSP
activities through an ACO.
Specifically, the IRS requests comments regarding how a tax-exempt organization’s participation in particular
non-MSSP activities through an ACO
further or are substantially related to
an exempt purpose. Comments should
describe the activities a tax-exempt organization might expect to participate in
through an ACO and address under what
rationale participation in such non-MSSP
activities might further exempt purposes
and also what criteria, requirements, and
safeguards would ensure the furtherance
of these exempt purposes. In particular,
comments should address how a participating tax-exempt organization will ensure
that non-MSSP activities further exempt
purposes in the absence of safeguards
similar to those present in the MSSP,
such as (1) any regulatory requirements
imposing quality performance and other
standards on the non-MSSP activities and
(2) any oversight and monitoring of the
non-MSSP activities by a government
agency such as CMS.
Comments should also take into account two principles under existing law.
First, although the promotion of health has
been recognized as a charitable purpose,
not every activity that promotes health
supports tax exemption under § 501(c)(3).
See IHC Health Plans, 325 F.3d at 1197;

2011–16 I.R.B.

Fed’n Pharmacy Serv., 72 T.C. at 691–92;
Rev. Rul. 98–15. Second, if a tax-exempt
organization is a partner (or member, in
the case of an LLC) of an ACO treated as
a partnership for federal tax purposes, the
ACO’s activities will be attributed to the
tax-exempt organization for purposes of
determining both whether the organization
operates exclusively for exempt purposes
and whether it is engaged in an unrelated
trade or business. See, e.g., Rev. Rul.
2004–51; Rev. Rul. 98–15.
REQUEST FOR PUBLIC COMMENT
Public comments should be submitted
in writing on or before May 31, 2011.
Comments should be sent to the following
address:
Internal Revenue Service
SE:T:EO:RA:G (Notice 2011–20)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Interim Guidance on
Informational Reporting
to Employees of the Cost of
Their Group Health Insurance
Coverage
Notice 2011–28
I. PURPOSE
This notice provides interim guidance
on informational reporting to employees of
the cost of their employer-sponsored group
health plan coverage. This informational
reporting is required under § 6051(a)(14)
of the Code, enacted as part of the Affordable Care Act to provide useful and comparable consumer information to employees on the cost of their health care coverage. As more fully described below —

•

This reporting to employees is for
their information only, to inform them
of the cost of their health care coverage, and does not cause excludable
employer-provided health care coverage to become taxable. Nothing
in § 6051(a)(14), this notice, or the
additional guidance that is contemplated under § 6051(a)(14), causes or
will cause otherwise excludable employer-provided health care coverage
to become taxable.

•

This notice provides interim guidance
that generally applies beginning with
2012 Forms W–2 (that is, the forms required for the calendar year 2012 that
employers generally are required to
furnish to employees in January 2013
and then file with the Social Security
Administration (SSA)). Employers
are not required to report the cost of
health coverage on any forms required
to be furnished to employees prior to
January 2013. See Notice 2010–69.
However, any employers that choose
to report earlier (on the 2011 Forms
W–2 generally furnished to employees in January 2012) may look to this
notice for guidance regarding that voluntary earlier reporting.

•

This notice also provides additional
transition relief for certain employers
and with respect to certain types of
employer-sponsored coverage. This
transition relief will continue at least

Comments may be hand delivered to:
SE:T:EO:RA:G (Notice 2011–20)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Comments
may
also
be
sent
electronically
to
[email protected].
Please include “Notice 2011–20” in the
subject line.
All comments will be available for public inspection.
DRAFTING INFORMATION
The principal author of this notice is Mackenzie McNaughton of
Exempt Organizations, Tax Exempt
and Government Entities Division. For
further information regarding this notice,
contact Mackenzie McNaughton at (202)
283–9484 (not a toll-free call).

2011–16 I.R.B.

through the 2012 Forms W–2 which
are required to be furnished to employees in January 2013. In other words,
those employers to which the additional transition relief applies (which
includes smaller employers that are
required to file fewer than 250 2011
Forms W–2) will not be required to
report the cost of health care coverage
on any forms required to be furnished
to employees prior to January 2014.
This transition relief will continue until the issuance of further guidance.

656

•

Comments are invited on this interim
guidance.

Section 6051(a)(14) was added to the
Code by § 9002 of the Patient Protection
and Affordable Care Act of 2010 (the Affordable Care Act), Public Law 111–148,
enacted March 23, 2010, and provides
that the reporting be made on Form W–2,
Wage and Tax Statement. Notice 2010–69,
2010–44 I.R.B. 567, provides that this
reporting will not be mandatory for 2011
Forms W–2 (that is, the forms required for
the calendar year 2011 that employers are
generally required to give employees in
January 2012 and then file with the Social
Security Administration).
As explained above, this notice provides interim guidance that generally is
applicable beginning with 2012 Forms
W–2. In addition, employers may rely
on the guidance provided in this notice if
they voluntarily choose to report the cost
of coverage on 2011 Forms W–2, even
though this reporting is not required for
2011. This interim guidance is applicable until further guidance is issued. To
the extent that future guidance applies
the reporting requirement to additional
employers or categories of employers or
additional types of coverage that guidance
will apply prospectively only and will
not apply to any calendar year beginning
within six months of the date the guidance
is issued. Also as explained above, this
notice provides transition relief for certain employers and with respect to certain
types of employer-sponsored coverage.
See section IV of this notice. This transition relief will be extended at least through
the 2012 Forms W–2 and the availability
of this transition relief through the 2012
Forms W–2 will not be affected by the
issuance of any further guidance. Thus,

April 18, 2011

reporting by these employers and with respect to these types of coverage will not be
required for calendar year 2012 (that is, on
the Forms W–2 that employers generally
are required to furnish to employees in
January 2013 and then file with the SSA).
For example, as provided in Q&A–3 of
this notice, employers that are required to
file fewer than 250 2011 Forms W–2 will
not be subject to the reporting requirement
for 2012 Forms W–2.
The interim guidance is set forth in
section III of this notice. Q&A–1 and
Q&A–2 discuss the general requirements.
Q&A–3 identifies the employers subject
to the reporting requirements. Q&A–4
through Q&A–10 provide the methods for
reporting the cost of the coverage on the
Form W–2. Q&A–11 through Q&A–15
define certain terms related to the cost of
coverage required to be reported on the
Form W–2. Q&A–16 through Q&A–23
set forth the types of coverage the cost
of which is required to be included in
the amount reported on the Form W–2.
Q&A–24 through Q&A–27 discuss several calculation methods that may be used
to determine the cost of the coverage.
Q&A–28 through Q&A–31 address a
number of other issues employers may
encounter in determining the cost of the
coverage. Section IV of this notice contains transition relief for certain employers
and with respect to certain types of employer-sponsored coverage. Section V of
this notice contains a request for comments
on all aspects of this guidance, including
any areas to be addressed in further guidance or future regulations that will provide
the final rules under § 6051(a)(14).
II. BACKGROUND
Section 6051(a) provides generally that
an employer must provide a written statement to each employee showing the remuneration paid by such person to such
employee during the calendar year, on or
before January 31 of the succeeding year
(or, if the employee terminates employment during the year, within 30 days after the date of receipt of a request from
such employee submitted before January
2). Form W–2, Wage and Tax Statement,
is the form used to provide an employee
this information.
Section 6051(a)(14) provides generally that the aggregate cost of applicable

April 18, 2011

employer-sponsored coverage must be
included in the information reported on
Form W–2, effective for taxable years
beginning on or after January 1, 2011.
Section 6051(a)(14), provides that, for this
purpose, the aggregate cost is to be determined under rules similar to the rules of
§ 4980B(f)(4), referring to the definition
of the “applicable premium” for purposes
of COBRA continuation coverage.
Section 6051(a)(14) does not apply to
reporting the amount contributed to any
Archer MSA (as defined in § 220(d)) or to
any health savings account (as defined in
§ 223(d)) of an employee or an employee’s
spouse. See § 6051(a)(11) and (a)(12).
Section 6051(a)(14) also does not apply to
the amount of any salary reduction contributions to a flexible spending arrangement
(within the meaning of §§ 106(c)(2) and
125).
Section 6051(a)(14) provides that
the aggregate cost of applicable employer-sponsored coverage (the amount
required to be reported on Form W–2)
has the same meaning as in § 4980I(d)(1).
Section 4980I(d)(1)(A) provides that the
term “applicable employer-sponsored
coverage” means, with respect to any
employee, coverage under any group
health plan made available to the employee by an employer which is excludable from the employee’s gross income
under § 106, or would be so excludable
if it were employer-provided coverage
(within the meaning of § 106). Section
4980I(f)(4) provides that, for purposes
of § 4980I(d)(1) the term “group health
plan” has the same meaning as under
§ 5000(b)(1).
Under section 4980I(d)(1)(B), the term
“applicable employer-sponsored coverage” does not include (i) any coverage
(whether through insurance or otherwise)
described in § 9832(c)(1) (other than
coverage for on-site medical clinics described in subparagraph (G) thereof) or for
long-term care, or (ii) any coverage under
a separate policy, certificate, or contract
of insurance which provides benefits substantially all of which are for treatment of
the mouth (including any organ or structure within the mouth) or for treatment of
the eye, or (iii) any coverage described
in § 9832(c)(3) the payment for which is
not excludable from gross income and for
which a deduction under § 162(l) is not
allowable.

657

The types of coverage described in
§ 9832(c)(1) (providing that certain “excepted benefits” are not subject to the
requirements of chapter 100 of the Code)
that are not subject to this reporting requirement are as follows:

•

Coverage only for accident, or disability income insurance, or any combination thereof;

•

Coverage issued as a supplement to liability insurance;

•

Liability insurance, including general
liability insurance and automobile liability insurance;

•

Workers’ compensation or similar insurance;

•

Automobile medical payment insurance;

•
•

Credit-only insurance;
Other similar insurance coverage,
specified in regulations, under which
benefits for medical care are secondary
or incidental to other insurance benefits.

The types of coverage described in
§ 9832(c)(3) include the following, provided that such coverage is offered as
independent, noncoordinated benefits:
(A) coverage only for a specified
disease or illness; and
(B) hospital indemnity or other fixed
indemnity insurance.
Section 4980I(d)(1)(C) provides that
coverage shall be treated as applicable employer-sponsored coverage without regard
to whether the employer or employee pays
for the coverage.
Section 4980I(d)(1)(E) provides that
applicable employer-sponsored coverage
shall include coverage under any group
health plan established and maintained
primarily for its civilian employees by
the Government of the United States, by
the government of any State or political
subdivision thereof, or by any agency or
instrumentality of any such government.
Section 4980B(f)(4)(A) provides that
the term “applicable premium” means,
with respect to any period of continuation coverage of qualified beneficiaries,
the cost to the plan for such period of the

2011–16 I.R.B.

coverage for similarly situated beneficiaries with respect to whom a qualifying
event has not occurred (without regard to
whether such cost is paid by the employer
or employee). Section 4980B(f)(4)(B)
provides a special rule for self-insured
plans, generally requiring that such plans
calculate the applicable premium through
one of two methods — the actuarial
method or the past cost method. Section
4980B(f)(4)(C) provides that the determination of any applicable premium shall
be made for a period of 12 months and
shall be made before the beginning of such
period.
Section 54.4980B–1, Q&A–2 of the
Miscellaneous Excise Tax Regulations,
provides that, for purposes of § 4980B,
for topics relating to the COBRA continuation coverage requirements of § 4980B
that are not addressed in §§54.4980B–1
through 54.4980B–10 (such as methods
for calculating the applicable premium),
plans and employers must operate in good
faith compliance with a reasonable interpretation of the statutory requirements in
§ 4980B.
III. INTERIM GUIDANCE
This interim guidance generally is applicable beginning with 2012 Forms W–2
(that is, the forms required for the calendar
year 2012 that employers generally are required to furnish to employees in January
2013 and then file with the SSA). In addition, employers may rely on the guidance
provided in this notice if they voluntarily choose to report the cost of coverage
on 2011 Forms W–2, even though such
reporting is not required for 2011. This
interim guidance is applicable until further guidance is issued. To the extent
that future guidance applies the reporting
requirement to additional employers or
categories of employers, additional types
of coverage, or otherwise applies the reporting requirement more expansively,
that guidance will apply prospectively
only and will not apply to any calendar
year beginning within six months of the
date the guidance is issued. See also Section IV of this notice for certain transition
relief that will be extended at least through
the 2012 Forms W–2.
Except as otherwise specified, the interim guidance in this section applies
solely for purposes of § 6051(a)(14) and

2011–16 I.R.B.

no inference should be drawn concerning
any other provision of the Code.
In General (Q&A–1 and Q&A–2)
Q–1: What does § 6051(a)(14) require?
A–1: Section 6051(a)(14) generally requires the aggregate cost of applicable employer-sponsored coverage to be reported
on Form W–2.
Q–2: Does the new requirement under
§ 6051(a)(14) to report the aggregate cost
of employer-sponsored coverage on Form
W–2, or compliance with this requirement,
have any impact on whether such coverage
is taxable?
A–2: No. The new requirement is
informational only. The provisions of
§ 6051(a)(14) do not affect whether any
particular coverage is excludable from
gross income under § 106 or any other
Code provision, and the reporting of any
amount on Form W–2 in compliance with
the requirements of § 6051(a)(14) will not
affect the amount includable in income or
the amount reported in any other box on
Form W–2. The purpose of the reporting
is to provide useful and comparable consumer information to employees on the
cost of their health care coverage.
Employers Subject to the Reporting
Requirement (Q&A–3)
Q–3:
What employers are subject to the reporting requirement under
§ 6051(a)(14)?
A–3: Except as provided in this
Q&A–3, all employers that provide applicable employer-sponsored coverage
(see Q&A–12) during a calendar year are
subject to the reporting requirement under
§ 6051(a)(14). This includes federal, state
and local government entities, churches
and other religious organizations, and employers that are not subject to the COBRA
continuation coverage requirements under
§ 4980B, to the extent such employers
provide applicable employer-sponsored
coverage under a group health plan, but
does not include Federally recognized Indian tribal governments. (Notice 2010–69
provides that reporting by these employers
is not mandatory until the 2012 Forms
W–2 (that is, the forms required for the
calendar year 2012 that employers generally are required to furnish to employees in
January 2013 and then file with the Social
Security Administration (SSA))).

658

However, in the case of the 2012 Forms
W–2 and until the issuance of further
guidance, an employer is not subject to
the reporting requirement for any calendar
year if the employer was required to file
fewer than 250 Forms W–2 for the preceding calendar year. (This rule is based
upon the rule in § 6011(e) that exempts
employers from filing returns electronically if they file fewer than 250 returns.)
Therefore, if an employer files fewer than
250 2011 Forms W–2 (meaning the Forms
W–2 for the 2011 calendar year that employers generally furnish to employees
In January 2012 and then file with SSA),
the employer would not be subject to the
reporting requirement for Forms W–2
for the 2012 calendar year (meaning the
Forms W–2 for the 2012 calendar year
that employers generally furnish to employees in January, 2013 and then file with
SSA). See also Q&A–21 for an exception
to the reporting requirement for coverage
under a self-insured plan that is not subject to any federal continuation coverage
requirements, and see also Q&A–22 for
an exception from the reporting requirement for plans maintained primarily for
members of the military, or primarily for
members of the military and their families.
Method of Reporting on the Form W–2
(Q&A–4 through Q&A–10)
Q–4: Is the reporting of the aggregate
cost of applicable employer-sponsored
coverage required for Forms W–2 issued
for the 2010 or 2011 calendar years?
A–4: No. Section 6051(a)(14) does not
apply to Forms W–2 for calendar years
prior to 2011 and, accordingly, reporting
of the aggregate cost of applicable employer-sponsored coverage is not required
for Forms W–2 issued for the 2010 calendar year. Moreover, Notice 2010–69 provides that reporting will not be mandatory
for the 2011 calendar year and, accordingly, an employer will not be treated as
failing to meet the requirements of § 6051
for 2011, and will not be subject to any
penalties for failure to meet such requirements, merely because it does not report
the aggregate cost of applicable employersponsored coverage on Forms W–2 for
2011.
Q–5: How is the aggregate reportable
cost reported on Form W–2?

April 18, 2011

A–5: The aggregate reportable cost is
reported on Form W–2 in box 12, using
code DD.
Q–6: What rules apply in the case of
coverage provided by the employer for a
period during a calendar year after an employee has terminated employment?
A–6: An employer may apply any reasonable method of reporting the cost of
coverage provided under a group health
plan for an employee who terminated
employment during the calendar year, provided that the method is used consistently
for all employees receiving coverage under that plan who terminate employment
during the calendar year. However, regardless of the method of reporting used
by the employer for other terminated
employees, an employer is not required
to report any amount in box 12, Code
DD for an employee who, pursuant to
§31.6051–1(d)(1)(i), has requested before
the end of the calendar year during which
the employee terminated employment to
receive a Form W–2.
Example 1. Employee is an employee of Employer on January 1, and continues in employment
through April 25. During that entire period and
through April 30, Employee had individual coverage for himself under a group health plan with
a cost of coverage of $350 per month. Employee
elects continuation coverage for the six months following termination of employment, covering the
period May 1 through October 31, for which the
Employee pays $350 per month. Employer reports
$1,400 as the reportable cost under the plan for the
calendar year, covering the four months during which
Employee performed services and had coverage as
an active employee. Employer applies this method
consistently for all employees terminating during the
calendar year who have coverage under that group
health plan. Employer has applied a reasonable
method of reporting Employee’s reportable cost
under the plan.
Example 2. Same facts as Example 1, except that
Employer reports $3,500 as the reportable cost under the plan for the calendar year, covering both the
monthly periods during which Employee performed
services and had coverage as an active employee, and
the monthly periods during which Employee retained
continuation coverage under the plan. Employer applies this method consistently for all employees terminating during the calendar year who retained coverage under that group health plan. Employer has applied a reasonable method of reporting Employee’s
reportable cost under the plan.

Q–7: In the case of an individual who is
an employee of multiple employers within
a calendar year, must each employer provide a Form W–2 reporting the aggregate
reportable cost?
A–7: Each employer providing employer-sponsored coverage must report

April 18, 2011

the aggregate reportable cost of coverage
it provides. However, if the employers
are related employers within the meaning
of § 3121(s) and one such employer is a
common paymaster within the meaning of
§ 3121(s) for wages paid to the employee,
the common paymaster must include the
aggregate reportable cost of the coverage
provided to that employee by all the employers for whom it serves as the common
paymaster on the Form W–2 issued by
the common paymaster. In such case, the
related employers that are not the common paymaster must not report the cost
of coverage they provide. For employers
participating in a multiemployer healthcare plan, see Q&A–17.
Q–8: In the case of an individual
who transfers to a new employer that
qualifies as a successor employer under
§ 3121(a)(1), must both the predecessor
and successor employers report the aggregate reportable cost of coverage each
provided?
A–8: Yes, unless the successor employer follows the optional procedure in
Rev. Proc. 2004–53, 2004–2 C.B. 320,
and issues one Form W–2 reflecting wages
paid to the employee during the calendar
year by both the predecessor employer and
the successor employer. Consistent with
the rules applicable to reporting of wages,
the successor employer following the optional procedure must include the aggregate reportable cost of coverage provided
by both employers on the Form W–2 that it
issues, and the predecessor employer must
not report the cost of coverage it provides.
Q–9: Must an employer issue a Form
W–2 including the aggregate reportable
cost to an individual to whom the employer
is not otherwise required to issue a Form
W–2, such as a retiree or other former
employee receiving no compensation required to be reported on a Form W–2?
A–9: No. An employer is not required
to issue a Form W–2 including the aggregate reportable cost to an individual to
whom the employer is not otherwise required to issue a Form W–2.
Q–10: Is the total of the aggregate reportable costs attributable to an employer’s
employees required to be reported on Form
W–3, Transmittal of Wage and Tax Statements?
A–10: No. The total of the aggregate reportable costs attributable to an employer’s employees is not required to be re-

659

ported on Form W–3, Transmittal of Wage
and Tax Statements.
Aggregate Cost of Applicable
Employer-Sponsored Coverage
(Q&A–11 through Q&A–15)
Q–11: What is the aggregate cost of
applicable employer-sponsored coverage
and how is the aggregate cost of applicable employer-sponsored coverage referred
to in this notice?
A–11: The aggregate cost of applicable employer-sponsored coverage is the
total cost of coverage under all applicable employer-sponsored coverage (as defined in Q&A–12 of this notice) provided
to the employee. In this notice, the cost of
coverage under a group health plan is referred to as the reportable cost and the aggregate cost of applicable employer-sponsored coverage is referred to as the aggregate reportable cost.
Q–12: What is applicable employersponsored coverage?
A–12: Applicable employer-sponsored
coverage means, with respect to any employee, coverage under any group health
plan (see Q&A–13) made available to the
employee by an employer that is excludable from the employee’s gross income under § 106, or would be so excludable if it
were employer-provided coverage (within
the meaning of such § 106), except that
applicable employer-sponsored coverage
does not include:
(1) any coverage for long-term care,
(2) any coverage (whether through
insurance or otherwise) described in
§ 9832(c)(1) (other than subparagraph (G)
thereof (coverage for on-site medical clinics)),
(3) any coverage under a separate policy, certificate, or contract of insurance
which provides benefits substantially all of
which are for treatment of the mouth (including any organ or structure within the
mouth) or for treatment of the eye, and
(4) any coverage described in
§ 9832(c)(3) the payment for which is
not excludable from gross income and for
which a deduction under § 162(l) is not
allowable
See Q&A–16 through Q&A–23 for
guidance on applicable employer-sponsored coverage that is not required to be
included in the aggregate reportable cost.
Q–13: What is a group health plan?

2011–16 I.R.B.

A–13: A group health plan is a plan
(including a self-insured plan) of, or contributed to by, an employer (including a
self-employed person) or employee organization to provide health care (directly or
otherwise) to the employees, former employees, the employer, others associated or
formerly associated with the employer in a
business relationship, or their families. For
purposes of identifying whether a specific
arrangement is a group health plan, taxpayers may rely upon a good faith application
of a reasonable interpretation of the statutory provisions and applicable guidance,
including §54.4980B–2, Q&A–1.
Q–14: Does the aggregate reportable
cost include both the portion of the cost
paid by the employer and the portion of the
cost paid by the employee?
A–14: Yes. The aggregate reportable
cost generally includes both the portion of
the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for
that cost through pre-tax or after-tax contributions. However, see Q&A–19 regarding contributions to a health FSA.
Q–15: Does the aggregate reportable
cost include any portion of the cost of coverage under an employer-sponsored group
health plan that is includible in the employee’s gross income, for example, the
cost of coverage for a person other than
an employee, the employee’s spouse, the
employee’s dependent, or the employee’s
child who will not have attained age 27 by
the end of the taxable year?
A–15: Yes. The aggregate reportable
cost includes the cost of coverage under
the employer-sponsored group health plan
of the employee and any person covered
by the plan because of a relationship to
the employee, including any portion of the
cost that is includible in an employee’s
gross income. Thus, the aggregate reportable cost is not reduced by the amount
of the cost of coverage included in the employee’s gross income.
Example. An employee has family health coverage under an employer-sponsored group health plan
for himself, his spouse and dependents, and an adult
child age 28, with a cost of coverage of $15,000. The
fair market value of the health coverage for the adult
child age 28 is included in the income and wages of
the employee. The aggregate reportable cost with respect to the family health coverage is $15,000.

