IRB 2014-02 (Rev. January 6, 2014)

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Bulletin No. 2014 –2January 6, 2014HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.INCOME TAXRev. Rul. 2014 –1, page 263.Federal rates; adjusted federal rates; adjusted federal longterm rate and the long-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and other sections of theCode, tables set forth the rates for December 2013.Rev. Rul. 2014 –2, page 255.National Mortgage Settlement payments. This revenue ruling explains the tax treatment of payments to homeowners pursuant tothe National Mortgage Settlement, a group of settlement agreements entered into in 2012 with five bank mortgage servicers toaddress mortgage loan servicing and foreclosure abuses.REG–136984 –12, page 378.These proposed regulations under section 752 of the Coderelate to recourse liabilities of a partnership and the specialrules for related persons. The proposed regulations affectpartnerships and their partners. Comments are requested byMarch 17, 2014.REG–159420 – 04, page 374.Proposed regulations under section 41 of the Code provideguidance on the treatment of qualified research expendituresand gross receipts resulting from transactions between members of a controlled group of corporations or a group of tradesor businesses under common control for purposes of determining the credit under section 41 for increasing researchactivities. Comments are requested by March 13, 2014. Apublic hearing is scheduled for April 23, 2014.Notice 2014 –1, page 270.This notice provides guidance on the application of the rules undersection 125 of the Code (relating to cafeteria plans, includinghealth and dependent care flexible spending arrangements(FSAs)), and section 223 of the Code (relating to health savingsFinding Lists begin on page ii.accounts (HSAs)), as those two provisions relate to the participationby same-sex spouses in certain employee benefit plans following theSupreme Court decision in United States v. Windsor, 570 U.S. ,133 S. Ct. 2675 (2013), and the issuance of Rev. Rul. 2013–17.Rev. Rul. 2013–17 is amplified.Notice 2014 – 6, page 279.This notice provides guidance on section 45R for certain smallemployers that cannot offer a qualifying health plan (QHP)through a Small Business Health Options Program (SHOP)Exchange because the employer’s principal business addressis in a county in which a QHP through a SHOP Exchange will notbe available for the 2014 calendar year.Announcement 2014 –1, page 393.This announcement notifies financial institutions creating accountsand entering registration information on the IRS FATCA registration website about certain steps, as originally announced in Notice2013– 43, those financial institutions will need to take on or afterJanuary 1, 2014. This announcement also provides general information concerning anticipated publication dates of final qualifiedintermediary (QI), withholding foreign partnership (WP), and withholding foreign trust agreements (WT).EMPLOYEE PLANSRev. Rul. 2014 –3, page 259.2014 covered compensation tables; permitted disparity. Thecovered compensation tables under section 401 of the Codefor the year 2014 are provided for use in determining contributions to defined benefit plans and permitted disparity.(Continued on the next page)

REG–143172–13, page 383.This document proposes amendments to regulations regardingexcepted benefits under the Code. Excepted benefits are exemptfrom the health reform requirements that were added to the Codeby the Health Insurance Portability and Accountability Act and theAffordable Care Act. Comments requested by February 24, 2014.509(a) of the Code, operating foundation status under section4942(j)(3), and exempt operating foundation status under section4940(d)(2), of organizations exempt from Federal income taxunder section 501(c)(3). This revenue procedure also applies tothe issuance of determination letters on the foundation statusunder section 509(a)(3) of nonexempt charitable trusts describedin section 4947(a)(1). Rev. Proc. 2013–10 is superseded.Notice 2014 –5, page 276.This notice provides temporary nondiscrimination relief for certain“closed” defined benefit pension plans (i.e., defined benefit plansthat provide ongoing accruals but that have been amended to limitthose accruals to some or all of the employees who participatedin the plan on a specified date). The notice permits certain employers that sponsor a closed DB plan and a DC plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of § 401(a)(4) on the basis of equivalentbenefits, even if the aggregated plans do not satisfy the currentconditions for testing on that basis. This notice also requests comments on possible permanent changes to the nondiscrimination rulesunder § 401(a)(4). Comments requested by February 28, 2014.EXEMPT ORGANIZATIONSNotice 2014 – 4, page 274.Under interim guidance, a Type III supporting organization will betreated as functionally integrated if it (i) supports a supportedorganization that is a governmental entity to which the supportingorganization is responsive; and (ii) engages in activities for or onbehalf of that governmental supported organization that performthe functions of, or carry out the purposes of, that governmentalsupported organization and that, but for the involvement of thesupporting organization, would normally be engaged in by thegovernmental supported organization itself. Pending further guidance, private foundations and sponsoring organizations that maintain donor-advised funds generally may continue to rely on thegrantor reliance standards of Notice 2006–109, as modified by thisnotice, in determining whether a potential grantee is a Type I, Type II,or functionally integrated Type III SO for purposes of the excise taxesimposed under sections 4942, 4945, and 4966. Comments arerequested by March 7, 2014. Notice 2006 –109 modified.Rev. Proc. 2014 –9, page 281.This document sets forth procedures for issuing determinationletters and rulings on the exempt status of organizations undersections 501 and 521 of the Code. The procedures also applyto the revocation and modification of determination letters orrulings, and provide guidance on the exhaustion of administrative remedies for purposes of declaratory judgment undersection 7428 of the Code. Rev. Proc. 2013–9 is superseded.Rev. Proc. 2014 –10, page 293.This document sets forth procedures for issuing determinationletters and rulings on private foundation status under sectionEMPLOYMENT TAXT.D. 9649, page 265.