2011–16 I.R.B.

Cost of Coverage Required to be
Included in the Aggregate Reportable
Cost (Q&A–16 through Q&A–23)
Q–16: Is the cost of coverage under
all applicable employer-sponsored coverage required to be included in the aggregate reportable cost?
A–16: Except as provided in this Q&A
and in Q&A–17 through Q&A–23, the
cost of coverage under all applicable
employer-sponsored coverage must be
included in the aggregate reportable cost.
However, the following amounts are not
included in the aggregate reportable cost
and are not permitted to be reported under
§ 6051(a)(14):
(1) the amount contributed to any
Archer MSA (as defined in § 220(d)),
(2) the amount contributed to any
Health Savings Account (as defined in
§ 223(d)), and
(3) the amount of any salary reduction
election to a flexible spending arrangement (within the meaning of §§ 106(c)(2)
and 125).
Q–17: Is the cost of coverage under a multiemployer plan (as defined in
§ 54.4980B–2, Q&A–3) required to be
included in the aggregate reportable cost
reported on Form W–2?
A–17: No. An employer that contributes to a multiemployer plan is not required to include the cost of coverage provided to an employee under that multiemployer plan in determining the aggregate reportable cost. If the only applicable
employer-sponsored coverage provided to
an employee is provided under a multiemployer plan, the employer is not required
to report any amount under § 6051(a)(14)
on the Form W–2 for that employee.
Q–18: Is the cost of coverage under
a Health Reimbursement Arrangement
(HRA) required to be included in the aggregate reportable cost reported on Form
W–2?
A–18: No. An employer is not required to include the cost of coverage
under an HRA in determining the aggregate reportable cost. If the only applicable
employer-sponsored coverage provided to
an employee is an HRA, the employer is
not required to report any amount under
§ 6051(a)(14) on the Form W–2 for that
employee.
Q–19: If an employer offers a health
flexible spending arrangement (health

660

FSA) through a § 125 cafeteria plan, is the
amount of the health FSA required to be
included in the aggregate reportable cost
reported on Form W–2?
A–19: The amount of a health FSA for
a cafeteria plan year equals the amount
of salary reduction (as defined in Proposed Treas. Reg. §1.125–1(r)) elected
by the employee for the plan year, plus
the amount of any optional employer flex
credits (as defined under Proposed Treas.
Reg. §1.125–5(b), expressed as a fixed
amount, or as a formula such as matching salary reduction), that the employee
elects to apply to the health FSA. In determining the aggregate reportable cost, the
amount of the health FSA is reduced (but
not below zero) by the employee’s salary
reduction election (see Q&A–16).
If the amount of salary reduction (for
all qualified benefits) elected by an employee equals or exceeds the amount of the
health FSA for the plan year, the employer
does not include the amount of the health
FSA for that employee in the aggregate reportable cost. However, if the amount of
the health FSA for the plan year exceeds
the salary reduction elected by the employee for the plan year, then the amount of
that employee’s health FSA minus the employee’s salary reduction election for the
health FSA must be included in the aggregate reportable cost and reported under
§ 6051(a)(14).
For purposes of this Q&A–19, a health
FSA means an FSA (as defined in Proposed Treas. Reg. §1.125–5(a)) that is a
medical reimbursement arrangement.
Example 1: Employer maintains a § 125 cafeteria
plan that offers permitted taxable benefits (including
cash) and qualified nontaxable benefits (including a
health FSA). The plan offers an employer flex credit
of $1,000. Employee makes a $2,000 salary reduction election for several qualified benefits under the
plan, including a health FSA for $1,500. The cost of
the qualified benefits for Employee under the plan for
the year is $3,000. The amount of Employee’s salary
reduction election ($2,000) for the plan year equals
or exceeds the amount of the health FSA ($1,500)
for the plan year. Thus, for purposes of reporting on
Form W–2, none of the health FSA amount is taken
into account for purposes of determining the aggregate reportable cost.
Example 2: Employer maintains a § 125 cafeteria
plan that offers permitted taxable benefits (including
cash) and qualified nontaxable benefits (including a
health FSA). The plan offers a flex credit in the form
of a match of each employee’s salary reduction contribution. Employee makes a $700 salary reduction
election for a health FSA. Employer provides an additional $700 to the health FSA to match Employee’s
salary reduction election. The amount of the health

April 18, 2011

FSA for Employee for the plan year is $1,400. The
amount of Employee’s health FSA ($1,400) for the
plan year exceeds the salary reduction election ($700)
for the plan year. The employer must include $700
($1,400 health FSA amount minus $700 salary reduction) in determining the aggregate reportable cost.

Q–20: Is the cost of coverage under a
dental plan or a vision plan included in
the aggregate reportable cost, if that plan
is not integrated into a group health plan
providing other types of health coverage
subject to the reporting requirements of
§ 6051(a)(14)?
A–20: No. An employer is not required to include the cost of coverage under a dental plan or a vision plan if such
plan is not integrated into a group health
plan providing additional health care coverage subject to the reporting requirements
of § 6051(a)(14). An employer must include the cost of coverage under a dental
plan or a vision plan if such plan is integrated into a group health plan providing
such additional health care coverage.
Q–21: Is the cost of coverage provided under a self-insured group health
plan that is not subject to any federal
continuation coverage requirements (for
example, a church plan within the meaning of § 4980B(d)(3) that is a self-insured
group health plan) required to be included
in the aggregate reportable cost reported
on Form W–2?
A–21: No. An employer is not required
to include in the aggregate reportable cost
the cost of coverage provided under a
self-insured group health plan that is not
subject to any federal continuation coverage requirements. If the only group
health plan coverage provided to an employee by the employer is provided under
a self-insured group health plan that is
not subject to any federal continuation
coverage requirements, the employer is
not required to report any amount under
§ 6051(a)(14) on the Form W–2 for that
employee. Employers who provide coverage under a self-insured group health plan
that is subject to Federal continuation coverage requirements must report the cost of
coverage on Form W–2. For this purpose,
federal continuation coverage requirements include the COBRA requirements
under the Code, the Employee Retirement
Income Security Act of 1974 or the Public Health Service Act and the temporary
continuation coverage requirement under

April 18, 2011

the Federal Employees Health Benefits
Program.
Q–22: Is the cost of coverage provided
by the federal government, the government of any State or political subdivision
thereof, or any agency or instrumentality of any such government, under a plan
maintained primarily for members of the
military or for members of the military and
their families, required to be included in
the aggregate reportable cost reported on
Form W–2?
A–22: No.
Q–23: In determining the aggregate
reportable cost, how should an employer
treat an excess reimbursement of a highly
compensated individual that is included in
gross income under § 105(h)?
A–23: The cost of applicable employer-sponsored coverage is not modified
because of excess reimbursements of
highly compensated individuals that are
included in gross income under § 105(h);
that is, an excess reimbursement that is
included in income is neither added to
the cost of coverage, nor subtracted from
the cost of coverage, in determining the
aggregate reportable cost.
Example: Employer provides self-insured health
coverage with a cost of coverage of $12,000 under
which a highly compensated individual receives a
$4,000 excess reimbursement. As a result, under
§ 105(h), that individual must include the $4,000 excess reimbursement in gross income. The excess reimbursement does not modify the determination of
the aggregate reportable cost, so that Employer must
include $12,000 as the cost of coverage under the plan
in determining the aggregate reportable cost for that
individual.

Methods of Calculating the Cost of
Coverage (Q&A–24 through Q&A–27)
Q–24: How may an employer calculate
the reportable cost under a plan?
A–24: An employer may calculate
the reportable cost under a plan using
the COBRA applicable premium method
(Q&A–25). Alternatively, (1) an employer that is determining the cost of
coverage for an employee covered by the
employer’s insured plan may calculate the
reportable cost using the premium charged
method (Q&A–26); and (2) an employer
that subsidizes the cost of coverage or
that determines the cost of coverage for a
year by applying the cost of coverage in
a prior year may calculate the reportable
cost using the modified COBRA premium
method (Q&A–27). For employers that

661

charge employees a composite rate (the
same premium for different types of coverage under a plan, for example, a premium
for self-only coverage versus family coverage), see Q&A–28.
The reportable cost for an employee
receiving coverage under the plan is the
sum of the reportable costs for each period
(such as a month) during the year as determined under the method used by the employer. An employer is not required to use
the same method for every plan, but must
use the same method with respect to a plan
for every employee receiving coverage under that plan.
Q–25: How does an employer calculate
the reportable cost for a period under the
COBRA applicable premium method?
A–25: Under the COBRA applicable
premium method, the reportable cost for
a period equals the COBRA applicable
premium for that coverage for that period. If the employer applies this method,
the employer must calculate the COBRA
applicable premium in a manner that satisfies the requirements under § 4980B(f)(4).
Under current guidance, the COBRA applicable premium calculation would meet
these requirements if the employer made
such calculation in good faith compliance
with a reasonable interpretation of the
statutory requirements under § 4980B (see
§54.4980B–1, Q&A–2).
Q–26: How does an employer calculate
the reportable cost for a period under the
premium charged method?
A–26: The premium charged method
may be used to determine the reportable
cost only for an employee covered by an
employer’s insured group health plan. In
such a case, if the employer applies this
method, the employer must use the premium charged by the insurer for that employee’s coverage (for example, for single-only coverage or for family coverage,
as applicable to the employee) for each period as the reportable cost for that period.
Q–27: How does an employer calculate
the reportable cost for a period under the
modified COBRA premium method?
A–27: An employer may use the modified COBRA premium method with
respect to a plan only where it subsidizes
the cost of COBRA (so that the premium
charged to COBRA qualified beneficiaries
is less than the COBRA applicable
premium) or where the actual premium
charged by the employer to COBRA

2011–16 I.R.B.

qualified beneficiaries for each period in
the current year is equal to the COBRA
applicable premium for each period in
a prior year. If the employer subsidizes
the cost of COBRA, the employer may
determine the reportable cost for a
period based upon a reasonable good
faith estimate of the COBRA applicable
premium for that period, if such reasonable
good faith estimate is used as the basis
for determining the subsidized COBRA
premium. If the actual premium charged
by the employer to COBRA qualified
beneficiaries for each period in the current
year is equal to the COBRA applicable
premium for each period in a prior year, the
employer may use the COBRA applicable
premium for each period in the prior year
as the reportable cost for each period in
the current year.
Example 1: For the calendar year 2012, Employer
A subsidizes 50% of a reasonable good faith estimate of the COBRA applicable premium. Employer
A’s reasonable good faith estimate of the COBRA
applicable premium for self-only coverage for each
month in 2012 is $300. Accordingly, the actual
COBRA premium Employer A charges individuals
eligible for COBRA continuation coverage electing
self-only coverage is $150 per month. Solely for
purposes of § 6051(a)(14) reporting, if Employer
A uses the modified COBRA premium method, it
must treat $300 per month (the reasonable good faith
estimate of the COBRA applicable premium) as the
monthly reportable cost for self-only coverage for
the calendar year 2012.
Example 2: Employer B determined that the
COBRA applicable premium for each month in
calendar year 2011 for individuals eligible for
COBRA continuation coverage electing self-only
coverage would be $350 per month, and charged an
actual COBRA premium for such coverage of $357
per month ($350 x 102%). Employer B knows that
the cost of coverage for 2012 is not less than the
COBRA applicable premium for 2011 and decides
not to make a new determination of the COBRA
applicable premium for the calendar year 2012
but rather to continue to charge an actual COBRA
premium for self-only coverage of $357 per month
($350 x 102%). Solely for purposes of § 6051(a)(14)
reporting, if Employer B uses the modified COBRA
premium method, it must treat $350 per month ($357
charged — $7 increase permissible under COBRA)
as the monthly reportable cost for self-only coverage
for the calendar year 2012.
Example 3: Employer C makes a good faith
estimate of the COBRA applicable premium for
the calendar year 2012 for individuals eligible for
COBRA continuation coverage electing self-only
coverage of $500 per month. To ensure compliance with the COBRA requirements despite not
calculating a precise COBRA applicable premium,
Employer C charges an actual COBRA premium of
$350 per month for individuals eligible for COBRA
coverage electing self-only coverage. Solely for
purposes of § 6051(a)(14) reporting, if Employer C

2011–16 I.R.B.

uses the modified COBRA premium method, it must
treat $500 per month as the monthly reportable cost
for self-only coverage for the calendar year 2012.

Other Issues Relating to Calculating
the Cost of Coverage (Q&A–28 through
Q&A–31)
Q–28: How may an employer charging
an employee a composite rate calculate the
reportable cost for a period?
A–28: An employer is considered to
charge employees a composite rate (1) if
there is a single coverage class under the
plan (that is, if an employee elects coverage, all individuals eligible for coverage
under the plan because of their relationship to the employee are included in the
elections and no greater amount is charged
to the employee regardless of whether the
coverage will include only the employee
or the employee plus other such individuals), or (2) if there are different types
of coverage under a plan (for example,
self-only coverage and family coverage, or
self-plus-one coverage and family coverage) and employees are charged the same
premium for each type of coverage. In
such a case, the employer using a composite rate may calculate and use the same
reportable cost for a period for (1) the
single class of coverage under the plan,
or (2) all the different types of coverage
under the plan for which the same premium is charged to employees, provided
this method is applied to all types of coverage provided under the plan.
For example, if a plan charges one premium for either self-only coverage, or selfand-spouse coverage (the first coverage
group), and also charges one premium for
family coverage regardless of the number
of family members covered (the second
coverage group), an employer may calculate and report the same reportable cost for
all of the coverage provided in the first
coverage group, and the same reportable
cost for all of the coverage provided in the
second coverage group. In such a case,
the reportable costs under the plan must be
determined under one of the methods described in Q&A–25 through Q&A–27 for
which the employer is eligible.
Q–29: If the reportable cost for a period changes during the year, must the reportable cost under the plan for the year
for an employee reflect the increase or decrease?

662

A–29: If the cost for a period changes
during the year (for example, under the
COBRA applicable premium method because the 12-month period for determining
the COBRA applicable premium is not the
calendar year), the reportable cost under
the plan for an employee for the year must
reflect the increase or decrease for the periods to which the increase or decrease applies. For examples of the application of
this rule, see Q&A–30 below.
Q–30: How is the reportable cost under a plan calculated if an employee commences, changes or terminates coverage
during the year?
A–30: If an employee changes coverage during the year, the reportable cost under the plan for the employee for the year
must take into account the change in coverage by reflecting the different reportable
costs for the coverage elected by the employee for the periods for which such coverage is elected. If the change in coverage occurs during a period (for example,
in the middle of a month where costs are
determined on a monthly basis), an employer may use any reasonable method to
determine the reportable cost for such period, such as using the reportable cost at
the beginning of the period or at the end
of the period, or averaging or prorating the
reportable costs, provided that the same
method is used for all employees with coverage under that plan. Similarly, if an
employee commences coverage or terminates coverage during a period, an employer may use any reasonable method to
calculate the reportable cost for that period, provided that the same method is used
for all employees with coverage under the
plan.
The following examples illustrate
the principles set forth in Q&A–29 and
Q&A–30:
Example 1: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012 is
$500. Employee is employed by employer for the
entire calendar year 2012, and had self-only coverage
under the group health plan for the entire year. For
purposes of reporting for the 2012 calendar year,
Employer must treat the 2012 reportable cost under
the plan for Employee as $6,000 ($500 x 12).
Example 2: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the period October 1, 2011
through September 30, 2012 is $500, and that the
monthly reportable cost under a group health plan
for self-only coverage for the period October 1, 2012
through September 30, 2013 is $520. Employee is

April 18, 2011

employed by employer for the entire calendar year
2012 and had self-only coverage under the group
health plan for the entire year. For purposes of reporting for the 2012 calendar year, Employer must
treat the 2012 reportable cost under the plan for
Employee as $6,060 (($500 x 9) + ($520 x 3)).
Example 3: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012 is
$500, and that the monthly reportable cost under the
same group health plan for self-plus-spouse coverage
for the calendar year 2012 is $1,000. Employee
is employed by Employer for the entire calendar
year 2012. Employee had self-only coverage under the group health plan from January 1, 2012
through June 30, 2012, and then had self-plus-spouse
coverage from July 1, 2012 through December 31,
2012. For purposes of reporting for the 2012 calendar
year, Employer must treat the 2012 reportable cost
under the plan for Employee as $9,000 (($500 x 6) +
($1,000 x 6)).
Example 4: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012
is $500. Employee commences employment and
self-only coverage under the group health plan on
March 14, 2012, and continues employment and
self-only coverage through the remainder of the
calendar year. For purposes of reporting for the 2012
calendar year, Employer treats the cost of coverage
under the plan for Employee for March 2012 as $250
($500 x 1/2). Because Employer’s method of calculating the reportable cost of under the plan for March
2012 by prorating the reportable cost for March
2012 to reflect Employee’s date of commencement
of coverage is reasonable, Employer must treat the
2012 reportable cost under the plan for Employee as
$4,750 (($500 x 1/2) + ($500 x 9)).

Q–31: If an employer has used a
12-month determination period that is not
the calendar year for purposes of applying
the COBRA applicable premium under
a plan, may the employer also use that
12-month determination period for purposes of calculating the reportable cost for
the year under the plan?
A–31: No. The reportable cost under
a plan must be determined on a calendar
year basis. For rules on translating the
COBRA applicable premium to a calendar
year amount, see Q&A–29 and Q&A–30.
IV. TRANSITION RELIEF
Certain provisions of this interim guidance provide transition relief intended to
facilitate compliance with the reporting
requirement under § 6051(a)(14). See
Q&A–3 (relief for employers filing fewer
than 250 Forms W–2); Q&A–6 (relief with
respect to certain Forms W–2 furnished
to terminated employees before the end
of the year); Q&A–17 (relief with respect
to multiemployer plans); Q&A–18 (relief

April 18, 2011

for HRAs); Q&A–20 (relief with respect
to certain dental and vision plans); and
Q&A–21 (relief with respect to self-insured plans of employers not subject to
COBRA continuation coverage or similar
requirements). Future guidance may limit
the availability of some or all of this transition relief; however, such guidance will
be prospective only and will not be applicable earlier than January 1 of the calendar
year beginning at least six months after its
date of issuance. In no case will such guidance limit the availability of this transition
relief for the 2012 Forms W–2 (meaning
Forms W–2 for the calendar year 2012
that employers generally are required to
furnish to employees in January 2013 and
then file with the SSA). For example, in no
event will reporting be required for 2012
Forms W–2 for any employer required to
file fewer than 250 2011 Forms W–2.
V. REQUEST FOR COMMENTS
The Treasury Department and the IRS
request comments on all aspects of this
interim guidance and the reporting requirements under § 6051(a)(14), including
areas that should be addressed in proposed
and final regulations or other future guidance. Comments are requested on how
future guidance could further reduce the
burden of compliance with the reporting
requirements while still providing useful
and comparable consumer information to
employees on the cost of their health care
coverage. In addition, the Treasury Department and the IRS request comments
on any challenges employers may face in
implementing the reporting requirements
for the 2012 Forms W–2, and how further
guidance could address those challenges,
including through the provision of additional transition relief. In particular, Treasury and IRS request comments on issues
that would arise in applying the reporting
requirements to employers contributing
to multiemployer plans (see Q&A–17),
such as the potential methods by which
the coverage provided to an employee
could be allocated among the contributing
employers and the potential methods by
which contributing employers could obtain the requisite information to report the
reportable cost. Comments are also particularly requested as to issues that would
arise in applying the reporting requirements to employers that filed fewer than

663

250 Forms W–2 for the previous calendar
year (see Q&A–3), and to employers
that sponsor a self-insured plan that is
not subject to any federal continuation
coverage requirements (see Q&A–21).
Comments must be submitted by
July 18, 2011. All materials submitted
will be available for public inspection
and copying.
Comments should be
submitted to Internal Revenue Service,
CC:PA:LPD:RU (Notice 2011–28), Room
5203, PO Box 7604, Ben Franklin Station,
Washington, DC 20224. Submissions
may also be hand-delivered Monday
through Friday between the hours of 8 a.m.
and 4 p.m. to the Courier’s Desk, 1111
Constitution Avenue, NW, Washington,
DC 20224, Attn: CC:PA:LPD:RU (Notice
2011–28), Room 5203.
Submission
may also be sent electronically via the
internet to the following email address:
[email protected].
Include the notice number (Notice
2011–28) in the subject line.
VI. DRAFTING INFORMATION
The principal author of this notice is
Leslie Paul of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities), though other
Treasury Department and IRS officials
participated in its development. For further information, contact Leslie Paul at
(202) 622–6080 (not a toll-free number).

Puerto Rican Excise Tax
Notice 2011–29
On October 25, 2010, Puerto Rico
enacted legislation amending the Puerto
Rico Internal Revenue Code of 1994
(“PR IRC”).
The legislation adds
new rules (“Expanded ECI Rules”)
to section 1123 of the PR IRC that
characterize certain income of nonresident
corporations, partnerships, and individuals
(collectively,
“nonresidents”)
as
effectively connected with the conduct
of a trade or business in Puerto Rico
(“PR ECI”) and therefore subject to
Puerto Rican income tax. The legislation
also adds new section 2101 to the PR
IRC to impose an excise tax (“Excise
Tax”) on a controlled group member’s
acquisition from another group member

2011–16 I.R.B.

of certain personal property manufactured
or produced in Puerto Rico and certain
services performed in Puerto Rico.
Technical corrections to the legislation
were enacted on October 28, 2010, and
January 31, 2011.
Final regulations
relating to the Expanded ECI Rules
and the Excise Tax were published on
December 29, 2010.
The Expanded
ECI Rules and the Excise Tax are
generally effective for income accruing
and acquisitions occurring, respectively,
after December 31, 2010.
Section 901 allows a credit against
U.S. income tax for the amount of any
income, war profits and excess profits
tax (collectively, an “income tax”) paid
or accrued during the taxable year to any
foreign country or to any possession of
the United States. A foreign levy is an
income tax only if (a) it is a tax and (b)
the predominant character of that tax is
that of an income tax in the U.S. sense.
§1.901–2(a)(1) of the Income Tax Regulations.
Under section 903, an income tax includes a tax paid or accrued in lieu of an
income tax that is otherwise generally imposed by any foreign country or by any
possession of the United States. Section
1.903–1(a) provides that a foreign levy is
a tax in lieu of an income tax only if it is
a tax within the meaning of §1.901–2(a)(2)
and it meets the “substitution requirement”
of §1.903–1(b). A foreign levy satisfies
the substitution requirement only if it operates in substitution for and not in addition to a generally imposed income tax or
series of income taxes and only to the extent that liability for the foreign tax is not
dependent (by its terms or otherwise) on
the availability of a credit for the foreign
tax against income tax liability to another
country. §1.903–1(b)(1) and (2).
The IRS and the Treasury Department
are evaluating the Excise Tax. The provisions of the Excise Tax are novel. The determination of the creditability of the Excise Tax requires the resolution of a number of legal and factual issues. Pending the
resolution of these issues, the IRS will not
challenge a taxpayer’s position that the Excise Tax is a tax in lieu of an income tax under section 903. This notice is effective for
Excise Tax paid or accrued on or after January 1, 2011. Any change in the foreign
tax credit treatment of the Excise Tax after resolution of the pending issues will be

2011–16 I.R.B.

prospective, and will apply to Excise Tax
paid or accrued after the date that further
guidance is issued.
Various personnel from the IRS and the
Treasury Department participated in the
development of this notice. For further
information regarding this notice, contact
Richard L. Chewning at (202) 622–3850
(not a toll-free call).

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 168, 280F; 1.168(k)–1.)

Rev. Proc. 2011–26
SECTION 1. PURPOSE
This revenue procedure provides guidance under § 2022(a) of the Small Business
Jobs Act of 2010, Pub. L. No. 111–240,
124 Stat. 2504 (September 27, 2010)
(SBJA), and § 401(a) and (b) of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,
Pub. L. No. 111–312, 124 Stat. 3296
(December 17, 2010) (TRUIRJCA). Sections 2022(a) of the SBJA and 401(a) of
the TRUIRJCA amend § 168(k)(2) of the
Internal Revenue Code by extending the
placed-in-service date for property to qualify for the 50-percent additional first year
depreciation deduction. Section 401(b)
of the TRUIRJCA amends § 168(k) by
adding § 168(k)(5), which temporarily
allows a 100-percent additional first year
depreciation deduction for certain new
property.
SECTION 2. BACKGROUND
.01 Prior to the enactment of the SBJA,
§ 168(k)(1) allowed a 50-percent additional first year depreciation deduction for
qualified property acquired by a taxpayer
after 2007 and placed in service by the taxpayer before 2010 (before 2011 in the case
of property described in § 168(k)(2)(B)
and (C)). Section 2022(a) of the SBJA
amends § 168(k)(2) by extending the
placed-in-service date to before 2011
(before 2012 in the case of property described in § 168(k)(2)(B) and (C)), and
extending other dates in § 168(k)(2) from
“January 1, 2010” to “January 1, 2011”
(for example, the self-constructed property

664

rules in § 168(k)(2)(E)(i)).
Section
2022(c) of the SBJA provides that these
amendments apply to property placed
in service after December 31, 2009, in
taxable years ending after that date.
.02 Section 401(a) of the TRUIRJCA
further amends § 168(k)(2) by extending
the placed-in-service date to before 2013
(before 2014 in the case of property described in § 168(k)(2)(B) and (C)), and
extending other dates in § 168(k)(2) from
“January 1, 2011” to “January 1, 2013”
(for example, the self-constructed property rules in § 168(k)(2)(E)(i)). Section
401(e)(1) of the TRUIRJCA provides
that these amendments apply to property
placed in service after December 31, 2010,
in taxable years ending after that date.
.03 Section 401(b) of the TRUIRJCA
also amends § 168(k) by adding
§ 168(k)(5) to the Code.
It allows
a 100-percent additional first year
depreciation deduction for qualified
property acquired by a taxpayer
(under rules similar to the rules of
§ 168(k)(2)(A)(ii) and (iii)) after
September 8, 2010, and before January
1, 2012, and placed in service by the
taxpayer before January 1, 2012 (before
January 1, 2013, in the case of property
described in § 168(k)(2)(B) and (C)).
Section 401(e)(2) of the TRUIRJCA
provides that § 168(k)(5) applies to
property placed in service after September
8, 2010, in taxable years ending after such
date. Section 3 of this revenue procedure
defines which property is eligible for
the 100-percent additional first year
depreciation deduction.
.04 Sections 1.168(k)–1(b)(4)(iii)(C)(1)
and (2) of the Income Tax Regulations
provide that if the manufacture, construction, or production of the larger
self-constructed property begins before
December 31, 2007 (as modified by the
dates in § 168(k)(2)(E)(i)), for qualified
property, the larger self-constructed property and any acquired or self-constructed
components related to the larger self-constructed property do not qualify for the
50-percent additional first year depreciation deduction. Because of the policies
underlying the enactment of an unprecedented 100-percent additional first year
depreciation provision, rules similar to,
but not necessarily the same as, the acquisition rules under § 168(k)(2)(A)(iii)
for qualified property are warranted

April 18, 2011

solely for purposes of § 168(k)(5). Accordingly, the Treasury Department and
the Internal Revenue Service (“the Service”) will allow, solely for purposes of
§ 168(k)(5), a limited exception to this
rule in §§ 1.168(k)–1(b)(4)(iii)(C)(1) and
(2) for certain components. See section
3.02(2)(b) of this revenue procedure for
this limited exception.
.05 Section 168(k)(2)(D)(iii) provides
that a taxpayer may elect not to deduct
additional first year depreciation for any
class of property placed in service by the
taxpayer during the taxable year. The
term “class of property” is defined in
§ 1.168(k)–1(e)(2)(i) to mean, in general, each class of property described in
§ 168(e) (for example, 5-year property).
If the taxpayer makes this election, it applies to all qualified property that is in
the same class and placed in service in
the same taxable year. This revenue procedure provides a limited exception for a
taxpayer to elect the 50-percent, instead
of the 100-percent, additional first year
depreciation deduction for certain qualified property placed in service by the
taxpayer in its taxable year that includes
September 9, 2010 (see section 4.02 of
this revenue procedure). Section 4.03 of
this revenue procedure specifies the time
and manner for making this election.
.06 Section 1.168(k)–1(e)(3)(i) provides that the election not to deduct additional first year depreciation must be made
by the due date (including extensions) of
the federal tax return for the taxable year
in which the taxpayer places the property
in service. Section 1.168(k)–1(e)(3)(ii)
provides that this election generally must
be made in the manner prescribed on Form
4562, “Depreciation and Amortization,”
and its instructions. The instructions to
Form 4562 for the 2009 and 2010 taxable years provide that the election is
made by attaching a statement to the taxpayer’s timely filed tax return indicating
that the taxpayer is electing not to deduct
the additional first year depreciation and
the class of property for which the taxpayer is making the election. Section
1.168(k)–1(e)(7)(i) provides that once the
election is made, it generally may be revoked only with the written consent of
the Commissioner of Internal Revenue.
Some taxpayers with a taxable year beginning in 2009 and ending in 2010 that
filed their 2009 federal tax returns before

April 18, 2011

the enactment of the SBJA are uncertain
how to claim or not claim the 50-percent additional first year depreciation for
qualified property placed in service after December 31, 2009, in taxable years
ending in 2010. Section 5 of this revenue
procedure provides the procedures for
claiming or not claiming the 50-percent
additional first year depreciation for this
property.
SECTION 3. 100-PERCENT
ADDITIONAL FIRST YEAR
DEPRECIATION DEDUCTION
.01 In General. Depreciable property is
eligible for the 100-percent additional first
year depreciation deduction if the property is qualified property (as defined in
§ 168(k)(2), as amended by the SBJA and
the TRUIRJCA) and also meets the additional requirements in section 3.02 of this
revenue procedure. For purposes of determining whether depreciable property is
qualified property, rules similar to the rules
in § 1.168(k)–1 for “qualified property” or
for “30-percent additional first year depreciation deduction” apply.
.02 Application of Additional
Requirements and Revised Dates.
(1) In general.
For purposes of
§ 168(k)(5), qualified property is eligible
for the 100-percent additional first year depreciation deduction if the property meets
all of the following additional requirements in the first taxable year in which
the property is subject to depreciation by
the taxpayer, whether or not depreciation
deductions for that property are allowable:
(a) The taxpayer acquires the qualified property after September 8,
2010, and before January 1, 2012
(before January 1, 2013, in the case
of qualified property described in
§ 168(k)(2)(B) or (C)). Solely for purposes
of § 168(k)(5) and this section 3.02(1)(a),
a taxpayer acquires the qualified property
when the taxpayer pays or incurs
the cost of the property.
Qualified
property that a taxpayer manufactures,
constructs, or produces (as defined under
§ 1.168(k)–1(b)(4)(iii)(A) and modified
by this section 3.02(1)(a) solely for
purposes of § 168(k)(5)) for use in its
trade or business or for its production of
income is acquired by the taxpayer for
purposes of § 168(k)(5) and this section
3.02(1)(a) when the taxpayer begins

665

constructing, manufacturing, or producing
that property (as determined under
§ 1.168(k)–1(b)(4)(iii)(B)). If a taxpayer
enters into a written binding contract
(as defined in § 1.168(k)–1(b)(4)(ii))
after September 8, 2010, and before
January 1, 2012, to acquire (including
to manufacture, construct, or produce)
qualified
property
described
in
§ 168(k)(2)(B) or (C), the property will
be treated as having met the acquisition
requirement of this section 3.02(1)(a).
See section 3.02(2) of this revenue
procedure for additional rules applicable
to self-constructed property.
(b) The taxpayer places the qualified
property in service after September 8,
2010, and before January 1, 2012 (before
January 1, 2013, in the case of qualified
property described in § 168(k)(2)(B) or
(C)). For this purpose, rules similar to the
rules in § 1.168(k)–1(b)(5) apply. However, in applying § 1.168(k)–1(b)(5)(ii),
“December 31, 2007” is substituted for
“September 10, 2001.”
(c) The original use of the qualified property commences with the taxpayer after September 8, 2010.
For
this purpose, rules similar to the rules
in § 1.168(k)–1(b)(3) apply.
However, in applying § 1.168(k)–1(b)(3)(i),
“September 8, 2010” is substituted for
“September 10, 2001” and, in applying
§ 1.168(k)–1(b)(3)(iii), “December 31,
2007” is substituted for “September 10,
2001.”
(2) Self-constructed property.
(a) Application of § 1.168(k)–1(b)(4)(iii).
If a taxpayer manufactures, constructs,
or produces qualified property for use by
the taxpayer in its trade or business or
for its production of income, rules similar to the self-constructed property rules
in § 1.168(k)–1(b)(4)(iii) apply for determining whether this property meets
the acquisition requirement of section
3.02(1)(a) of this revenue procedure.
However, see section 3.02(2)(b) of this
revenue procedure for a limited exception for certain components of a larger
self-constructed property. Further, in applying § 1.168(k)–1(b)(4)(iii)(C)(1) solely
for purposes of § 168(k)(5), an acquired
component that is qualified property is
not required to be acquired pursuant to
a written binding contract (as defined in
§ 1.168(k)–1(b)(4)(ii)) to satisfy the acquisition requirement of section 3.02(1)(a)

2011–16 I.R.B.

of this revenue procedure. For purposes of
the additional first year depreciation deduction, the term “component” is intended
to refer to any part used in the manufacture, construction, or production of the
larger self-constructed property, which
may or may not be the same as the asset
for depreciation purposes or the same as
the unit of property for purposes of other
Code sections.
(b) Limited exception for components
acquired or self-constructed after September 8, 2010, and before January 1, 2012,
when the manufacture, construction, or
production of larger self-constructed property begins before September 9, 2010.
Solely for purposes of § 168(k)(5) and
section 3.02(1)(a) of this revenue procedure, the Treasury Department and the
Service will allow a limited exception to
the rule described in section 2.04 of this
revenue procedure for the components
described in this section 3.02(2)(b). If
before September 9, 2010, a taxpayer
begins the manufacture, construction, or
production of the larger self-constructed
property that is qualified property for use
in its trade or business or for its production of income, but this larger self-constructed property meets the requirements
of sections 3.02(1)(b) and (c) of this revenue procedure, the taxpayer may elect
to treat any acquired or self-constructed
component of that larger self-constructed
property as being eligible for the 100-percent additional first year depreciation
deduction if the component is qualified
property and is acquired or self-constructed by the taxpayer after September 8,
2010, and before January 1, 2012 (before
January 1, 2013, in the case of qualified
property described in § 168(k)(2)(B)
or (C)). The taxpayer may make this
election for one or more components that
are described in this section 3.02(2)(b).
The taxpayer must make the election in
this section 3.02(2)(b) by the due date
(including extensions) of the federal tax
return for the taxpayer’s taxable year in
which the larger self-constructed property
is placed in service by the taxpayer, and
by attaching a statement to that return
indicating that the taxpayer is making the
election provided in section 3.02(2)(b)
of Rev. Proc. 2011–26 and whether the
taxpayer is making the election for all
or some of the components described in
section 3.02(2)(b) of Rev. Proc. 2011–26.

2011–16 I.R.B.

If a taxpayer has timely filed its federal tax
return for the taxpayer’s taxable year in
which the larger self-constructed property
is placed in service by the taxpayer on or
before April 18, 2011, see § 301.9100–2(b)
of the Procedure and Administration
Regulations for an automatic extension
of 6 months from the due date of that
federal return (excluding extensions) to
make the election specified in this section
3.02(2)(b).
(3) Disqualified transactions. A rule
similar to the rule in § 168(k)(2)(E)(iv)
applies for determining whether qualified
property fails the acquisition requirement
of section 3.02(1)(a) of this revenue procedure. Solely for purposes of § 168(k)(5):
(a) Section 168(k)(2)(E)(iv)(I) and (II)
is applied by substituting “September 8,
2010” for “December 31, 2007;”
(b) Section 1.168(k)–1(b)(4)(iv)(A)
is applied by substituting “September 9,
2010” for “September 11, 2001;” and
(c) In determining when the qualified
property was originally placed in service
for purposes of § 1.168(k)–1(b)(4)(iv),
this determination includes the operation of § 1.168(k)–1(b)(5)(ii) as modified
by section 3.02(1)(b) of this revenue
procedure, § 1.168(k)–1(b)(5)(iii), and
§ 1.168(k)–1(b)(5)(iv).
.03 Special Rules.
(1) Application of § 1.168(k)–1(f).
(a) In general. Solely for purposes of
§ 168(k)(5), the rules of § 168(k)–1(f) apply to depreciable property that is qualified
property and that also meets the requirements of section 3.02 of this revenue
procedure. For example, for purposes
of the redetermination of basis rules of
§ 1.168(k)–1(f)(2), the 100-percent additional first year depreciation deduction
applies to the increase or decrease in basis of qualified property if the underlying
property is eligible for the 100-percent additional first year depreciation deduction.
In addition, in applying § 1.168(k)–1(f)
for purposes of § 168(k)(5), the taxpayer
should make the following substitutions:
(i) “September 8, 2010” is substituted
for “September 10, 2001;”
(ii) “January 1, 2012” is substituted for
“May 6, 2003;”
(iii) “December 31, 2011” is substituted
for “December 31, 2004;”
(iv) “January 1, 2012” is substituted for
“January 1, 2005;”

666

(v) “December 31, 2012” is substituted
for “December 31, 2005;” and
(vi) “January 1, 2013” is substituted for
“January 1, 2006.”
(b) Limitation of amount of depreciation for certain passenger automobiles.
For purposes of applying
§ 1.168(k)–1(f)(8) to passenger automobiles (as defined in § 280F(d)(5)), the
limitation under § 280F(a)(1)(A)(i) is
increased by $8,000 for a passenger automobile that is eligible for the 100-percent
additional first year depreciation deduction.
(2)
Property
described
in
§ 168(k)(2)(B). For property that is
qualified property solely by reason of
§ 168(k)(2)(B)(i) and that is eligible
for the 100-percent additional first year
depreciation deduction, only the property’s adjusted basis attributable to the
manufacture, construction, or production
before January 1, 2013, is eligible for the
100-percent additional first year depreciation deduction. Section 168(k)(2)(B)(ii).
(3) Qualified restaurant property and
qualified retail improvement property.
Qualified property that meets the definition of both qualified leasehold improvement property (as defined in §§ 168(e)(6),
168(k)(3), and 1.168(k)–1(c)) and qualified restaurant property (as defined in
§ 168(e)(7)) or qualified retail improvement property (as defined in § 168(e)(8)) is
eligible for the 50-percent or 100-percent
additional first year depreciation deduction (assuming all other requirements in
§ 168(k) are met). For example, if in 2011
a taxpayer constructs and places in service
qualified property that is an improvement
to a restaurant building and that improvement meets the definition of both qualified
restaurant property and qualified leasehold
improvement property, the improvement
is eligible for the 100-percent additional
first year depreciation deduction (assuming all other requirements in § 168(k) are
met). However, if in 2011 a taxpayer
constructs and places in service a new
restaurant building, that building is not
qualified leasehold improvement property
and is not eligible for any additional first
year depreciation deduction.
(4) Mid-quarter convention.
The
depreciable basis (as defined in
§ 1.168(d)–1(b)(4)) of qualified property that is eligible for any additional
first year depreciation deduction is taken

April 18, 2011

into account in determining whether the
mid-quarter convention applies to the
property placed in service during the taxable year.
(5) Coordination with other Code sections.
(a) Tax credits and section 1603 payments. Except for the rehabilitation credit
under § 47, the 100-percent additional
first year depreciation deduction is determined for qualified property eligible
for the 100-percent additional first year
depreciation deduction after the reduction
to the property’s basis by the amount
of any credits claimed for the property
that require an adjustment to basis (for
example, the disabled access credit under
§ 44 or the energy credit under § 48) or any
payments received for specified energy
property under § 1603 of the American
Recovery and Reinvestment Tax Act of
2009, Division B, Pub. L. 111–5, 123
Stat. 115 (section 1603 payments). For
the treatment of the rehabilitation credit
and the 100-percent additional first year
depreciation deduction, a rule similar to
the rule in § 1.168(k)–1(f)(10) applies.
(b) Application of § 50(d)(5). For purposes of applying § 50(d)(5), the shortest
recovery period under § 168 that is applicable to qualified property eligible for the
100-percent additional first year depreciation deduction is the recovery period assigned to that property under § 168(c).
(c) Section 280F(a) limitations on passenger automobiles.
(i) In general.
If the unadjusted
depreciable basis (as defined in
§ 1.168(b)–1(a)(3)) of a passenger automobile (as defined in § 280F(d)(5)) that is
qualified property eligible for the 100-percent additional first year depreciation
deduction exceeds the first year limitation amount under § 280F(a)(1)(A)(i), the
excess amount is the unrecovered basis
of the passenger automobile for purposes
of § 280F(a)(1)(B)(i) and, therefore, is
treated as a deductible expense in the first
taxable year succeeding the end of the
recovery period subject to the limitation
under § 280F(a)(1)(B)(ii). For example, if
a calendar-year taxpayer places in service
in December 2010 a passenger automobile
that cost $20,000, is not a truck or van,
and is eligible for the 100-percent additional first year depreciation deduction, the
100-percent additional first year depreciation deduction for this property is limited

April 18, 2011

to $11,060 under § 280F(a)(1)(A)(i) (see
Table 7 of Rev. Proc. 2011–21, 2011–12
I.R.B. 560) and the excess amount of
$8,940 is recovered by the taxpayer beginning in taxable year 2016, subject to the
limitation under § 280F(a)(1)(B)(ii).
(ii) Safe harbor method of accounting.
To mitigate the anomalous result that occurs in the taxable years subsequent to the
placed-in-service year and before the first
taxable year succeeding the end of the recovery period for a passenger automobile
that is qualified property eligible for the
100-percent additional first year depreciation deduction, the Treasury Department
and the Service are providing a safe harbor
method of accounting under this section
3.03(5)(c)(ii). A taxpayer adopts this safe
harbor method of accounting by applying
it to deduct depreciation of its passenger
automobile (as defined in § 280F(d)(5)) on
its federal tax return for the first taxable
year succeeding the placed-in-service year
of the passenger automobile. For a taxpayer with a passenger automobile that has
an unadjusted depreciable basis exceeding the first year limitation amount under § 280F(a)(1)(A)(i) and that is qualified
property eligible for the 100-percent additional first year depreciation, the safe harbor method of accounting operates as follows:
(A) In the placed-in-service year of the
passenger automobile, the taxpayer will
deduct the lesser of the 100-percent additional first year depreciation for the passenger automobile or the first year limitation amount under § 280F(a)(1)(A)(i). See
Rev. Proc. 2011–21, 2011–12 I.R.B. 560,
for the first year limitation amount under
§ 280F(a)(1)(A)(i) for a passenger automobile placed in service in 2010 or 2011 if
either the 50-percent or 100-percent additional first year depreciation deduction applies.
(B) Next, the taxpayer will determine
the unrecovered basis of the passenger automobile for its placed-in-service year as
though the taxpayer claimed the 50-percent, instead of the 100-percent, additional
first year depreciation for the passenger
automobile. For this purpose, the unrecovered basis is equal to the depreciation
that would be allowable for the passenger
automobile had the taxpayer claimed the
50-percent additional first year depreciation deduction less the amount determined

667

under section 3.03(5)(c)(ii)(A) of this revenue procedure.
(C) If there is any unrecovered basis for the passenger automobile in its
placed-in-service year (as determined
under section 3.03(5)(c)(ii)(B) of this
revenue procedure), the taxpayer will determine the depreciation deductions for the
passenger automobile for the taxable years
subsequent to the placed-in-service year
as though the taxpayer claimed the 50-percent, instead of the 100-percent, additional
first year depreciation for the passenger automobile, subject to the limitation
amounts under § 280F(a)(1)(A). Accordingly, for purposes of § 1.168(k)–1(d)(2),
the remaining adjusted depreciable basis
of the passenger automobile is equal to its
unadjusted depreciable basis reduced by
the amount of the 50-percent additional
first year depreciation deemed allowed or
allowable, whichever is greater, for the
passenger automobile.
(D) If there is no unrecovered basis for the passenger automobile in its
placed-in-service year (as determined
under section 3.03(5)(c)(ii)(B) of this
revenue procedure), the taxpayer will
determine the depreciation deduction
for the passenger automobile for any
12-month taxable year subsequent to the
placed-in-service year by multiplying the
adjusted depreciable basis (as defined in
§ 1.168(b)–1(a)(4)) of the passenger automobile by the applicable depreciation rate
for each taxable year (as determined under
sections 6.03, 6.04, 6.05, and 6.06 of Rev.
Proc. 87–57, 1987–2 C.B. 687, 692). If
any taxable year is less than 12 months,
the depreciation deduction determined
under this section 3.03(5)(c)(ii)(D) must
be adjusted for a short taxable year (for
further guidance, see Rev. Proc. 89–15,
1989–1 C.B. 816). The taxpayer must not
use the optional depreciation tables for
computing the depreciation deductions for
the passenger automobile. For purposes
of determining the applicable depreciation
rate, the applicable depreciation method
is the method under § 168(b), and the
applicable convention is the convention
under § 168(d), that would apply in the
placed-in-service year for the passenger
automobile had the taxpayer claimed the
50-percent additional first year depreciation deduction.

2011–16 I.R.B.

.04 Examples.
(1) Example 1 — Acquired property and self-constructed property not eligible for the 100-percent additional first year depreciation deduction. In June
2008, X began constructing an electric generation
power plant for its own use. In February 2009, prior
to the completion of the power plant, X and Y (an unrelated party) entered into a written binding contract
under which X transferred the rights to own and use
this power plant to Y for $2 million. On March 1,
2009, Y began construction to complete the power
plant. Between March 2009 and August 2010, Y
incurred another $10 million to complete the construction of the power plant. This $10 million includes amounts for acquired components that were
acquired by Y pursuant to written binding contracts
entered into after March 1, 2009, and for self-constructed components, the construction, manufacturing, or production of which began after March 1,
2009. Y completed construction of the power plant
in August 2010. On October 1, 2010, Y placed the
power plant in service. The power plant is included
in asset class 49.13 of Rev. Proc. 87–56, 1987–2
C.B. 674, and has a recovery period of 20 years under
§ 168(c).
First, Y must determine if the power plant is
qualified property and if its components are qualified
property. Y acquired the $2 million portion of the
total $12 million unadjusted depreciable basis pursuant to a written binding contract entered into after
December 31, 2007. Further, Y began construction
to complete the power plant after December 31,
2007, and all of its components were self-constructed
beginning, or acquired pursuant to written binding
contracts entered into, after December 31, 2007.
Also, the original use of the power plant began with
Y after December 31, 2007, and Y placed the power
plant in service before January 1, 2014 (the power
plant is property described in § 168(k)(2)(B)). Thus,
the power plant is qualified property and all of its
components are qualified property.
Y must next determine if the power plant and
any of its components are eligible for the 100-percent additional first year depreciation deduction. Because X and Y are not related parties, the transaction
between X and Y will not be a disqualified transaction pursuant to § 1.168(k)–1(b)(4)(iv), as modified by section 3.02(3) of this revenue procedure.
Although the original use of the power plant began
with Y after September 8, 2010, and Y placed the
power plant in service after September 8, 2010, and
before January 1, 2013 (the power plant is property
described in § 168(k)(2)(B)), the power plant does
not meet the acquisition rule in § 168(k)(5) and section 3.02(1)(a) of this revenue procedure. Y acquired
the $2 million portion of the total $12 million unadjusted depreciable basis before September 9, 2010.
Further, Y began construction to complete the power
plant before September 9, 2010, and Y acquired or
self-constructed all of the components to complete
the construction of the power plant before September 9, 2010. Accordingly, Y’s total expenditures of
$12 million for the power plant do not qualify for the
100-percent additional first year depreciation deduction. Instead, Y’s total expenditures of $12 million
for the power plant qualify for the 50-percent additional first year depreciation deduction.
(2) Example 2 — Acquired property and self-constructed property partially eligible for the 100-per-

2011–16 I.R.B.

cent additional first year depreciation deduction.
In August 2009, X began constructing an electric generation power plant for its own use. On
September 1, 2010, prior to the completion of the
power plant, X and Y (an unrelated party) entered
into a written binding contract and X transferred
the rights to own and use this power plant to Y
for $5 million. On September 15, 2010, Y began
construction to complete the power plant. Between
September 15, 2010, and November 2011, Y incurred
another $10 million to complete the construction of
the power plant. This $10 million includes amounts
for acquired components that were acquired by Y
after September 15, 2010, and for self-constructed
components, the construction, manufacturing, or
production of which began after September 15,
2010. All acquired components to complete the
construction of the power plant were acquired by Y
pursuant to written binding contracts entered into
after September 1, 2010. Y completed construction
of the power plant in November 2011. On December
15, 2011, Y placed the power plant in service. The
power plant is included in asset class 49.13 of Rev.
Proc. 87–56, and has a recovery period of 20 years
under § 168(c).
First, Y must determine if the power plant is
qualified property and if its components are qualified
property. Y acquired the $5 million portion of the
total $15 million unadjusted depreciable basis pursuant to a written binding contract entered into after
December 31, 2007. Further, Y began construction
to complete the power plant after December 31,
2007, and all of its components were self-constructed
beginning, or acquired pursuant to written binding
contracts entered into, after December 31, 2007.
Also, the original use of the power plant began with
Y after December 31, 2007, and Y placed the power
plant in service before January 1, 2014 (the power
plant is property described in § 168(k)(2)(B)). Thus,
the power plant and its components are qualified
property.
Y must next determine if the power plant and
any of its components are eligible for the 100-percent additional first year depreciation deduction. X
and Y are not related parties; therefore, the transaction between X and Y will not be a disqualified
transaction pursuant to § 1.168(k)–1(b)(4)(iv), as
modified by section 3.02(3) of this revenue procedure. Although the original use of the power
plant began with Y after September 8, 2010, and Y
placed the power plant in service after September 8,
2010, and before January 1, 2013 (the power plant
is property described in § 168(k)(2)(B)), not all of
Y’s total expenditures of $15 million qualify for
the 100-percent additional first year depreciation
deduction. Given that Y acquired the $5 million
portion of the total $15 million unadjusted depreciable basis before September 9, 2010, that portion
qualifies only for the 50-percent additional first
year depreciation deduction. However, because
Y began construction to complete the power plant
after September 8, 2010, and Y acquired or began
self-constructing all of the components to complete
the construction of the power plant after September
8, 2010, the $10 million portion of the total $15
million unadjusted depreciable basis qualifies for
the 100-percent additional first year depreciation
deduction.

668

(3) Example 3 — Component election made. X, a
calendar-year taxpayer, began constructing a ship for
its own use in March 2010. Between March 2010 and
June 2012, X incurred $25 million to complete the
construction of the ship. This $25 million includes
$15 million for acquired components that were acquired by X after September 8, 2010, and before
January 1, 2013, and for self-constructed components, the construction, manufacturing, or production
of which began after September 8, 2010, and before
January 1, 2013 (the ship is property described in
§ 168(k)(2)(B)). All acquired components of the
ship were acquired by X pursuant to written binding
contracts entered into after March 2010. The original
use of all components of the ship commences with X.
X completed construction of the ship in June 2012,
and placed it in service in August 2012. On its 2012
federal tax return, X makes the election provided
under section 3.02(2)(b) of this revenue procedure.
The ship is included in asset class 00.28 of Rev. Proc.
87–56, and has a recovery period of 10 years under
§ 168(c).
First, X must determine if the ship is qualified property and if its components are qualified
property. X began construction of the ship after
December 31, 2007, and all of its components were
self-constructed beginning, or acquired pursuant
to written binding contracts entered into, after
December 31, 2007. Also, the original use of the
ship began with X after December 31, 2007, and X
placed the ship in service before January 1, 2014 (the
ship is property described in § 168(k)(2)(B)). Thus,
the ship and its components are qualified property.
X must next determine if the ship and any of
its components are eligible for the 100-percent additional first year depreciation deduction. Although the
original use of the ship began with X after September 8, 2010, and X placed the ship in service after
September 8, 2010, and before January 1, 2013 (the
ship is property described in § 168(k)(2)(B)), not all
of X’s total expenditures of $25 million qualify for the
100-percent additional first year depreciation deduction. X began construction of the ship before September 9, 2010, but made the election provided under
section 3.02(2)(b) of this revenue procedure. As a result, the $15 million portion (of the total $25 million
unadjusted depreciable basis for the ship) incurred
for the components that were acquired or self-constructed by X after September 8, 2010, and before
January 1, 2013, qualifies for the 100-percent additional first year depreciation deduction. The remaining $10 million portion of the total $25 million unadjusted depreciable basis qualifies only for the 50-percent additional first year depreciation deduction.
(4) Example 4 — Component election not made.
The facts are the same as in Example 3, except X
did not make the election provided under section
3.02(2)(b) of this revenue procedure on its 2012
federal tax return. As a result, X’s total expenditures
of $25 million for the ship do not qualify for the
100-percent additional first year depreciation deduction. Although the original use of the ship began
with X after September 8, 2010, and X placed the
ship in service after September 8, 2010, and before
January 1, 2013 (the ship is property described in
§ 168(k)(2)(B)), the ship does not meet the acquisition rule in § 168(k)(5) and section 3.02(1)(a) of this
revenue procedure because X began construction of
the ship before September 9, 2010. Accordingly,

April 18, 2011

X’s total expenditures of $25 million for the ship
qualify only for the 50-percent additional first year
depreciation deduction.
(5) Example 5 — Application of § 280F(a) safe
harbor method of accounting when there is unrecovered basis. In December 2010, X, a calendar-year
taxpayer, purchased and placed in service for use in
its business a new passenger automobile that cost
$20,000. The passenger automobile is not a truck
or van, is 5-year property under § 168(e), and is eligible for the 100-percent additional first year depreciation deduction. X does not claim any § 179 deduction for the passenger automobile. For 2010, X
deducts $11,060 for the 100-percent additional first
year depreciation for this property, which is the depreciation limitation for 2010 under § 280F(a)(1)(A)(i)
(see Table 7 in Rev. Proc. 2011–21). X adopts the
safe harbor method of accounting provided in section
3.03(5)(c)(ii) of this revenue procedure.
Under the safe harbor method of accounting, X
is deemed to have claimed the 50-percent additional
first year depreciation deduction for purposes of determining the unrecovered basis and the remaining
adjusted depreciable basis of the passenger automobile. Accordingly, for 2010, the total depreciation
allowable for the passenger automobile is deemed
to be $12,000 [(50 percent multiplied by unadjusted
depreciable basis of $20,000) + (20 percent multiplied by the remaining adjusted depreciable basis of
$10,000)]. Thus, the unrecovered basis for the passenger automobile for 2010 is $940 ($12,000 deemed
depreciation allowable less the $11,060 depreciation
deduction for 2010) and that amount is recovered by
X beginning in the 2016 taxable year, subject to the
limitation under § 280F(a)(1)(B)(ii).
For 2011, the total depreciation allowable for the
passenger automobile is deemed to be $3,200 (32 percent multiplied by the remaining adjusted depreciable
basis of $10,000). Because this amount is less than
the depreciation limitation of $4,900 for 2011 (see Table 7 in Rev. Proc. 2011–21), X deducts $3,200 as
depreciation on its federal income tax return for the
2011 taxable year.
(6) Example 6 — Application of § 280F(a) safe
harbor method of accounting when there is no unrecovered basis. The facts are the same as in Example 5, except the cost of the passenger automobile is $18,400. For 2010, X deducts $11,060 for the
100-percent additional first year depreciation for this
property, which is the depreciation limitation for 2010
under § 280F(a)(1)(A)(i) (see Table 7 in Rev. Proc.
2011–21).
Under the safe harbor method of accounting, X
is deemed to have claimed the 50-percent additional
first year depreciation deduction for purposes of determining the unrecovered basis and the remaining
adjusted depreciable basis of the passenger automobile. As a result, for 2010, the total depreciation allowable for the passenger automobile is deemed to be
$11,040 [(50 percent multiplied by unadjusted depreciable basis of $18,400) + (20 percent multiplied by
the remaining adjusted depreciable basis of $9,200)].
Thus, there is no unrecovered basis for the passenger
automobile for 2010 because the 2010 deemed depreciation allowable of $11,040 is less than the 2010 depreciation deduction of $11,060.
Pursuant to section 3.03(5)(c)(ii)(D) of this
revenue procedure, X must not use the optional
depreciation tables for computing the depreciation

April 18, 2011

deductions for the passenger automobile for the taxable years subsequent to the placed-in-service year.
Therefore, assuming the applicable depreciation
method and convention for the passenger automobile
is the 200-percent declining balance method and the
half-year convention, respectively, the total depreciation allowable for the passenger automobile for
2011 is $2,936 (40 percent multiplied by the adjusted
depreciable basis of $7,340 [unadjusted depreciable
basis of $18,400 less the total depreciation allowable
for prior taxable years of $11,060]). Because this
amount is less than the depreciation limitation of
$4,900 for 2011 (see Table 7 in Rev. Proc. 2011–21),
X deducts $2,936 as depreciation on its federal income tax return for the 2011 taxable year.

SECTION 4. ELECTION NOT TO
DEDUCT ADDITIONAL FIRST YEAR
DEPRECIATION
.01 In General. The election under
§ 168(k)(2)(D)(iii) not to deduct additional first year depreciation for a class
of property applies to all qualified property that is in that class of property and
placed in service in the same taxable year.
See § 1.168(k)–1(e)(1). For example, if
a calendar-year taxpayer for its taxable
year ending December 31, 2010, makes
the election not to deduct additional first
year depreciation for 5-year property, all
5-year property placed in service by the
taxpayer during its 2010 taxable year is not
qualified property under § 168(k)(2) and,
therefore, is not eligible for the 50-percent
or the 100-percent additional first year depreciation deduction for the 2010 taxable
year. However, see section 4.02 of this
revenue procedure for a limited exception.
.02 Limited Exception. The Treasury
Department and the Service recognize
that a taxpayer may have difficulty determining the exact date during a month on
which the taxpayer acquires and places
in service property. To minimize disputes
regarding whether a taxpayer acquired or
placed in service particular property after
September 8, 2010, the Treasury Department and the Service will allow a taxpayer
to elect to deduct the 50-percent, instead
of the 100-percent, additional first year
depreciation for all qualified property that
is in the same class of property and placed
in service by the taxpayer in its taxable
year that includes September 9, 2010,
provided the taxpayer does not make an
election not to deduct additional first year
depreciation for that class of property for
that taxable year under § 168(k)(2)(D)(iii)
or section 5.04 of this revenue proce-

669

dure. If the taxpayer makes the election
under this section 4.02, the allowable additional first year depreciation deduction
is determined for the class of property
based on the 50-percent additional first
year depreciation deduction. For example, if a calendar-year taxpayer for its
taxable year ending December 31, 2010,
placed in service 5-year property before
September 9, 2010, and other 5-year
property after September 8, 2010, the
taxpayer may elect to claim the 50-percent
additional first year depreciation for all
of its 5-year property that is qualified
property and placed in service during the
2010 taxable year.
.03 Time and Manner for Making Election. The election specified in section 4.02
of this revenue procedure must be made
by the due date (including extensions) of
the federal tax return for the taxpayer’s
taxable year that includes September 9,
2010, and must be made in the same manner as the § 168(k)(2)(D)(iii) election is
made. See § 1.168(k)–1(e)(3). If a taxpayer has timely filed its federal tax return for the taxpayer’s taxable year that
includes September 9, 2010, on or before
April 18, 2011, see § 301.9100–2(b) of the
Procedure and Administration Regulations
for an automatic extension of 6 months
from the due date of that federal return (excluding extensions) to make the election
specified in section 4.02 of this revenue
procedure.
SECTION 5. SBJA RETROACTIVE
APPLICATION OF 50-PERCENT
ADDITIONAL FIRST YEAR
DEPRECIATION DEDUCTION
.01 Scope. This section 5 applies to
a taxpayer that did not claim the 50-percent additional first year depreciation for
some or all qualified property placed in
service by the taxpayer after December 31,
2009, on its federal tax return for its taxable year beginning in 2009 and ending in
2010 (2009 taxable year) or its taxable year
of less than 12 months beginning and ending in 2010 (2010 short taxable year). For
purposes of this section 5:
(1) Except as provided in section
5.04(3) of this revenue procedure, the term
“qualified property” has the same meaning as provided in § 168(k)(2) before the
enactment of the TRUIRJCA;

2011–16 I.R.B.

(2) The term “2009 qualified property”
means qualified property placed in service
by the taxpayer before January 1, 2010, in
its 2009 taxable year; and
(3) The term “2010 qualified property”
means qualified property placed in service
by the taxpayer after December 31, 2009,
in its 2009 taxable year or 2010 short taxable year, as applicable.
.02 No Election Made To Not Deduct
50-Percent Additional First Year Depreciation. If a taxpayer timely filed its federal
tax return for the 2009 taxable year or the
2010 short taxable year, as applicable, did
not deduct on that return the 50-percent additional first year depreciation for a class
of property that is qualified property or for
some or all of its 2010 qualified property,
and did not make an election within the
time and in the manner described in either
section 2.06 or section 5.04(2) of this revenue procedure not to deduct the 50-percent additional first year depreciation for
the class of property in which the qualified
property or the 2010 qualified property, as
applicable, is included, the taxpayer may
claim the 50-percent additional first year
depreciation for that property by filing either:
(1) An amended federal tax return (or a
qualified amended return under Rev. Proc.
94–69, 1994–2 C.B. 804 (or its successor),
if applicable) for the 2009 taxable year or
the 2010 short taxable year, as applicable,
before the taxpayer files its federal tax return for the first taxable year succeeding
the 2009 taxable year or the 2010 short taxable year, as applicable; or
(2) A Form 3115, Application for
Change in Accounting Method, under section 6.01 of the Appendix of Rev. Proc.
2011–14, 2011–4 I.R.B. 330, 361, with
the taxpayer’s timely filed federal tax return for the first or second taxable year
succeeding the 2009 taxable year or the
2010 short taxable year, as applicable, if
the taxpayer owns the property as of the
first day of the year of change (as defined
in section 3.06 of Rev. Proc. 2011–14).
.03 Consent Granted to Revoke Election to Not Deduct 50-Percent Additional
First Year Depreciation. If, on its timely
filed federal tax return for the 2009 taxable year or the 2010 short taxable year,
as applicable, a taxpayer made an election within the time and in the manner described in section 2.06 of this revenue pro-

2011–16 I.R.B.

cedure to not deduct the 50-percent additional first year depreciation for a class
of property that is qualified property, the
Commissioner grants the taxpayer consent
to revoke that election, provided the taxpayer files an amended federal tax return
for the 2009 taxable year or the 2010 short
taxable year, as applicable, in a manner
that is consistent with the revocation of the
election and by the later of (1) June 17,
2011, or (2) before the taxpayer files its
federal tax return for the first taxable year
succeeding the 2009 taxable year or the
2010 short taxable year.
.04 Election To Not Deduct 50-Percent
Additional First Year Depreciation.
(1) In general. A taxpayer that timely
filed its federal tax return for the 2009 taxable year or the 2010 short taxable year,
as applicable, has made the election to not
deduct the 50-percent additional first year
depreciation for a class of property that is
qualified property if the taxpayer made the
election within the time and in the manner provided in section 2.06 of this revenue
procedure and did not revoke that election
within the time and in the manner provided
in section 5.03 of this revenue procedure.
(2) Deemed election. If section 5.04(1)
of this revenue procedure does not apply,
a taxpayer that timely filed its federal tax
return for the 2009 taxable year or the 2010
short taxable year, as applicable, also will
be treated as making the election to not
deduct the 50-percent additional first year
depreciation for a class of property that is
qualified property if the taxpayer:
(a) on that return, did not deduct the
50-percent additional first year depreciation for that class of property but did
deduct depreciation; and
(b) does not file an amended federal tax
return (or a qualified amended return) or a
Form 3115 within the time and in the manner provided in section 5.02 or section 5.03
of this revenue procedure, as applicable, to
claim the 50-percent additional first year
depreciation for the class of property.
(3) Application. If the taxpayer makes
the election under section 5.04(1) or (2)
of this revenue procedure for its 2009
taxable year, the election applies to both
2009 qualified property and 2010 qualified
property in the same class of property for
which the election is made. If the taxpayer
makes the election under section 5.04(1) or
(2) of this revenue procedure for its 2010
short taxable year, the election applies

670

to 2010 qualified property in the same
class of property for which the election is
made. The election under section 5.04(1)
or (2) of this revenue procedure also applies to qualified property (as defined in
§ 168(k), as amended by the SBJA and the
TRUIRJCA) in that class of property that
is eligible for the 100-percent additional
first year depreciation deduction and
placed in service during the taxpayer’s
2009 taxable year or 2010 short taxable
year, as applicable, and, therefore, this
property is not eligible for the 50-percent
or 100-percent additional first year
depreciation deduction.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2011–21 is amplified as provided in section 3.03(5)(c) of this revenue
procedure.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
March 29, 2011.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–2207.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in
this revenue procedure are in sections
3.02(2)(b) and 4.03. This information is
required to make the elections provided
under these sections. This information will
be used by the Service for examination
purposes. The collections of information
are required to obtain a benefit. The likely
respondents are individuals, business or
other for-profit institutions, and small
businesses.
The estimated total annual reporting
burden is 125,000 hours.
The estimated annual burden per respondent varies from .25 hours to 1 hour,
depending on individual circumstances,

April 18, 2011

with an estimated average of .5 hours.
The estimated number of respondents is
250,000.
The estimated frequency of responses
(used for reporting requirements only) is
annually.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in

April 18, 2011

the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kathleen Reed of the Office

671

of Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding the additional first year depreciation deduction, contact Douglas Kim
at (202) 622–4930 (not a toll-free call).
For further information regarding the depreciation deduction limitations under
§ 280F(a), contact Bernard P. Harvey at
(202) 622–4930 (not a toll-free call).

2011–16 I.R.B.

Part IV. Items of General Interest
ANNOUNCEMENT AND REPORT CONCERNING ADVANCE PRICING AGREEMENTS
Announcement 2011–22
March 29, 2011
This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act
of 1999, which requires the Secretary of the Treasury to report annually to the public concerning Advance Pricing Agreements
(APAs) and the APA Program. The first report covered calendar years 1991 through 1999. Subsequent reports covered separately
each calendar year 2000 through 2009. This twelfth report describes the experience, structure, and activities of the APA Program
during calendar year 2010. It does not provide guidance regarding the application of the arm’s length standard.
John E. Hinding
Director, Advance Pricing Agreement Program
Background
Internal Revenue Code (IRC) § 482 provides that the Secretary may distribute, apportion, or allocate gross income, deductions,
credits, or allowances between or among two or more commonly controlled businesses if necessary to reflect clearly the income
of such businesses. Under the § 482 regulations, the standard to be applied in determining the true taxable income of a controlled
business is that of a business dealing at arm’s length with an unrelated business. The arm’s length standard has also been
adopted by the international community and is incorporated into the transfer pricing guidelines issued by the Organization for
Economic Cooperation and Development (OECD). OECD, TRANSFER PRICING GUIDELINES FOR MULTINATIONAL
ENTERPRISES AND TAX ADMINISTRATIONS (2010). Transfer pricing issues by their nature are highly factual and have
traditionally been one of the largest issues identified by the IRS in its audits of multinational corporations. The APA Program
is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the
traditional examination process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to
seek a transfer pricing adjustment under IRC § 482 for a covered transaction if the taxpayer files its tax return for a covered year
consistent with the agreed transfer pricing method (TPM). In 2010, the IRS and taxpayers executed 69 APAs and 9 amended APAs.
Since 1991, with the issuance of Rev. Proc. 91–22, 1991–1 C.B. 526, the IRS has offered taxpayers, through the APA Program,
the opportunity to reach an agreement in advance of filing a tax return on the appropriate TPM to be applied to related party
transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Directives Manual
(CCDM), ¶¶ 42.10.10 — 42.10.16 (November 15, 1996).1 Also in 1996, the IRS updated Rev. Proc. 91–22 with the release of
Rev. Proc. 96–53, 1996–2 C.B. 375.2 In 1998, the IRS published Notice 98–65, 1998–2 C.B. 803,3 which set forth streamlined
APA procedures for small business taxpayers. Then on July 1, 2004, the IRS updated and superseded both Rev. Proc. 96–53 and
Notice 98–65 by issuing Rev. Proc. 2004–40, 2004–2 C.B. 50,4 effective for all APA requests filed on or after August 19, 2004.
On December 19, 2005, the IRS again updated the procedural rules for processing and administering APAs with the release of
Rev. Proc. 2006–09, 2006–1 C.B. 278.5 Rev. Proc. 2006–09 supersedes Rev. Proc. 2004–40 and is effective for all APA requests
filed on or after February 1, 2006. On May 21, 2008, the IRS released Rev. Proc. 2008–31, 2008–1 C.B. 1133, which revised Rev.
Proc. 2006–09 to describe further the types of issues that may be resolved in the APA process.6 Specifically, Rev. Proc. 2008–31
added a new sentence to Section 2.01 of Rev. Proc. 2006–09, to advise that the APA process may be used to resolve any issue for
which transfer pricing principles may be relevant, such as attribution of profit to a permanent establishment under certain U.S.
income tax treaties, the amount of income effectively connected with the conduct of a U.S. trade or business, and the amount of
income derived from sources partly within and partly without the United States.

1

Current CCDM provisions regarding APA procedures are available at http://www.irs.gov/irm/part32/ch04s01.html.

2

Available at http://www.irs.gov/pub/irs-irbs/irb96–49.pdf.

3

Available at http://www.irs.gov/pub/irs-irbs/irb98–52.pdf.

4

Available at http://www.irs.gov/pub/irs-irbs/irb04–29.pdf.

5

Available at http://www.irs.gov/irb/2006–02_IRB/ar12.html.

6

Available at http://www.irs.gov/pub/irs-irbs/irb08–31.pdf.

2011–16 I.R.B.

672

April 18, 2011

Advance Pricing Agreements
An APA generally combines an agreement between a taxpayer and the IRS with an agreement between the United States and one
or more foreign tax authorities (under the authority of the mutual agreement process of our income tax treaties) on an appropriate
TPM for the transactions at issue (Covered Transactions). With such “bilateral” APAs, the taxpayer ordinarily is assured that
the income associated with the Covered Transactions will not be subject to double taxation by the combination of the United
States and the foreign jurisdictions. The policy of the United States, as reflected in §§ 2.08 and 7 of Rev. Proc. 2006–09, is to
encourage taxpayers that enter the APA Program to seek bilateral or multilateral APAs when competent authority procedures
are available with respect to the foreign country or countries involved. However, the IRS may execute an APA with a taxpayer
without reaching a competent authority agreement (a unilateral APA).
A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved TPM for U.S. tax purposes. A
unilateral APA binds the taxpayer and the IRS, but does not prevent a foreign tax administration from taking a different position
on the appropriate TPM for a transaction. As stated in § 7.07 of Rev. Proc. 2006–09, should a transaction covered by a unilateral
APA be subject to double taxation as the result of an adjustment by a foreign tax administration, the taxpayer may seek relief
by requesting that the U.S. Competent Authority (USCA) consider initiating a mutual agreement proceeding pursuant to an
applicable income tax treaty (if any).
The policy generally preferring bilateral (or multilateral) over unilateral APAs is grounded in the APA Program’s goal to achieve
certainty and the avoidance of double taxation through an early dispute resolution process that is most efficient from both taxpayer
and government perspectives. Consistent with that policy, the IRS is reviewing both initial and renewal submissions for factors
weighing in favor of bilateral or multilateral APAs (e.g., potentially large amounts of income; complex issues; a high risk of
adjustment in a foreign country; or other indications in the interests of efficient tax administration) or unilateral APAs (e.g., small
amounts at stake relative to the additional transaction costs of a bilateral or multilateral APA; a multiplicity of smaller foreign
situs operations covered by unilateral APAs while bilateral or multilateral APAs cover major intercompany transaction flows; or
other indications in the interests of efficient tax administration). To date no request for a unilateral APA has been rejected on the
sole basis that the submission sought a unilateral rather than a bilateral or multilateral process.
As before, when a unilateral APA involves taxpayers operating in a country that is a U.S. treaty partner, information relevant
to the APA (including a copy of the APA and APA annual reports) may be provided to the treaty partner under normal rules
and principles governing the exchange of information under income tax treaties.
The APA Program
An IRS team headed by an APA team leader is responsible for the consideration of each APA. As of the last statutory report (for
the period ending December 31, 2009), the APA Program had nineteen team leaders; by December 31, 2010, that number declined
to sixteen. The team leader is responsible for organizing the IRS APA team. The IRS APA team leader arranges meetings with the
taxpayer, secures necessary information from the taxpayer to analyze the taxpayer’s Covered Transactions and the available facts
under the arm’s length standard of IRC § 482 and the regulations thereunder, and leads the discussions with the taxpayer.
The APA team generally includes an economist, an IRS Large Busines and International Division (LB&I) international examiner,
LB&I field counsel, and, in a bilateral case or multilateral APA case, a USCA analyst. The economist may be from the APA
Program or the IRS field organization. As in the last statutory report, as of December 31, 2010, the APA Program had seven
economists on staff, plus one economist manager. The APA team may also include an LB&I International Technical Advisor,
other LB&I exam personnel, and an Appeals Officer.
The APA Process
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc.
2006–09, § 4.12. The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion
and agreement; and (5) drafting, review, and execution.
(1) Application
In many APA cases, the taxpayer’s application is preceded by a pre-file conference (PFC) with the APA staff in which the taxpayer
can solicit the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer
must disclose its identity when it applies for an APA. The APA Program has been requiring taxpayers interested in an APA under
Rev. Proc. 2008–31 to schedule a PFC before submitting a formal APA application.

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673

2011–16 I.R.B.

Even outside the expanded jurisdiction conferred in Rev. Proc. 2008–31, PFCs are useful tools for the early exchange of ideas and
expectations on complex, novel, and potentially contentious issues that will be present in an APA submission. The APA Program
believes that discussions with the IRS in PFCs, when followed in an APA submission, has the potential to shorten the period of
time required to complete an APA by identifying issues that will require specific development and providing preliminary views
on acceptable methodologies and analytical concepts. The APA Program has recently revised its internal practices concerning
PFCs to improve efficiency, including better tracking of PFCs and, most notably, assigning some of the PFCs presenting the
most complex or novel issues to senior staff.
As part of a taxpayer’s APA application, the taxpayer must file the appropriate user fee on or before the due date, including
extensions, of the tax return for the first taxable year that the taxpayer proposes to be covered by the APA. (If the taxpayer receives
an extension to file its tax return, it must file its user fee no later than the actual filing date of the return.) Many taxpayers file a
user fee first and then follow up with a full application later — a “dollar file” in APA parlance. The procedures for PFCs, user
fees, and applications can be found in §§ 3 and 4 of Rev. Proc. 2006–09.
The APA application can be a relatively modest document for small businesses. Section 9 of Rev. Proc. 2006–09 describes
the special APA procedures for small business taxpayers. For most taxpayers, however, the APA application is a substantial
document filling several binders. APA applications must be accompanied by a declaration, signed by an authorized corporate
officer, attesting to the accuracy and completeness of the information presented.
The application is assigned to an APA team leader who is responsible for the case. The APA team leader’s first responsibility is to
organize the APA team. This involves contacting the appropriate LB&I International Territory Manager to secure the assignment
of an international examiner to the APA case and the LB&I Counsel’s office to secure a field counsel lawyer. In a bilateral or
multilateral case, the USCA will assign a USCA analyst to the team. In a large APA case, the international examiner may invite
his or her manager and other LB&I personnel familiar with the taxpayer to join the team. If the APA may affect taxable years in
Appeals, the appropriate appellate conferee will be invited to join the team. In cases involving cost-sharing arrangements, other
complex intangibles and services transactions, or novel issues, the APA team leader contacts the Manager, LB&I International
Technical Advisors, to determine whether or not to include a technical advisor on the team. The multi-functional nature of APA
teams combines the APA Program’s transfer pricing expertise and APA experience with other elements of the IRS that possess
complementary or supplementary knowledge about the taxpayer, the taxpayer’s industry, related or ancillary tax issues, the
foreign competent authority, and other relevant issues. By bringing all relevant parties to the table in a single proceeding, the
APA process is able to resolve transfer pricing issues early on in a more principled, efficient, consistent, and comprehensive
manner than the standard administrative process (i.e., audit, appeals, litigation).
The APA team leader distributes copies of the APA application to all team members, makes initial contact with the taxpayer to
confirm the APA Program’s receipt of the taxpayer’s application, and sets up an opening conference with the taxpayer. Under
past APA case management procedures, the APA office strived to (i) make initial contact with the taxpayer within 21 days of its
receipt of the APA application and (ii) hold the opening conference within 45 days from the date that the APA team expects
to begin actively working the case — the “Start Date” under the revised case management procedures. However, limited
Program resources have led to delays, so, for example, opening conferences are now frequently held six months or more after a
completed application is received.
On or about the opening conference, the APA team leader proposes a case plan appropriate for the case. Case plans are generally
targeted to complete a unilateral APA or, in the case of a bilateral APA, the U.S. recommended negotiating position (RNP)
within 12 months from the date of the opening conference. The targeted completion date in a particular case, however, may
vary from the 12-month benchmark, depending on the complexity of the case, APA team workloads, taxpayer schedules, and
other factors. Case plans are signed by both an APA manager and an authorized official of the taxpayer and are intended to be
adhered to except in unforeseen or exceptional circumstances. Implementation and adherence to case plans has been uneven,
at best. The rapidly increasing workloads have resulted in the actual median and average times for completing unilateral and
bilateral APAs, recommended negotiating positions for bilateral APAs, and APAs for small business taxpayers to increase
significantly. These APA inventory and case completion times are described in greater detail below in Tables 2 through 11. The
APA Program is taking steps to increase its tracking of and adherence to case plans and, as discussed below, is endeavoring to
increase efficiencies and augment resources through a pooling with USCA.

2011–16 I.R.B.

674

April 18, 2011

Due Diligence
The APA team must satisfy itself that the relevant facts submitted by the taxpayer are complete and accurate. This due diligence
aspect of the APA is vital to the process. It is because of this due diligence that the IRS can reach advance agreements with
taxpayers in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways. Typically, the APA
team leader will submit in advance of the opening conference a list of questions to the taxpayer for discussion at the conference.
The opening conference may result in additional questions and an agreement to meet one or more times in the future. These
questions and meetings are not an audit and are focused on the transfer pricing issues associated with the transactions in the
taxpayer’s application, or other transactions that the taxpayer and the IRS may agree to add.
(3) Analysis
A significant part of the analytical work associated with an APA is done typically by the APA economist or an IRS field economist
assigned to the case. The analysis may result in the need for additional information. Once the IRS APA team has completed its
due diligence and analysis, it begins discussions with the taxpayer over the various aspects of the APA including the covered
transactions, the TPM, the selection of comparable transactions, asset intensity and other adjustments, the appropriate critical
assumptions, the APA term, and other key issues. The APA team leader will discuss particularly difficult issues with his or her
managers, but generally the APA team leader is empowered to negotiate the APA.
(4) Discussion and Agreement
The discussion and agreement phase differs for bilateral and unilateral cases. In a bilateral case, the discussions have typically
proceeded in two parts and involve two IRS offices — the APA Program and the USCA. In the first part, the APA team attempted
to reach a consensus with the taxpayer regarding the RNP that the USCA should take in negotiations with its treaty partner.
This U.S. RNP was a paper drafted by the APA team leader, reviewed by APA management, and signed by the APA Director
that provides the APA Program’s view of the best TPM for the Covered Transactions, taking into account IRC § 482 and the
regulations thereunder, the relevant tax treaty, and the USCA’s experience with the treaty partner.
The experience of the APA office and the USCA has been that APA negotiations are likely to proceed more rapidly with a foreign
competent authority if the U.S. negotiating position is fully supported by the taxpayer. Consequently, the APA office has worked
with the taxpayer in developing the U.S. RNP. Often, however, the taxpayer has disagreed with part or all of the RNP. In these
cases, the APA office will send an RNP to the USCA that identifies and explains the elements of the RNP with which the taxpayer
disagrees. The APA team leader also solicited the views of the other members of the APA team, and, in the vast majority of
APA cases, the other members of the APA team concur in the position prepared by the APA team leader. If there was any
disagreement that cannot be resolved, it is noted in the RNP.
After the APA Program completed the recommended U.S. negotiating position, the APA process shifted from the APA Program to
the USCA — the “hand-off.” The USCA analyst assigned to the APA took the U.S. RNP and prepared the final U.S. negotiating
position, which was then transmitted to the foreign competent authority. The negotiations with the foreign competent authority
were conducted by the USCA analyst, most often in face-to-face negotiating sessions conducted periodically throughout the year.
At the request of the USCA, APA Program staff members have assisted in the negotiations.
Both in response to the inherent inefficiencies of the “hand-off” and because of resource constraints, the APA Program and USCA
have commenced efforts towards a pooling of resources and better managing their shared bilateral caseload as a single inventory.
These efforts are still at the initial stage. Practices that are under consideration include the possible assignment of a single APA
team leader, or USCA analyst, from either the APA Program or the USCA to work a bilateral case through both offices from
inception through to conclusion, consistent with the applicable revenue procedures. By the end of 2010, a few cases were
identified for carrying forward under the pooling approach.
In unilateral APA cases, the discussions proceed solely between the APA Program and the taxpayer. In a unilateral case, the
taxpayer and the APA Program must reach agreement to conclude an APA. As in bilateral cases, the APA team leader almost
always will achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. Under APA
Program procedures, IRS field personnel assigned to a case are solicited formally for their concurrence in the final APA. This
concurrence, or any item in disagreement, is noted in a memorandum prepared by the APA team leader that accompanies the final
APA sent forward for review and execution.

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2011–16 I.R.B.

(5) Drafting, Review, and Execution
Once the IRS, competent authorities, and the taxpayer reach agreement, the final APA is drafted. The APA Program has developed
standard language that is incorporated into every APA. The current version of this language is found in Attachment A. APAs are
reviewed by the APA Branch Chief and the APA Director. In addition, the team leader prepares a summary memorandum for
approval by the Associate Chief Counsel (International) (ACC(I)). On March 1, 2001, the ACC(I) delegated to the APA Director
the authority to execute APAs on behalf of the IRS. See Chief Counsel Notice CC–2001–016. The APA is executed for the
taxpayer by an appropriate corporate officer. It is anticipated that under the pooling practice between the APA Program and
USCA, RNPs and final APAs would continue to be reviewed and approved by the APA Director and ACC(I), while the mutual
agreement reached between competent authorities would continue to be reviewed and approved by the USCA.
Model APA at Attachment A
[§ 521(b)(2)(B)]
Attachment A contains the current version of the model APA language.

The Current APA Office Structure, Composition, and Operation
In 2010, the APA office consisted of four branches, with Branches 1 and 3 staffed with APA team leaders and Branch 2 staffed
with economists based in Washington, D.C. Branch 4, the APA West Coast branch, is headquartered in San Francisco, California,
with an additional office in Laguna Niguel, California, and is staffed with both team leaders and economists.
APA full-time staffing decreased during 2010, starting at 39 at the end of 2009, falling to 35 by the end of the year. As of
December 31, 2010, the APA staff was as follows:

Total hours spent by APA professional staff increased in 2010 by roughly 14.5% over the previous year. The decrease in the
staff near the end of 2010 is yet to be reflected in staff hours due to the timing of the departures. The change in APA hours
spent over the last nine years is reflected in the table below.

2011–16 I.R.B.

676

April 18, 2011

Hours of APA attorneys, economists, and paralegal staff by year (excluding holiday and leave):

APA Issue/Industry Coordination Teams
In May 2005, the IRS Chief Counsel announced a series of initiatives to improve APA Program performance. One initiative was
to increase specialization within the office by creating teams of select individuals to handle all cases of a particular type. The
purpose was to increase efficiency, quality, and consistency.
The APA Program selected five categories of cases for specialization — cases involving cost sharing arrangements, financial
products, the semiconductor industry, the automotive industry, and the pharmaceutical industry. These categories were selected
because they each had a sufficient number of cases and commonality of issues to warrant their assignment to teams. Cases falling
within these five categories have historically accounted for about 40 percent of the APA Program’s case load and about half of its
total case time. At the end of 2010, cases within these five categories accounted for 86 of the 243 cases pending in the office that
were either unilateral APAs or bilateral APAs that had not yet been forwarded to the USCA.

April 18, 2011

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2011–16 I.R.B.

Staffing of the coordination teams at the end of 2010 is indicated below:

The APA Program is mindful that the purpose of the coordination effort is not to impose the same transfer pricing method on all
taxpayers in an industry. The appropriate transfer pricing method remains a case-by-case determination, influenced by numerous
factors that are not common to all companies operating in a particular industry. While the coordination effort may result in the
APA Program promoting a common approach on some issues where appropriate, the Program expects that the greater industry
familiarity developed through the coordination effort will also allow it to develop a more sophisticated understanding of issues
that will permit more tailored approaches, thereby promoting more (appropriately) varied results than might otherwise be the case.
APA Training
In 2010, the APA office continued its training activities. Training sessions addressed APA-related current developments, the
application of Rev. Proc. 2008–31, regulatory developments, new APA office practices and procedures, OECD study on
restructuring, review of novel or unique APAs or RNPs, and international tax law issues. The training materials used for new hires
are available to the public through the APA internet site at http://www.irs.gov/businesses/corporations/article/0,,id=96221,00.html.
The APA’s new-hire materials, which were originally prepared in 2003 and have not been updated, do not constitute guidance on
the application of the arm’s length standard and are not to be relied upon or cited as precedent. Also available to the public is a
spreadsheet model that performs calculations in a Comparable Profits Method (CPM) analysis, which APA economists developed
in 2007 and which is now routinely used by the APA office when performing APA analyses. An electronic version of the model
may be obtained by contacting the APA office in Washington, D.C. at (202) 435–5220 (not a toll-free number).

2011–16 I.R.B.

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April 18, 2011

APA Program Statistical Data
[§ 521(b)(2)(C) and (E)]
The statistical information required under § 521(b)(2)(C) is contained in Tables 1 and 10 below; the information required under
§ 521(b)(2)(E) is contained in Tables 2 and 3 below. The 144 APA applications during 2010 represented a new one-year high for
the Program, following record-breaking years in 2008 (123) and 2009 (127).7 From 2000–2007, the APA Program averaged 91
applications per year, and it had never received more than 110 applications in a single year. The APA Program expects APA
applications to continue in 2011 at the same high levels as in 2008–2010.
TABLE 1: APA APPLICATIONS, EXECUTED APAS, AND PENDING APAS

Year
Total

Cumulative
Total

144

1523

0

69

973

13

904

Unilateral

Bilateral

46

98

20

49

385

506

14

18

32

293

5

4

9

70

85

315

400

Pending requests for new
APAs

38

186

224

Pending requests for renewal
APAs

47

129

176

APAs canceled or revoked

0

0

0

9

APAs withdrawn

8

11

19

165

APA applications filed during 2010
executed8

All APAs
Year 2010

1991–2010
APA renewals executed during 2010
APAs revised or amended during
2010
Pending requests for APAs

Multilateral

TABLE 2: MONTHS TO COMPLETE APAS

Months to Complete Advance Pricing Agreements in 2010
All New

All Renewals

All Combined

Average

40.7

Average

33.1

Average

37.2

Median

37.3

Median

31.0

Median

33.2

Unilateral
New

Unilateral
Renewals

Unilateral
Combined

Average

26

Average

23.3

Average

24.1

Median

26.9

Median

24.2

Median

24.4

7 Of the 127 new APA applications in 2009 — the first full year in which Rev. Proc. 2008–31 was in effect — approximately ten submissions invoked APA jurisdiction under Rev. Proc.
2008–31. In 2010, the APA Program completed three or fewer APAs falling within APA jurisdiction because of Rev. Proc. 2008–31.
8

“All APAs executed” includes APA renewals, but not APAs revised or amended.

April 18, 2011

679

2011–16 I.R.B.

Months to Complete Advance Pricing Agreements in 2010
Bilateral/Multilateral
New

Bilateral/Multilateral
Renewals

Bilateral/Multilateral
Combined

Average

43.6

Average

40.7

Average

42.5

Median

39.2

Median

34.1

Median

37.3

TABLE 3: APA COMPLETION TIME — MONTHS PER APA

Months

Number
of APAs

Months

Number
of APAs

1

26

3

51

1

2

27

2

52

1

3

28

2

53

4

29

1

54

30

5

55

6

31

2

56

7

32

3

57

33

2

58

9

34

2

59

1

10

35

2

60

1

11

36

2

61

1

37

3

62

13

38

1

63

14

39

1

64

40

1

65

41

1

66

Months

5

8

12

15

Number
of APAs

1

1

1

1

16
17

1

42

18

3

43

19

44

20

45

21

2

22

1
1

1

67
1

2

46

68
69

1

70

1

71–80

47

1

81

23

1

48

1

82–118

24

4

49

2

119

25

1

50

1

1
1

TABLE 4: RECOMMENDED NEGOTIATING POSITIONS

Recommended Negotiating Positions Completed in 2010

2011–16 I.R.B.

58

680

April 18, 2011

Table 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS

New

Renewal

Combined

Average

25.4

Average

22.9

Average

24.4

Median

25.8

Median

24.8

Median

25.4

TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME — MONTHS PER APA

Months

Number

Months

Number

Months

Number

Months

1

12

1

23

4

34

2

13

2

24

3

35

3

14

25

5

36

1

4

15

2

26

3

37

2

5

16

1

27

6

38

6

17

2

28

4

39

7

18

4

29

2

40

19

4

30

2

20

1

31

2

21

2

32

1

8
9

1

10
11

22

33

Number

1

2

TABLES 7 AND 8 BELOW SHOW HOW LONG EACH APA REQUEST PENDING AT THE END OF 2010 HAS BEEN IN
THE SYSTEM AS MEASURED FROM THE FILING DATE OF THE APA SUBMISSION. THE NUMBERS FOR PENDING
UNILATERAL AND BILATERAL CASES DIFFER FROM THE NUMBERS IN TABLE 1 BECAUSE TABLES 7 AND 8
REFLECT ONLY CASES FOR WHICH SUBMISSIONS HAVE BEEN RECEIVED, WHILE TABLE 1 INCLUDES ANY
CASE FOR WHICH A USER FEE HAS BEEN PAID.

TABLE 7: UNILATERAL APAS — TIME IN INVENTORY — MONTHS PER APA

Months

Number
of APAs

Months

Number
of APAs

Months

Number
of APAs

Months

Number
of APAs

1

5

10

2

19

3

28

1

2

6

11

4

20

0

30

2

3

5

12

5

21

0

31

1

4

2

13

4

22

1

32

1

5

3

14

0

23

1

33

1

6

6

15

3

24

0

35

1

7

1

16

2

25

1

36

2

8

3

17

3

26

1

37

1

9

4

18

0

27

0

44

1

April 18, 2011

681

2011–16 I.R.B.

TABLE 8: BILATERAL APAS — TIME IN INVENTORY — MONTHS PER APA

Months

Number
of APAs

Months

Number
of APAs

Months

Number
of APAs

Months

1

9

25

4

49

0

73

2

4

26

4

50

1

74

3

1

27

9

51

3

75

4

3

28

6

52

0

76

5

9

29

4

53

0

77

6

4

30

6

54

1

78

7

4

31

2

55

1

79

8

10

32

4

56

0

80

9

11

33

5

57

0

81

10

3

34

8

58

1

82

11

6

35

5

59

5

83

12

10

36

8

60

1

84

13

1

37

2

61

0

85

14

5

38

4

62

2

86

15

5

39

1

63

0

87

16

7

40

2

64

1

88

17

12

41

2

65

0

89

18

5

42

3

66

0

90

19

13

43

1

67

1

91–93

20

2

44

4

68

3

94

21

7

45

0

69

0

95–96

22

5

46

3

70

0

97

23

14

47

0

71

2

24

7

48

3

72

0

Number
of APAs
1

1

1

1

1

Of the 350 cases in the APA Program’s inventory shown in Tables 7 and 8, 107 cases (all of which are reflected in Table 8) are
bilateral cases that have been forwarded to the USCA office for discussion with a treaty partner. This leaves 243 cases in the
APA Program’s active inventory at the end of 2010 that are either unilateral APAs (76 cases) or bilateral APAs for which the
APA Program has not yet completed a recommended negotiating position (167 cases). Of the 243 active APA cases, 36 involve
small business taxpayer (SBT) cases, as defined in Rev. Proc. 2006–9, § 4.12(5).
The table below shows the average age (in months) of the 243 active cases in inventory at the end of 2010, along with a
comparison of the number of active cases and their average age at year-end for each year back to 2004. The table also shows the
same information for cases that were at least 6-months old or 1-year old (the latter being a subset of the former) at the end of
each year to allow comparison without potential distortions caused by year-to-year variations in the number of cases received in
the latter half or during the course of the year. The build-up in inventory during 2010 primarily reflects the delays caused by
the significant fluctuations in APA personnel in 2009 combined with the record number of new APA applications during the
past three years. The increases in APA applications and inventory levels have, in fact, masked improvements in recent years in
APA productivity, as measured by the number of completed APA items (e.g., APAs, APA amendments, and recommended US
negotiating positions) divided by total APA staff hours during a year.

2011–16 I.R.B.

682

April 18, 2011

TABLE 9: NUMBER AND AVERAGE AGE OF ACTIVE CASES IN INVENTORY AT YEAR-END

2004

2005

2006

2007

2008

2009

2010

Active cases

130

133

110

105

161

222

243

Average age (months)

15.2

13.2

10.6

9.1

10.2

12.9

15.4

Active cases 6+ months

106

87

81

66

110

176

196

Average age (months)

17.8

18.5

13.0

13.0

13.5

15.6

18.3

Active cases 1+ year

60

55

32

27

51

116

138

Average age (months)

24.2

23.3

19.4

18.5

18.7

19.5

22.1

TABLE 10: SMALL BUSINESS TAXPAYER APAs

Small Business Taxpayer APAs Completed in 2010

7

New

4

Renewals

3

Unilateral

3

Bilateral

4

TABLE 11: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs

Months to Complete Small Business Taxpayer APAs in 2010
New

Renewal

Combined

Average

37.9

Average

30.0

Average

34.5

Median

37.3

Median

24

Median

29

Although the APA Program strives to complete SBT cases on an expedited basis, our experience is that such cases require nearly
the same level of resources and the same commitment of time as non-SBT cases. This phenomenon may be explained by a number
of factors, including the fact that the complexity or novelty of transfer pricing issues do not necessarily depend on the dollar
volume of the related-party transactions, the lesser transfer pricing experience and/or resources of many SBTs, and the importance
to both SBTs and non-SBTs of obtaining APA outcomes that reflect each taxpayer’s particular facts and circumstances (as opposed
to an analysis based on streamlined factual development and general transfer pricing principles). The Program completed four
SBT RNPs during 2010 with average and median lengths of 20.1 and 21.1 months, respectively.

April 18, 2011

683

2011–16 I.R.B.

TABLE 12: INDUSTRIES COVERED9

Industry Involved — NAICS Codes
Wholesale trade, durable goods – 421

Number
16–18

Computer and electronic product manufacturing – 334

7–9

Professional, scientific and technical services – 545

4–6

Wholesale trade, nondurable goods – 422

1–3

Transportation equipment manufacturing – 336

1–3

Motor vehicle and parts dealers – 441

1–3

Chemical manufacturing – 325

1–3

Electronic equipment, appliance and component manufacturing – 335

1–3

Machinery manufacturing – 333

1–3

Oil and gas extraction – 212

1–3

Publishing industries – 511

1–3

Miscellaneous manufacturing – 339

1–3

Information service and data processing services – 514

1–3

Beverage and tobacco manufacturing – 312

1–3

Air transportation – 481

1–3

Plastics and rubber products manufacturing – 326

1–3

Securities, commodity contracts and other intermediary and related activities – 523

1–3

Clothing and clothing accessories stores – 448

1–3

Food manufacturing – 311

1–3

Sporting goods, hobby, book and music stores – 451

1–3

Broadcasting and telecommunications – 513

1–3

Insurance carriers and related activities – 524

1–3

Paper manufacturing – 322

1–3

Nonmetallic mineral product manufacturing – 327

1–3

Water transportation – 483

1–3

Electronic and appliance stores – 443

1–3

Data Processing, Hosting, and Related Services – 518

1–3

9

The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced the U.S. Standard Industrial Classification (SIC) system. NAICS
was developed jointly by the United States, Canada, and Mexico to provide new comparability in statistics about business activity across North America.

2011–16 I.R.B.

684

April 18, 2011

Trades or Businesses
[§ 521(b)(2)(D)(i)]
The nature of the relationships between the related organizations, trades, or businesses covered by APAs executed in 2010
set forth in Table 13 below:
TABLE 13: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES

Relationship

Number of APAs

Foreign Parent — U.S. Subsidiary (-ies)

44

Unilateral

14

Bilateral

30

U. S. Parent — Foreign Subsidiary (-ies)

20

Unilateral

4

Bilateral

16
≤3

Foreign Company and U.S. branch(es)
Unilateral

0
≤3

Bilateral

≤3

U.S. Company and non-U.S. branch(es)
Unilateral

0

Bilateral

≤3

Partnership

≤3

Unilateral

≤3

Bilateral

≤3

Covered Transactions
[§ 521(b)(2)(D)(ii)]
The controlled transactions covered by APAs executed in 2010 are set forth in Tables 14 and 15 below:
TABLE 14: TYPES OF COVERED TRANSACTIONS

Transaction Type

Number

Sale of tangible property into the United States

40

Performance of services by U.S. entity

28

Performance of services by non-U.S. entity

21

Use of intangible property by U.S. entity

19

Use of intangible property by non-U.S. entity

11

Sale of tangible property from the United States

11

Cost Sharing — U.S. parent/foreign subsidiary

≤3

Cost Sharing -non U.S. parent/domestic subsidiary

≤3

Other

≤3

April 18, 2011

685

2011–16 I.R.B.

TABLE 15: TYPES OF SERVICES INCLUDED IN COVERED TRANSACTIONS

Intercompany Services Involved in the Covered Transactions

Number

Marketing

29

Distribution

26

Logistical support

19

Technical support services

18

Sales support

15

IT

11

Management

10

Headquarters costs

9

Product support

9

Legal

7

Health, safety, environmental, and regulatory affairs

6

Purchasing

6

Research and development

6

Corporate and public relations

5

Treasury activities

5

Tax compliance activities/services

5

Warranty services

≤3

Assembly

≤3

Accounting and auditing

≤3

Benefits

≤3

Staffing and recruiting

≤3

Accounts receivable

≤3

Accounts payable

≤3

Payroll

≤3

Budgeting

≤3

Contract manufacturing

≤3

Others

≤3

2011–16 I.R.B.

686

April 18, 2011

Business Functions Performed and Risks Assumed
[§ 521(b)(2)(D)(ii)]
The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose
results are tested in the Covered Transactions in the APAs executed in 2010 are set forth in Tables 16 and 17 below:
TABLE 16: FUNCTIONS PERFORMED BY THE TESTED PARTY

Functions Performed

Number

Distribution

78

Product service

62

Marketing functions

47

Manufacturing

41

Managerial, legal, accounting, finance, personnel, and other support services

29

Transportation and warehousing

28

Purchasing and materials management

18

Licensing of intangibles

17

Research and development

15

Product design and engineering

14

Product assembly or packaging

13

Technical training and technical support

12

Consulting Services

8

Trading and risk management of financial products

7

Process engineering

≤3

Engineering and construction related services

≤3

Mining and extraction

≤3

Telecom Services

≤3

TABLE 17: RISKS ASSUMED BY THE TESTED PARTY

Risks Assumed
Market risks, including fluctuations in costs, demand, pricing, and inventory

Number
104

General business risks (e.g., related to ownership of PP&E)

62

Credit and collection risks

84

Product liability risks

35

Financial risks, including interest rates and currency

47

Research and development risks

18

April 18, 2011

687

2011–16 I.R.B.

Discussion
The majority of APAs have Covered Transactions that involve numerous business functions and risks. For instance, with respect
to functions, multinational groups that manufacture products typically conduct research and development (R&D), engage in
product design and engineering, manufacture the product, market and distribute the product, and perform support functions such
as legal, finance, and human resources services. Regarding risks, these groups are subject to market risks, R&D risks, financial
risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process, a significant
amount of time and effort is devoted to understanding how the functions and risks are allocated among the controlled group of
companies that are party to the Covered Transactions.
In its APA submission, the taxpayer must provide a functional analysis. The functional analysis identifies the economic activities
performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The
importance of the functional analysis derives from the economic theory positing that there is a positive relationship between risk
and expected return and that different functions provide different value and have different opportunity costs associated with them.
It is important that the functional analysis go beyond simply categorizing the tested party as, say, a distributor. It should provide
more specific information because, in the example of distributors, not all distributors undertake similar functions and risks.
The functional analysis is critical in determining the appropriate TPM (including the selection of comparables, tested party, and
profit level indicator (PLI)). In conjunction with evaluating the functional analysis, the APA Program considers contractual terms
between the controlled parties, the allocation of risk between the parties, the relevant economic conditions, and the type of property
or services at issue. In assessing contractual terms and risk allocations, the APA Program considers not only written agreements
between the parties, but also the economic substance of the transactions as indicated by the conduct of the parties over time, the
financial capacity of each party to fund losses arising from risks, and the managerial or operational control each party exercises
over activities giving rise to risk. Relevant economic conditions reviewed often include the geographic market and the level of the
market in which the functions are performed, and the business cycle or general economic condition of the industry under review.
During 2010, the APA Program received numerous inquiries about the potential effect of the economic downturn on existing
and pending APAs. On existing APAs, the APA Program, in consultation with the USCA, has adopted a general policy not to
re-open closed cases absent a special Critical Assumption on point.10 The APA Program has dealt with pending APA applications
(whether pending with the USCA or the APA Program) on a case-by-case basis. Whether or not a special “down-economy
adjustment” might be appropriate depends on a variety of factors, including whether or not the tested party and the comparables
have been similarly affected by the downturn, the tested party’s historic risk profile and performance, and a taxpayer’s willingness
to accept a symmetrical adjustment (e.g., in a renewal APA) when the economy improves. Approaches to the down economy
that have been considered include changing the APA term, waiting for more current financial data, using a different set of
comparables, and/or applying a longer testing period.
The APA Program’s evaluation of the functional analysis also considers the assets or other resources employed by each controlled
party. In this evaluation, each party’s ownership or investment in valuable intangible assets is often an important consideration.

Related Organizations, Trades, or Businesses Whose Prices or Results Are Tested to Determine
Compliance with APA Transfer Pricing Methods
[§ 521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose prices or results are tested to determine compliance with TPMs prescribed
in APAs executed in 2010 are set forth in Table 18 below:

TABLE 18: RELATED ORGANIZATIONS, TRADES, OR BUSINESSES WHOSE
PRICES OR RESULTS ARE TESTED11

Type of Organization

Number

U.S. distributor

46

Non-U.S. provider of services

21

10

See Table 21 and accompanying text.

11

“Multiple tested parties” includes covered transactions that utilize profit splits, CUPs, and CUTs.

2011–16 I.R.B.

688

April 18, 2011

U.S. provider of services

20

Non-U.S. distributor

12

U.S. manufacturer

9

Non-U.S. manufacturer

9

U.S. licensor of intangible property

≤3

Non-U.S. licensor of intangible property

≤3

Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods
[§ 521(b)(2)(D)(iv)]
The TPMs used in APAs executed in 2010 are set forth in Tables 19 and 20 below:
TABLE 19: TRANSFER PRICING METHODS USED FOR TRANSFERS OF
TANGIBLE AND INTANGIBLE PROPERTY12

TPM Used

Number

CPM: PLI is operating margin

55

Unspecified method

21

CUT (intangibles only)

6

CPM: PLI is Berry ratio

5

Residual profit split

5

CPM: PLI is other PLI

5

CPM: PLI is markup on total costs

≤3

Other profit split

≤3

TABLE 20: TRANSFER PRICING METHODS USED FOR SERVICES

TPM Used

Number

CPM: PLI is operating profit-to-total services cost ratio

46

Comparable Uncontrolled Services Price Method

16

Gross Services Margin Method

9

Services Cost Method: Specified Covered Services

7

CPM: PLI is return on assets or capital involved

5

Services Cost Method: Low Margin Covered Services

≤3

CPM: PLI is Berry ratio

≤3

Other profit split

≤3

Unspecified method

≤3

12 PLIs used with the Comparable Profit Method of Treas. Reg. § 1.482–5, and as used in these TPM tables, are as follows: (1) operating margin (ratio of operating profit to sales); (2) Berry
ratio (ratio of gross profit to operating expenses); (3) gross margin (ratio of gross profit to sales); (4) markup on total costs (percentage markup on total costs); and (5) rate of return on assets
or capital employed (ratio of operating profit to operating assets).

April 18, 2011

689

2011–16 I.R.B.

Discussion
The TPMs used in APAs completed during 2010 were based on the section 482 regulations. Under Treas. Reg. § 1.482–3, the
arm’s length amount for controlled transfers of tangible property may be determined using the Comparable Uncontrolled Price
(CUP) Method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), or the Profit Split
Method. Under Treas. Reg. § 1.482–4, the arm’s length amount for controlled transfers of intangible property may be determined
using the Comparable Uncontrolled Transaction (CUT) Method, the CPM, or the Profit Split Method. An “Unspecified Method”
may be used for transfers of either tangible or intangible property if it provides a more reliable result than the enumerated
methods under the best method rule of Treas. Reg. § 1.482–1(c).
For transfers involving the provision of services, Treas. Reg. § 1.482–9(a) provides that the arm’s length amount charged
must be determined under one of six specified methods or an unspecified method. The six specified methods are the Services
Cost Method, the Comparable Uncontrolled Services Price (CUSP) Method, the Gross Services Margin Method, the Cost of
Services Plus Method, the CPM, and the Profit Split Method. Treasury Reg. § 1.482–2(a) provides rules concerning the proper
treatment of loans or advances.
On January 5, 2009, the IRS issued new temporary regulations, Treas. Reg. § 1.482–7T, which provide rules for qualified cost
sharing arrangements under which the parties agree to share the costs of developing intangibles in proportion to their shares of
reasonably anticipated benefits. APAs involving cost sharing arrangements generally address both the method of allocating costs
among the parties as well as determining the appropriate amount of the payment for “platform contribution transactions” (PCTs)
due for the transfer of pre-existing intangibles, and the commitment of services with embedded intangibles, among the controlled
participants (known as “buy ins” in the previous cost-sharing regulations). As in 2009, in 2010 the APA Program completed its
recommendations on three or fewer bilateral cost sharing/PCT cases and sent those on to the USCA. In addition, the APA Program
is currently working on roughly 10 cases involving cost-sharing/PCTs, split almost evenly between bilateral and unilateral. The
PCT cases include both initial and subsequent buy-in/buy-out transactions. The methods used in the completed and pending
PCT cases include valuations based on the income method, including cases involving a split of the discounted present value of
platform contributions made by two or more parties, and other types of analyses.
In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 19, the majority of the APAs
followed the specified methods. However, several points should be made. The section 482 regulations note that for transfers
of tangible property, the CUP Method will generally be the most direct and reliable measure of an arm’s length price for the
controlled transaction if an uncontrolled transaction has no differences with the controlled transaction that would affect the price,
or if there are only minor differences that have a definite and reasonably ascertainable effect on price and for which appropriate
adjustments are made. Treas. Reg. § 1.482–3(b)(2)(ii)(A). As in earlier years, it was the experience of the APA Program in 2010
that CUP transactions meeting these criteria were difficult to find.
Similar to the CUP Method, for transfers of intangible property the CUT Method will generally provide the most direct and
reliable measure of an arm’s length result if an uncontrolled transaction involves the transfer of the same intangible under
the same, or substantially the same, circumstances as the controlled transaction. Treas. Reg. § 1.482–4(c)(2)(ii). Under the
regulation, circumstances between the controlled and uncontrolled transaction will be considered substantially the same if there
are at most only minor differences that have a definite and reasonably ascertainable effect on the amount charged and for
which appropriate adjustments are made. Id. It has generally been difficult to identify external comparables, and APAs using
the CUT Method tend to rely on internal transactions (those between the taxpayer and uncontrolled parties). In 2010, six
Covered Transactions utilized the CUT TPM.
The Resale Price Method was not applied in 2010. See Treas. Reg. § 1.482–3(c), (d).
The CPM is frequently applied in APAs. That is because reliable public data on comparable business activities of independent
companies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and
other relevant considerations are more likely to exist than comparability of product. The CPM also tends to be less sensitive than
other methods to differences in accounting practices between the tested party and comparable companies, e.g., classification of
expenses as cost of goods sold or operating expenses. Treas. Reg. § 1.482–3(c)(3)(iii)(B) and (d)(3)(iii)(B). In addition, the
degree of functional comparability required to obtain a reliable result under the CPM is generally less than that required under
the Resale Price Method or the Cost Plus Method. Lesser functional comparability is required because differences in functions
performed often are reflected in operating expenses, and thus taxpayers performing different functions may have very different
gross profit margins but earn similar levels of operating profit. Treas. Reg. § 1.482–5(c)(2).
Table 19 reflects at least 65 uses of the CPM (with varying PLIs) in Covered Transactions involving tangible or intangible
property. In some APAs, the CPM was also used concurrently with other methods.

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The CPM has proven to be versatile in part because of the various PLIs that can be used in connection with the method. Reaching
agreement on the appropriate PLI has been the subject of much discussion in many of the cases, and it depends heavily on the
facts and circumstances. Some APAs have called for different PLIs to apply to different parts of the Covered Transactions or
applied a secondary PLI as a check against the primary PLI.
The CPM was also used regularly with services as the Covered Transactions in APAs executed in 2010. There were at least
fifty-one services Covered Transactions using the CPM Method with various PLIs according to the specific facts of the taxpayers
involved. At least seven services-related APAs completed in 2010 applied the new Services Cost Method under the § 1.482–9
regulations. Table 20 reflects the methods used to determine the arm’s length results for APAs involving services transactions.
In 2010, five APAs involving tangible or intangible property used the Residual Profit Split Method. Treas. Reg. § 1.482–6(c)(3).
In residual profit split cases, routine contributions by the controlled parties are allocated routine market returns, and the residual
income is allocated among the controlled taxpayers based upon the relative value of their contributions of non-routine intangible
property to the relevant business activity.
Profit splits have also been used in a number of financial product APAs in which the primary income-producing functions
are performed in more than one jurisdiction.

Critical Assumptions
[§ 521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in 2010 are described in Table 21 below:
TABLE 21: CRITICAL ASSUMPTIONS

Critical Assumptions involving the following:

Number of APAs

Material changes to tax and/or financial accounting practices

69

Material changes to the business

69

Assets will remain substantially same

7

Other

7

Other financial ratios

6
≤3

Changes in affiliated companies

Discussion
APAs include critical assumptions upon which their respective TPMs depend. A critical assumption is any fact (whether or not
within the control of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the
continued existence of which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a
particular mode of conducting business operations, a particular corporate or business structure, or a range of expected business
volume. Rev. Proc. 2006–09, § 4.05. Failure to meet a critical assumption may render an APA inappropriate or unworkable. Most
APAs contain only the standard critical assumption language set forth in Appendix B of the Model APA (Attachment A to this
Announcement and Report). Where appropriate, additional critical assumption language may be added, but the APA Program
generally seeks to limit additional critical assumption language to objective, measurable benchmarks.
A critical assumption may change or fail to materialize due to changes in economic circumstances, such as a fundamental and
dramatic change in the economic conditions of a particular industry. In addition, a critical assumption may change or fail to
materialize due to a taxpayer’s actions that are initiated for good faith business reasons, such as a change in business strategy,
mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.
If a critical assumption has not been met, the APA may be revised by agreement of the parties. If such an agreement cannot be
achieved, the APA is canceled. If a critical assumption has not been met, the taxpayer must notify and discuss the APA terms with
the Service, and, in the case of a bilateral APA, competent authority consideration is initiated. Rev. Proc. 2006–09, §§ 11.05, 11.06.

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Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties
[§ 521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in
2010 are described in Tables 22 through 24 below. Various formulas for making adjustments to comparables are included as
Attachment B.
TABLE 22: SOURCES OF COMPARABLES

Number of Times This
Source Used

Comparable Sources
Compustat

73

No Comparables used

37

Disclosure

21

Mergent

15

Other

10

Worldscope

7

Amadeus

5

Moody’s

5

Austrailian Business Who’s Who

4

Capital IO

≤3

Global Vantage

≤3

SEC

≤3

Osiris

≤3

Japan Accounts and Data on Enterprises (JADE)

≤3

TABLE 23: COMPARABLES SELECTION CRITERIA

Number of Times This
Criterion Used

Selection Criteria Considered
Comparable functions

85

Comparable risks

72

Comparable industry

50

Comparable intangibles

37

Comparable products

41

Comparable terms

17

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TABLE 24: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES

Adjustment

Number of Times Used

Balance sheet adjustments
Payables

52

Receivables

51

Inventory

52

Property, plant, equipment

8
≤3

Other
Accounting adjustments
LIFO to FIFO inventory accounting

37

Other

24

Accounting reclassifications (e.g., from COGS to operating expenses)

≤3

Profit level indicator adjustments (used to “back into” one PLI from another PLI)
Miscellaneous adjustments
Goodwill value or amortization

22

Stock-based compensation

19

Research and development

≤3

Other

≤3

Discussion
At the core of most APAs are comparables. The APA Program works closely with taxpayers to find the best and most reliable
comparables for each Covered Transaction. In some cases, CUPs or CUTs can be identified. In other cases, profit data on
comparable business activities of independent companies are used in applying the CPM or a Profit Split Method. Generally,
in the APA Program’s experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of
the taxpayer.
For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA
Program typically has selected them using a three-part process. First, a pool of companies with potentially comparable business
activities has been identified through broad searches. From this pool, companies performing business activities that are clearly
not comparable to those of the tested party have been eliminated through the use of quantitative and qualitative analyses, i.e.,
quantitative screens and review of business descriptions. Then, based on a review of available descriptive and financial data,
a set of comparable independent companies has been finalized. The comparability of the final set has then been enhanced by
adjusting their financial data.
Sources of Comparables
Comparables used in APAs can be from the United States or foreign countries, depending on the relevant market, the type of
transaction being evaluated, the availability of relevant data, and the results of the functional and risk analyses. In general,
comparables have been located by searching a variety of databases that provide data on U.S. publicly traded companies and
on a combination of public and private non-U.S. companies. Table 22 shows the various databases and other sources used
in selecting comparables for the APAs executed in 2010.
Although comparables were most often identified from the databases cited in Table 22, in some cases, comparables were found
from other sources, such as comparables derived internally from taxpayer transactions with third parties.
Selecting Comparables
Initial pools of potential comparables generally are derived from the databases using a combination of industry and keyword
identifiers. Then, the pool is refined using a variety of selection criteria specific to the transaction or business activity being
tested and the TPM being used.

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The listed databases allow for searches by industrial classification, by keywords, or by both. These searches can yield a number of
companies whose business activities may or may not be comparable to those of the entity being tested. Therefore, comparables
based solely on industry classification or keyword searches are rarely used in APAs. Instead, the pool of comparables is examined
closely, and companies are selected based on a combination of screens, business descriptions, and other information such as
that found in the companies’ Annual Reports to shareholders and filings with the U.S. Securities and Exchange Commission
(SEC), company websites, and investment analyst reports.
Business activities of independent companies generally must meet certain basic comparability criteria to be considered
comparable. The independent company’s functions, risks, and economic conditions, and the property (product or intangible) and
services associated with the company’s business activities, must be comparable to those involved in the Covered Transaction.
Determining comparability requires judgment — the goal has been to use comparability criteria restrictive enough to eliminate
business activities that are not comparable, but yet not so restrictive as to leave no comparables remaining. The APA Program
normally has begun with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool
of reliable comparables. A determination on the appropriate size of the comparables set, as well as the business activities that
comprise the set, is highly fact-specific and depends on the reliability of the results.
In addition, the APA Program, consistent with the section 482 regulations, generally has looked at the results of comparables over
a multi-year period (the analysis window). Often this has been a three-year or a five-year period, but other periods are sometimes
used depending on the circumstances of the controlled transaction. Using a shorter period might result in the inclusion of
comparables in different stages of economic development or use of atypical years of a comparable due to cyclical fluctuations in
business conditions. The economic downturn has focused particular attention on the appropriate analysis window for APAs with
terms that include 2008 and 2009, and to a lesser extent 2010, given the different economic conditions that may have confronted
the comparables during the years comprising the analysis window, which typically lags behind the years covered by an APA (e.g.,
the comparables results for 2004–08 may be used to test the taxpayer’s results under the APA from 2008–2012). As noted in the
discussion following Table 17, the APA Program has been dealing with the economic downturn in various ways, including waiting
for more current comparables’ financial data to develop a more contemporaneous analysis window.
Many Covered Transactions have been tested with comparables that have been chosen using additional criteria and/or screens.
These include sales level criteria and tests for financial distress and product comparability. These common selection criteria and
screens have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales
level screen, for example, has been used to remove companies that, due to their smaller size, might face fundamentally different
economic conditions from those of the transaction or business activities being tested. In addition, APA analyses have incorporated
selection criteria designed to identify and remove companies experiencing “financial distress” because of concerns that companies
in financial distress face unusual circumstances and operational constraints that render them not comparable to the business
activity being tested. These “financial distress” criteria may include an unfavorable auditor’s opinion, bankruptcy, failure to
comply with financial obligations (e.g., debt covenants), and, in certain circumstances, operating losses in a given number of years.
An additional important class of selection criteria is the development and ownership of intangible property. Most often,
comparables are sought to test the results of a business activity that does not employ significant intangible assets or engage in
intangible development. Thus, for example, in some cases in which the tested business activity is manufacturing conducted by
a controlled entity that does not own significant manufacturing intangibles or conduct R&D, several criteria have been used
to ensure that the comparables similarly do not own significant intangibles or conduct R&D. These selection criteria have
included determining the importance of patents to a company or screening for R&D expenditures as a percentage of sales.
Similar selection criteria may be applied to ensure, where appropriate, that the comparables do not own or develop significant
marketing intangibles such as valuable trademarks. Again, quantitative screens related to identifying comparables with significant
intangible property generally have been used in conjunction with an understanding of the comparable derived from publicly
available business information.
Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of
property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings,
has been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher
PP&E), regardless of their industry classification. Similarly, a test involving the ratio of operating expenses to sales has helped to
determine whether a company undertakes a significant marketing and distribution function.

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Table 25 shows the number of times various screens were used in APAs executed in 2010:
TABLE 25: COMPARABILITY AND FINANCIAL DISTRESS SCREENS

Comparability/Financial Distress Screen

Times Used

Comparability screens used
R&D/sales

37

Sales

33

Foreign sales/total sales

18

Other

14

Related party transactions

12

Insufficient detail

9

PP&E/sales

9

SG&A/sales

8

Non-routine intangibles

7

Inventory/sales

5

Non-startup or start-up

4

Government sales

≤3

Employees

≤3

PP&E total assets

≤3

Operating expense/sales

≤3

Advertising/sales

≤3

Geographic market

≤3

Financial distress
Bankruptcy

62

Unfavorable auditor’s opinion

32

Losses in one or more years

14

Other

11

Stopped filing public documents

4

Adjusting Comparables
After the comparables have been selected, the regulations require that “[i]f there are material differences between the controlled
and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained
with sufficient accuracy to improve the reliability of the results.” Treas. Reg. § 1.482–1(d)(2). In almost all cases involving
income-statement-based PLIs used in the CPM or the Residual Profit Split Method, certain “asset intensity” or “balance sheet”
adjustments for factors that have generally agreed-upon effects on profits are calculated. In addition, in specific cases, additional
adjustments are performed to improve reliability.
The most common balance sheet adjustments used in APAs are adjustments for differences in accounts receivable, inventories,
and accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on the
principle that there is an opportunity cost for holding assets. For these assets, it is generally assumed that the cost is appropriately
measured by the interest rate on short-term debt.

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To compare the profits of two business activities with different relative levels of receivables, inventory, or payables, the APA
Program estimates the carrying costs of each item and adjusts profits accordingly. Although different formulas have been used in
specific APA cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions
that (1) balance sheet items normally should be expressed as mid-year averages, (2) formulas should try to avoid using data items
that are being tested by the TPM (for example, if sales are controlled, then the denominator of the balance sheet ratio should not
be sales), (3) a short term interest rate should be used, and (4) an interest factor should recognize the average holding period of the
relevant asset. As it has since 2007, during the course of 2010, the APA Program used an interest rate equal to LIBOR (3 months)
plus 200 basis points for purposes of calculating adjustments for accounts receivable and accounts payable for U.S. companies
in many cases. In addition, the APA Program often used an interest rate equal to the Corporate Bonds (Moody’s) Baa rate for
purposes of calculating inventory adjustments for U.S. companies. However, the facts and circumstances surrounding a given case
will ultimately determine the reliability of making balance sheet adjustments and the selection of the most reliable interest rate.
The APA Program also requires that financial data be compared on a consistent accounting basis. For example, although financial
statements may be prepared on a first-in first-out (FIFO) basis, cross-company comparisons are less meaningful if one or more of
the comparables use last-in first-out (LIFO) inventory accounting methods. This adjustment directly affects costs of goods sold
and inventories, and therefore affects both profitability measures and inventory adjustments.
In some cases, the APA Program has made an adjustment to account for differences in relative levels of PP&E between a tested
business activity and the comparables. Ideally, comparables and the business activity being tested will have fairly similar relative
levels of PP&E, since major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E
adjustment is made using a medium-term interest rate. During the course of 2010, the APA Program often used the Corporate
Bonds (Moody’s) Baa rate as the interest rate for purposes of calculating adjustments for inventory and PP&E for U.S. companies.
Again, however, the facts and circumstances surrounding a given case will ultimately determine the reliability of making balance
sheet adjustments and the selection of the most reliable interest rate.
Additional adjustments used less frequently include those for differences in other balance sheet items, operating expenses, R&D,
or currency risk. Accounting adjustments, such as reclassifying items from cost of goods sold to operating expenses, are also
made when warranted to increase reliability. Often, data are not available for both the controlled and uncontrolled transactions
in sufficient detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties in APAs executed in 2010 are reflected in Table 24 above.
Ranges, Targets, and Adjustment Mechanisms
[§ 521(b)(2)(D)(viii)-(ix)]
The types of ranges, targets, and adjustment mechanisms used in APAs executed in 2010 are described in Tables 26 and 27 below.
TABLE 26: RANGES AND TARGETS13

Type of Range

Number

Interquartile range

71

Other

13

Cost-only services

11

Specific point within CPM range (not floor or ceiling)

8

Floor (i.e., result must be less than x)

8

Ceiling (i.e., result must be no more than x)

7

Specific point (royalty)

5

Financial products statistical confidence interval to test against internal CUPs

13

≤3

The numbers do not include TPMs with cost or cost-plus methodologies.

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TABLE 27: ADJUSTMENTS WHEN OUTSIDE THE RANGE
Adjustment mechanism

Number

Taxpayer makes an adjustment: to specified point or royalty rate

58

Taxpayer makes an adjustment: to closest edge of multi-year average

41

Taxpayer makes an adjustment: to closest edge of single year

13

Taxpayer makes an adjustment: to median of current year

≤3

Taxpayer makes an adjustment: to median of multi-year average

≤3

Taxpayer makes an adjustment: to a specific dollar amount

≤3

Discussion
Treas. Reg. § 1.482–1(e)(1) states that sometimes a pricing method will yield “a single result that is the most reliable measure of
an arm’s length result.” Sometimes, however, a method may yield “a range of reliable results,” called the “arm’s length range.” A
taxpayer whose results fall within the arm’s length range will not be subject to adjustment.
Under Treas. Reg. § 1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable
uncontrolled transaction of similar comparability and reliability. If these comparables are of very high quality, as defined in the
section 482 regulations, then under Treas. Reg. § 1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the
comparables (from the least to the greatest). However, the APA Program has only rarely identified cases meeting the requirements
for the full range. If the comparables are of lesser quality, then under Treas. Reg. § 1.482–1(e)(2)(iii)(B), “the reliability of the
analysis must be increased, when it is possible to do so, by adjusting the range through application of a valid statistical method to
the results of all of the uncontrolled comparables.” One such method, the “interquartile range,” is ordinarily acceptable, although a
different statistical method “may be applied if it provides a more reliable measure.” The interquartile range is defined as,
roughly, the range from the 25th to the 75th percentile of the comparables’ results. See Treas. Reg. § 1.482–1(e)(2)(iii)(C).
The interquartile range was used seventy-one times in 2010.
Eight Covered Transactions reflected on Table 26 were tested against a single, specific result. Some APAs — deliberately
infrequent — specify not a point or a range, but a “floor” or a “ceiling.” When a floor is used, the tested party’s result must be
greater than or equal to some particular value. When a ceiling is used, the tested party’s result must be less than or equal to some
particular value. Fifteen APAs executed in 2010 used a floor or a ceiling.
Some APAs look to a tested party’s results over a period of years (multi-year averaging) to determine whether a taxpayer has
complied with the APA. In 2010, rolling multi-year averaging was used for seven Covered Transactions. All seven of these
Covered Transactions used rolling averages from three to five years. Seven Covered Transactions used cumulative multi-year
averaging, while twenty-seven Covered Transactions used term averages.
Adjustments
Where a taxpayer’s actual transactions do not produce results that conform to the TPM, a taxpayer must nonetheless report its
taxable income in an amount consistent with the TPM (an APA primary adjustment), as further discussed in § 11.02 of Rev.
Proc. 2006–09. When the TPM specifies an arm’s length range, an APA primary adjustment is necessary only if the taxpayer’s
actual transactional result falls outside the specified range.
Under Treas. Reg. § 1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the IRS may adjust the result “to
any point within the arm’s length range.” Accordingly, an APA may permit or require a taxpayer to make an adjustment after
the year’s end to put the year’s results within the range, or at the point specified by the APA. Similarly, to enforce the terms of
an APA, the IRS may make such an adjustment. When the APA specifies a range, the adjustment is sometimes to the closest
edge of the range, and sometimes to another point such as the median of the interquartile range. Depending on the facts of each
case, automatic adjustments are not always permitted. APAs may specify that in such a case there will be a negotiation between
the competent authorities involved to determine whether and to what extent an adjustment should be made. APAs may permit
automatic adjustments unless the result is far outside the range specified in the APA. Thus, APAs provide flexibility and efficiency,
permitting adjustments when normal business fluctuations and uncertainties push the result somewhat outside the range.

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APA Term and Rollback Lengths
[§ 521(b)(2)(D)(x)]
The various term lengths for APAs executed in 2010 are set forth in Table 28 below:

TABLE 28: TERMS OF APAS
APA Term in Years

Number of APAs

2

≤3

3

≤3

4

≤3

5

30

6

10

7

14

8

5

9

≤3

10 or more

≤3
≤3

The number of rollback years to which an APA TPM was applied in 2010 is set forth in Table 29 below:
TABLE 29: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM
Number of Rollback Years

Number of APAs

1

≤3

2

9

3

≤3

4

≤3

5 or more

5

Together, Tables 28 and 29 indicate that the 69 APAs completed in 2010 covered more than 427 taxable years, and potentially
more than 500 taxable years. In terms of dollar value, 38 of the 69 completed APAs involved Covered Transactions exceeding
$100 million per year, with 21 APAs covering transactions exceeding $250 million per year. Combining the total covered years
and the total dollar-value of Covered Transactions represents one measure of the effectiveness of the APA Program.

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Nature of Documentation Required
[§ 521(b)(2)(D)(xi)]
APAs executed in 2010 required that taxpayers provide various documents with their annual reports. These documents are
described in Table 30 below:
TABLE 30: NATURE OF DOCUMENTATION REQUIRED

Documentation

Number

Statement identifying all material differences between Taxpayer’s business operations during APA Year
and description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there
have been no such material differences, a statement to that effect.

69

Statement of all material changes in the Taxpayer’s accounting methods and classifications, and
methods of estimation, from those described or used in Taxpayer’s request for the APA. If there has
been no material change in accountings methods and classifications or methods of estimation, a
statement to that effect.

69

Description of any failure to meet Critical Assumptions or, if there have been none, a statement to
that effect.

69

Copy of the APA

69

Financial analysis demonstrating Taxpayer’s compliance with TPM.

69

Organizational chart

69

Any change to the taxpayer notice information in section 14 of the APA.

69

The amount, reason for, and financial analysis of any compensating adjustment under Paragraph 4 of
Appendix A and Rev. Proc. 2006–9, § 11.02(3), for the APA year, including but not limited to: the
amounts paid or received by each affected entity; the character (such as capital or ordinary expense)
and country source of the funds transferred, and the specific line item(s) of any affected U.S. tax return;
and any change to any entity classification for federal income tax purposes of any member of the
Taxpayer’s group that is relevant to the APA.

69

The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the
TPM for the APA Year, as reflected on Schedule M–1 or Schedule M–3 of the U.S. return for the
APA Year.

69

Financial Statements and any necessary account detail to show compliance with the TPM, with a copy
of the opinion from an independent CPA required by paragraph 5(f) of the APA.

63

Certified public accountant’s opinion that financial statements present fairly the financial position of
Taxpayer and the results of its operations, in accordance with a foreign GAAP.

8

CPA review of Taxpayer’s financial statements

5

Various work papers

4

Schedule of costs and expenses (e.g. intercompany allocations)

≤3

Profit and loss statement

≤3

Foreign tax return

≤3

Pertinent intercompany agreements

≤3

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Approaches for Sharing of Currency or Other Risks
[§ 521(b)(2)(D)(xii)]
During 2010, there were forty-seven tested parties that faced financial risks, including interest rate and currency risks. In
appropriate cases, APAs may provide specific approaches for dealing with currency risk, such as adjustment mechanisms
and/or critical assumptions.
Efforts to Ensure Compliance with APAs
[§ 521(b)(2)(F)]
As described in Rev. Proc. 2006–09, § 11.01, APA taxpayers are required to file annual reports to demonstrate compliance with
the terms and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual
report review, the APA Program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review
provides current information on the success or problems associated with the various TPMs adopted in the APA process.
All reports received by the APA Program are assigned to a designated APA team leader. Whenever possible, annual report reviews
are assigned to the team leader who negotiated the case, since that person will already be familiar with the relevant facts and terms
of the agreement. Other team leaders and economists may assist the assigned team leader as well. Once received by the APA
Program, the annual report is also sent to the field personnel with exam jurisdiction over the taxpayer.
The statistics for the review of APA annual reports are reflected in Table 31 below. As of December 31, 2010, there were 245
pending annual reports. In 2010, 336 annual reports were closed.
TABLE 31: STATISTICS OF ANNUAL REPORTS
Number of APA annual reports pending as of December 31, 2010

245

Number of APA annual reports closed in 2010

336

Number of APA annual reports requiring adjustment in 2010

3

Number of taxpayers involved in adjustments

3

Number of APA annual report cases over one-year old

2011–16 I.R.B.

126

700

April 18, 2011

Attachment A
Model APA — Based on Revenue Procedure 2006–9
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name],
EIN
.
RECITALS
[Insert Taxpayer Name] is the common parent of an affiliated group filing consolidated U.S. tax returns (collectively referred to
as “Taxpayer”), and is entering into this APA on behalf of itself and other members of its consolidated group.
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].
This APA contains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions
under I.R.C. section 482, any applicable tax treaties, and the Treasury Regulations.
{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending
executed on
.]

to

,

AGREEMENT
The Parties agree as follows:
1. Covered Transactions. This APA applies to the Covered Transactions, as defined in Appendix A.
2. Transfer Pricing Method. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3. Term. This APA applies to Taxpayer’s taxable years ending

through

(APA Term).

4. Operation
a. Revenue Procedure 2006–9 governs the interpretation, legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05 of Revenue Procedure 2006–9
(including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
5. Compliance.
a. Taxpayer must report its taxable income in an amount that is consistent with Appendix A and all other requirements of this
APA on its timely filed U.S. Return. However, if Taxpayer’s timely filed U.S. Return for an APA Year is filed prior to, or no later
than 60 days after, the effective date of this APA, then Taxpayer must report its taxable income for that APA Year in an amount that
is consistent with Appendix A and all other requirements of this APA either on the original U.S. Return or on an amended U.S.
Return filed no later than 120 days after the effective date of this APA, or through such other means as may be specified herein.
b. {Insert when U.S. Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length
nature of prices charged or received in the aggregate between Taxpayer and Foreign Participants with respect to the Covered
Transactions. Except as explicitly provided, this APA does not address and does not bind the IRS with respect to prices charged
or received, or the relative amounts of income or loss realized, by particular legal entities that are members of U.S. Group or
that are members of Foreign Group.]
c. For each taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA, then
the IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the amounts charged in the aggregate
between Taxpayer and Foreign Participant[s] with respect to the Covered Transactions.

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2011–16 I.R.B.

d. If Taxpayer does not comply with the terms and conditions of this APA, then the IRS may:
i.

enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482
consistent with this APA;

ii.

cancel or revoke this APA under section 11.06 of Revenue Procedure 2006–9; or

iii. revise this APA, if the Parties agree.
e. Taxpayer must timely file an Annual Report (an original and four copies) for each APA Year in accordance with Appendix C
and section 11.01 of Revenue Procedure 2006–9. Taxpayer must file the Annual Report for all APA Years through the APA Year
ending [insert year] by [insert date]. Taxpayer must file the Annual Report for each subsequent APA Year by [insert month and
day] immediately following the close of that APA Year. (If any date falls on a weekend or holiday, the Annual Report shall be
due on the next date that is not a weekend or holiday.) The IRS may request additional information reasonably necessary to
clarify or complete the Annual Report. Taxpayer will provide such requested information within 30 days. Additional time may
be allowed for good cause.
f. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial
Statements, and other APA Records, for the APA Term and any other year necessary to verify compliance. For Taxpayer to
comply with this APA, an independent certified public accountant must {use the following or an alternative} render an opinion
that Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.
g. In accordance with section 11.04 of Revenue Procedure 2006–9, Taxpayer will (1) maintain its APA Records, and (2) make
them available to the IRS in connection with an examination under section 11.03. Compliance with this subparagraph constitutes
compliance with the record-maintenance provisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any
taxable year during the APA Term.
h. The True Taxable Income within the meaning of Treasury Regulations sections 1.482–1(a)(1) and (i)(9) of a member of an
affiliated group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.
i. {Optional for US Parent Signatories} To the extent that Taxpayer’s compliance with this APA depends on certain acts of
Foreign Group members, Taxpayer will ensure that each Foreign Group member will perform such acts.
6. Critical Assumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 2006–9, section 4.05, appear
in Appendix B. If any critical assumption has not been met, then Revenue Procedure 2006–9, section 11.06, governs.
7. Disclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered “return
information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written determination” under I.R.C.
section 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public
disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does
not reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
8. Disputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate
Chief Counsel (International) to the extent reasonably practicable, before seeking alternative remedies.
9. Materiality. In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material
facts” in Revenue Procedure 2006–9, section 11.06(4).
10. Section Captions. This APA’s section captions, which appear in italics, are for convenience and reference only. The captions
do not affect in any way the interpretation or application of this APA.
11. Terms and Definitions. Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D
contains definitions for capitalized terms not elsewhere defined in this APA.
12. Entire Agreement and Severability. This APA is the complete statement of the Parties’ agreement. The Parties will sever,
delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.
13. Successor in Interest. This APA binds, and inures to the benefit of, any successor in interest to Taxpayer.
14. Notice. Any notices required by this APA or Revenue Procedure 2006–9 must be in writing. Taxpayer will send notices to the
IRS at the address and in the manner set forth in Revenue Procedure 2006–9, section 4.11. The IRS will send notices to:

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April 18, 2011

Taxpayer Corporation
Attn: Jane Doe, Sr. Vice President (Taxes)
1000 Any Road
Any City, USA 10000
(phone:
)

15. Effective Date and Counterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties
execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.

WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By:

Date:

, 20

Date:

, 20

Jane Doe
Sr. Vice President (Taxes)
IRS
By:
John E. Hinding
Director, Advance Pricing Agreement Program

APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1. Covered Transactions.
[Define the Covered Transactions.]
2. TPM.
{Note: If appropriate, adapt language from the following examples.}
[The Tested Party is

.]

• CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The Arm’s Length Range of the price charged for
is between
and
per unit.
• CUT Method
is between
The TPM is the CUT Method. The Arm’s Length Range of the royalty charged for the license of
% and
% of [Taxpayer’s, Foreign Participants’, or other specified party’s] Net Sales Revenue. [Insert definition of net
sales revenue or other royalty base.]
• Resale Price Method (RPM)
The TPM is the resale price method (RPM). The Tested Party’s Gross Margin for any APA Year is defined as follows: the
Tested Party’s gross profit divided by its sales revenue (as those terms are defined in Treasury Regulations section 1.482–5(d)(1)
% and
%, and the Median of the Arm’s Length
and (2)) for that APA Year. The Arm’s Length Range is between
%.
Range is

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703

2011–16 I.R.B.

• Cost Plus Method
The TPM is the cost plus method. The Tested Party’s Cost Plus Markup is defined as follows for any APA Year: the Tested
Party’s ratio of gross profit to production costs (as those terms are defined in Treasury Regulations section 1.482–3(d)(1)
and (2)) for that APA Year. The Arm’s Length Range is between
% and
%, and the Median of the Arm’s Length
Range is
%.
• CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). The profit level indicator is a Berry Ratio. The Tested Party’s Berry
Ratio is defined as follows for any APA Year: the Tested Party’s gross profit divided by its operating expenses (as those terms are
defined in Treasury Regulations section 1.482–5(d)(2) and (3)) for that APA Year. The Arm’s Length Range is between
and
, and the Median of the Arm’s Length Range is
.
• CPM using an Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s
Operating Margin is defined as follows for any APA Year: the Tested Party’s operating profit divided by its sales revenue (as
those terms are defined in Treasury Regulations section 1.482–5(d)(1) and (4)) for that APA Year. The Arm’s Length Range is
between
% and
%, and the Median of the Arm’s Length Range is
%.
• CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s
Three-Year Rolling Average operating margin is defined as follows for any APA Year: the sum of the Tested Party’s operating
profit (within the meaning of Treasury Regulations section 1.482–5(d)(4) for that APA Year and the two preceding years, divided
by the sum of its sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year and the two
preceding years. The Arm’s Length Range is between
% and
%, and the Median of the Arm’s Length Range is
%.
• Residual Profit Split Method
The TPM is the residual profit split method. [Insert description of routine profit level determinations and residual
profit-split mechanism].
[Insert additional provisions as needed.]
3. Application of TPM.
For any APA Year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate for the Covered
Transactions] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating
Margin for the Tested Party] within the Arm’s Length Range, then the amounts reported on Taxpayer’s U.S. Return must
clearly reflect such results.
For any APA year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate] [or] [Gross Margin,
Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] outside
the Arm’s Length Range, then amounts reported on Taxpayer’s U.S. Return must clearly reflect an adjustment that brings the
[price per unit, royalty rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year
Rolling Average Operating Margin] to the Median.
For purposes of this Appendix A, the “results of Taxpayer’s actual transactions” means the results reflected in Taxpayer’s and
Tested Party’s books and records as computed under U.S. GAAP [insert another relevant accounting standard if applicable], with
the following adjustments:
(a) [The fair value of stock-based compensation as disclosed in the Tested Party’s audited financial statements shall be treated as
an operating expense]; and
(b) To the extent that the results in any prior APA Year are relevant (for example, to compute a multi-year average), such results
shall be adjusted to reflect the amount of any adjustment made for that prior APA Year under this Appendix A.
4. APA Revenue Procedure Treatment
If Taxpayer makes a primary adjustment under the terms of this Appendix A, Taxpayer may elect APA Revenue Procedure
Treatment in accordance with section 11.02(3) of Revenue Procedure 2006–9.
[Insert additional provisions as needed.]

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704

April 18, 2011

APPENDIX B
CRITICAL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods and
classifications [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the same as
described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
[Insert additional provisions as needed.]
APPENDIX C
APA RECORDS AND ANNUAL REPORT
APA RECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other
writings that support the information provided in such documents.
ANNUAL REPORT
The Annual Report will include two copies of a properly completed APA Annual Report Summary in the form of Exhibit E to this
APA, one copy of the form bound with, and one copy bound separately from, the rest of the Annual Report. In addition, the
Annual Report will include a table of contents and the information and exhibits identified below, organized as follows.
1. Statements that fully identify, describe, analyze, and explain:
a. All material differences between any of the U.S. Entities’ business operations (including functions, risks assumed, markets,
contractual terms, economic conditions, property, services, and assets employed) during the APA Year and the description of
the business operations contained in the APA Request. If there have been no material differences, the Annual Report will
include a statement to that effect.
b. All material changes in the U.S. Entities’ accounting methods and classifications, and methods of estimation, from those
described or used in Taxpayer’s request for this APA. If any such change was made to conform to changes in U.S. GAAP (or
other relevant accounting standards), Taxpayer will specifically identify such change. If there has been no material change in
accounting methods and classifications or methods of estimation, the Annual Report will include a statement to that effect.
c. Any change to the Taxpayer notice information in section 14 of this APA.
d. Any failure to meet any critical assumption. If there has been no failure, the Annual Report will include a statement
to that effect.
e. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be
disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or
is otherwise relevant to the TPM.
f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 4 of Appendix A and
Revenue Procedure 2006–9, section 11.02(3), for the APA Year, including but not limited to:
i.

the amounts paid or received by each affected entity;

ii.

the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the specific
affected line item(s) of any affected U.S. Return; and

iii. the date(s) and means by which the payments are or will be made.
g. The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the TPM for the APA
Year, as reflected on Schedule M–1 or Schedule M–3 of the U.S. Return for the APA Year.
2. The Financial Statements, and any necessary account detail to show compliance with the TPM, with a copy of the independent
certified public accountant’s opinion required by paragraph 5(f) of this APA.

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3. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and
reference the Financial Statements in sufficient account detail to allow the IRS to determine whether Taxpayer has complied
with the TPM.
4. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities
that are parties to the Covered Transactions or are otherwise relevant to the TPM.
5. A copy of the APA.

APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this APA. The definitions appear alphabetically below:

Term

Definition

Annual Report

A report within the meaning of Revenue Procedure 2006–9, section 11.01.

APA

This Advance Pricing Agreement, which is an “advance pricing agreement” within the
meaning of Revenue Procedure 2006–9, section 2.04.

APA Records

The records specified in Appendix C.

APA Request

Taxpayer’s request for this APA dated
supplemental or additional information thereto.

Covered Transaction(s)

This term is defined in Appendix A.

Financial Statements

Financial statements prepared in accordance with U.S. GAAP and stated in U.S. dollars.

Foreign Group

Worldwide Group members that are not U.S. persons.

Foreign Participants

[name the foreign entities involved in Covered Transactions].

I.R.C.

The Internal Revenue Code of 1986, 26 U.S.C., as amended.

Pub. L. 106–170

The Ticket to Work and Work Incentives Improvement Act of 1999.

Revenue Procedure 2006–9

Rev. Proc. 2006–9, 2006–1 C.B. 278.

Transfer Pricing Method (TPM)

A transfer pricing method within the meaning of Treasury Regulations section 1.482–1(b)
and Revenue Procedure 2006–9, section 2.04.

U.S. GAAP

U.S. generally-accepted accounting principles.

U.S. Group

Worldwide Group members that are U.S. persons.

U.S. Return

For each taxable year, the “returns with respect to income taxes under subtitle A” that
Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for
partnership: For each taxable year, the “return” that Taxpayer must “make” in accordance
with I.R.C. section 6031.}

Worldwide Group

Taxpayer and all organizations, trades, businesses, entities, or branches (whether or not
incorporated, organized in the United States, or affiliated) owned or controlled directly or
indirectly by the same interests.

2011–16 I.R.B.

706

, including any amendments or

April 18, 2011

APPENDIX E
APA ANNUAL REPORT SUMMARY FORM
The APA Annual Report Summary on the next page is a required APA Record. The APA Team Leader has supplied some of
the information requested on the form. Taxpayer is to supply the remaining information requested by the form and submit the
form as part of its Annual Report.

APA Annual
Report
SUMMARY

APA Information

APA no.
Team Leader
Economist
Intl Examiner
CA Analyst

Department of the Treasury—
Internal Revenue Service
Office of Associate Chief Counsel
(International)
Advance Pricing Agreement Program
Taxpayer Name:
Taxpayer EIN:

NAICS:

APA Term: Taxable years ending

to

.

Original APA [ ] Renewal APA [ ]
Annual Report due dates:
, 200 for all APA Years through APA Year ending in 200 ; for each APA Year
thereafter, on
[month and day] immediately following the close of the APA Year.
Principal foreign country(ies) involved in covered transaction(s):
Type of APA: [ ] unilateral [ ] bilateral with
Tested party is [ ] US [ ] foreign [ ] both
Approximate dollar volume of covered transactions (on an annual basis) involving tangible goods
and services:
[ ] N/A [ ] <$50 million [ ] $50–100 million [ ] $100–250 million [ ] $250–500 million
[ ] >$500 million
APA tests on (check all that apply):
[ ] annual basis [ ] multi-year basis [ ] term basis
APA provides (check all that apply) a:
[ ] range [ ] point [ ] floor only [ ] ceiling only [ ] other
APA provides for adjustment (check all that apply) to:
[ ] nearest edge [ ] median [ ] other point

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2011–16 I.R.B.

APA Annual
Report
Information
(to be completed
by the Taxpayer)

APA date executed:

, 200

This APA Annual Report Summary is for APA Year(s) ending in 200
200

and was filed on

,

Check here [ ] if Annual Report was filed after original due date but in accordance with extension.
Has this APA been amended or changed? [ ] yes [ ] no

Effective Date:

Has Taxpayer complied with all APA terms and conditions? [ ] yes [ ] no
Were all the critical assumptions met? [ ] yes [ ] no
Has a Primary Compensating Adjustment been made in any APA Year covered by this Annual
Report?
[ ] yes [ ] no
If yes, which year(s): 200
Have any necessary Secondary Compensating Adjustments been made? [ ] yes [ ] no
Did Taxpayer elect APA Revenue Procedure treatment? [ ] yes [ ] no
Any change to the entity classification of a party to the APA? [ ] yes [ ] no
Taxpayer notice information contained in the APA remains unchanged? [ ] yes [ ] no
Taxpayer’s current US principal place of business: (City, State)
APA Annual
Report
Checklist of
Key Contents
(to be completed
by the Taxpayer)

Financial analysis reflecting TPM calculations

[ ] yes [ ] no

Financial statements showing compliance with TPM(s)

[ ] yes [ ] no

Schedule M–1 or M–3 book-tax differences

[ ] yes [ ] no

Current organizational chart of relevant portion of world-wide group

[ ] yes [ ] no

Attach copy of APA

[ ] yes [ ] no

Other APA records and documents included:
[The information required in the following section should be tailored to the particular case]
[ ] yes [ ] no
[ ] yes [ ] no
[ ] yes [ ] no
[ ] yes [ ] no
[ ] yes [ ] no
Contact
Information

2011–16 I.R.B.

Authorized Representative

Phone Number

708

Affiliation and Address

April 18, 2011

ATTACHMENT B
EXAMPLE FORMULAS FOR BALANCE SHEET ADJUSTMENTS
The formulas below provide examples of the balance sheet adjustment formulas used in the APA Program’s CPM spreadsheet
model.14 The formulas below are applicable to the operating margin profit level indicator. The APA Program’s calculations
measure balance sheet intensity by reference to the denominator of the profit level indicator (e.g., for the Berry ratio, the
denominator used is operating expenses). Therefore, the formulas vary for each profit level indicator.
Definitions of Variables:
AP

=

average accounts payable

AR

=

average trade accounts receivable, net of allowance for bad debt

cogs

=

cost of goods sold

INV

=

average inventory, stated on FIFO basis

opex

=

operating expenses (general, sales, administrative, and depreciation expenses)

PPE

=

property, plant, and equipment, net of accumulated depreciation

sales

=

net sales

h

=

average accounts payable or trade accounts receivable holding period, stated as a fraction of a year

i

=

interest rate

t

=

entity being tested

c

=

comparable

Equations:
Example Assuming Profit Level Indicator is Operating Margin:
Receivables Adjustment (“RA”):

RA = {[(ARt / salest) x salesc] - ARc} x {i/[1+(i x hc)]}

Payables Adjustment (“PA”):

PA = {[(APt / salest) x salesc] - APc} x {i/[1+(i x hc)]}

Inventory Adjustment (“IA”):

IA = {[(INVt / salest) x salesc] - INVc } x i

PP&E Adjustment (“PPEA”):

PPEA = {[(PPEt / salest) x salesc] - PPEc} x i

Then Adjust Comparables as Follows:
adjusted salesc = salesc + RA
adjusted cogsc = cogsc + PA - IA
adjusted opexc = opexc - PPEA

14

Copies of the APA Program’s CPM spreadsheet model are available from the APA Program by calling (202) 435–5220 (not a toll-free number) or by writing to the Office of Associate
Chief Counsel (International), Advance Pricing Agreement Program, Attn: CC:INTL:APA, MA2–266, 1111 Constitution Ave. NW, Washington DC, 20224.

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Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the effect:
Amplified describes a situation where
no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the
fact situation set forth therein. Thus, if
an earlier ruling held that a principle applied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare with modified, below).
Clarified is used in those instances
where the language in a prior ruling is being made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously published ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in
a ruling that lists previously published rulings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same position published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single ruling a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new ruling does more than restate the substance

of a prior ruling, a combination of terms
is used. For example, modified and superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously published ruling is first modified and then, as
modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original ruling has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the additions, and supersedes all prior rulings in
the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.

ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.

PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D. —Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z —Corporation.

Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.

2011–16 I.R.B.

i

April 18, 2011

Numerical Finding List1

Notices— Continued:

Treasury Decisions— Continued:

Bulletin 2011–1 through 2011–16

2011-25, 2011-14 I.R.B. 604

9510, 2011-6 I.R.B. 453

2011-28, 2011-16 I.R.B. 656

9511, 2011-6 I.R.B. 455

Announcements:

2011-29, 2011-16 I.R.B. 663

9512, 2011-7 I.R.B. 473

2011-1, 2011-2 I.R.B. 304

Proposed Regulations:

2011-2, 2011-3 I.R.B. 324

9513, 2011-8 I.R.B. 501
9514, 2011-9 I.R.B. 527

2011-3, 2011-3 I.R.B. 324

REG-140108-08, 2011-13 I.R.B. 591

9515, 2011-14 I.R.B. 599

2011-4, 2011-4 I.R.B. 424

REG-149335-08, 2011-6 I.R.B. 468

9516, 2011-13 I.R.B. 575

2011-5, 2011-4 I.R.B. 430

REG-146097-09, 2011-8 I.R.B. 516

9517, 2011-15 I.R.B. 610

2011-6, 2011-4 I.R.B. 433

REG-153338-09, 2011-14 I.R.B. 606

2011-7, 2011-5 I.R.B. 446

REG-124018-10, 2011-2 I.R.B. 301

2011-8, 2011-5 I.R.B. 446

REG-131151-10, 2011-8 I.R.B. 519

2011-9, 2011-7 I.R.B. 499

REG-131947-10, 2011-8 I.R.B. 521

2011-10, 2011-7 I.R.B. 499

REG-132724-10, 2011-7 I.R.B. 498

2011-11, 2011-7 I.R.B. 500

Revenue Procedures:

2011-12, 2011-9 I.R.B. 532
2011-13, 2011-8 I.R.B. 525

2011-1, 2011-1 I.R.B. 1

2011-14, 2011-9 I.R.B. 532

2011-2, 2011-1 I.R.B. 90

2011-15, 2011-8 I.R.B. 526

2011-3, 2011-1 I.R.B. 111

2011-16, 2011-7 I.R.B. 500

2011-4, 2011-1 I.R.B. 123

2011-17, 2011-9 I.R.B. 532

2011-5, 2011-1 I.R.B. 167

2011-18, 2011-12 I.R.B. 567

2011-6, 2011-1 I.R.B. 195

2011-19, 2011-11 I.R.B. 553

2011-7, 2011-1 I.R.B. 233

2011-20, 2011-10 I.R.B. 542

2011-8, 2011-1 I.R.B. 237

2011-21, 2011-12 I.R.B. 567

2011-9, 2011-2 I.R.B. 283

2011-22, 2011-16 I.R.B. 672

2011-10, 2011-2 I.R.B. 294

2011-23, 2011-12 I.R.B. 568

2011-11, 2011-4 I.R.B. 329

2011-24, 2011-12 I.R.B. 569

2011-12, 2011-2 I.R.B. 297

2011-25, 2011-14 I.R.B. 608

2011-13, 2011-3 I.R.B. 318

2011-26, 2011-14 I.R.B. 608

2011-14, 2011-4 I.R.B. 330

2011-27, 2011-15 I.R.B. 651

2011-15, 2011-3 I.R.B. 322

Notices:

2011-16, 2011-5 I.R.B. 440
2011-17, 2011-5 I.R.B. 441

2011-1, 2011-2 I.R.B. 259

2011-18, 2011-5 I.R.B. 443

2011-2, 2011-2 I.R.B. 260

2011-19, 2011-6 I.R.B. 465

2011-3, 2011-2 I.R.B. 263

2011-20, 2011-11 I.R.B. 551

2011-4, 2011-2 I.R.B. 282

2011-21, 2011-12 I.R.B. 560

2011-5, 2011-3 I.R.B. 314

2011-23, 2011-15 I.R.B. 626

2011-6, 2011-3 I.R.B. 315

2011-26, 2011-16 I.R.B. 664

2011-7, 2011-5 I.R.B. 437

Revenue Rulings:

2011-8, 2011-8 I.R.B. 503
2011-9, 2011-6 I.R.B. 459

2011-1, 2011-2 I.R.B. 251

2011-10, 2011-6 I.R.B. 463

2011-2, 2011-2 I.R.B. 256

2011-11, 2011-7 I.R.B. 497

2011-3, 2011-4 I.R.B. 326

2011-12, 2011-8 I.R.B. 514

2011-4, 2011-6 I.R.B. 448

2011-13, 2011-9 I.R.B. 529

2011-5, 2011-13 I.R.B. 577

2011-14, 2011-11 I.R.B. 544

2011-6, 2011-10 I.R.B. 537

2011-15, 2011-10 I.R.B. 539

2011-7, 2011-10 I.R.B. 534

2011-17, 2011-10 I.R.B. 540

2011-8, 2011-12 I.R.B. 554

2011-18, 2011-11 I.R.B. 549

2011-9, 2011-12 I.R.B. 554

2011-19, 2011-11 I.R.B. 550

2011-10, 2011-14 I.R.B. 597

2011-20, 2011-16 I.R.B. 652

Treasury Decisions:

2011-22, 2011-12 I.R.B. 557
2011-23, 2011-13 I.R.B. 588

9507, 2011-3 I.R.B. 305

2011-24, 2011-14 I.R.B. 603

9508, 2011-7 I.R.B. 495
9509, 2011-6 I.R.B. 450

1

A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin
2010–52, dated December 27, 2010.

April 18, 2011

ii

2011–16 I.R.B.

Finding List of Current Actions on
Previously Published Items1

Proposed Regulations:

Bulletin 2011–1 through 2011–16

Corrected by

Announcements:

Ann. 2011-11, 2011-7 I.R.B. 500

85-88
Obsoleted by
Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Revenue Procedures— Continued:
2009-39

REG-132554-08

Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B. 330
2009-44

REG-149335-08

Modified by

Hearing scheduled by
Ann. 2011-26, 2011-14 I.R.B. 608

Ann. 2011-6, 2011-4 I.R.B. 433
2010-1

Revenue Procedures:

Superseded by

Modified by

72-50

Rev. Proc. 2011-1, 2011-1 I.R.B. 1

Ann. 2011-6, 2011-4 I.R.B. 433

Modified and superseded by

2010-2

2009-62

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Superseded by

Obsoleted by

76-34

Rev. Proc. 2011-2, 2011-1 I.R.B. 90

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Modified and supersed by

2010-3

Notices:

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Superseded by

83-23

Rev. Proc. 2011-3, 2011-1 I.R.B. 111

Modified and superseded by

2010-4

Rev. Proc. 2011-15, 2011-3 I.R.B. 322

Superseded by

94-17

Rev. Proc. 2011-4, 2011-1 I.R.B. 123

Modified and superseded by

2010-5

Rev. Proc. 2011-15, 2011-3 I.R.B. 322

Superseded by

97-27

Rev. Proc. 2011-5, 2011-1 I.R.B. 167

Clarified and modified by

2010-6

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

Superseded by

2001-10

Rev. Proc. 2011-6, 2011-1 I.R.B. 195

Modified by

2010-7

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

Superseded by

2002-28

Rev. Proc. 2011-7, 2011-1 I.R.B. 233

Modified by

2010-8

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

Superseded by

2003-21

Rev. Proc. 2011-8, 2011-1 I.R.B. 237

Modified and superseded by

2010-9

Rev. Proc. 2011-15, 2011-3 I.R.B. 322

Superseded by

2004-34

Rev. Proc. 2011-9, 2011-2 I.R.B. 283

Modified by

2010-15

Notice 2011-25, 2011-14 I.R.B. 604

Rev. Proc. 2011-14, 2011-4 I.R.B. 330
Modified and clarified by

Updated by

2010-27

Rev. Proc. 2011-18, 2011-5 I.R.B. 443

2008-11

2006-87
Superseded by
Notice 2011-8, 2011-8 I.R.B. 503
2007-25
Superseded by
Notice 2011-8, 2011-8 I.R.B. 503
2007-77
Superseded by
Notice 2011-8, 2011-8 I.R.B. 503
2008-107
Superseded by
Notice 2011-8, 2011-8 I.R.B. 503
2009-23
Modified by
Notice 2011-24, 2011-14 I.R.B. 603
2009-24
Modified by
Notice 2011-24, 2011-14 I.R.B. 603
2009-83
Modified by

Superseded by
Notice 2011-8, 2011-8 I.R.B. 503
2010-59
Modified by
Notice 2011-5, 2011-3 I.R.B. 314
2010-71
Modified and superseded by
Notice 2011-9, 2011-6 I.R.B. 459
2010-79
Clarified and modified by
Notice 2011-4, 2011-2 I.R.B. 282

Rev. Proc. 2011-13, 2011-3 I.R.B. 318
2010-18

2006-44

Amplified and modified by

Modified by

Rev. Proc. 2011-21, 2011-12 I.R.B. 560

Ann. 2011-6, 2011-4 I.R.B. 433

2010-25

2006-56

Obsoleted in part by

Modified by

Rev. Proc. 2011-23, 2011-15 I.R.B. 626

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2011-1

2008-52

Corrected by

Modified by

Ann. 2011-7, 2011-5 I.R.B. 446

Notice 2011-4, 2011-2 I.R.B. 282
Rev. Proc. 2011-17, 2011-5 I.R.B. 441
Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2011-8
Corrected by
Ann. 2011-8, 2011-5 I.R.B. 446

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin 2010–52, dated December 27,
2010.

2011–16 I.R.B.

iii

April 18, 2011

Revenue Procedures— Continued:
2011-11
Corrected by
Ann. 2011-9, 2011-7 I.R.B. 499
2011-21
Amplified by
Rev. Proc. 2011-26, 2011-16 I.R.B. 664

Revenue Rulings:
81-100
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B. 251
2004-67
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B. 251
2008-40
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B. 251
2011-3
Corrected by
Ann. 2011-16, 2011-7 I.R.B. 500

Treasury Decisions:
9391
Corrected by
Ann. 2011-12, 2011-9 I.R.B. 532
9505
Corrected by
Ann. 2011-10, 2011-7 I.R.B. 499

April 18, 2011

iv

2011–16 I.R.B.

2011–16 I.R.B.

April 18, 2011

April 18, 2011

2011–16 I.R.B.

INTERNAL REVENUE BULLETIN
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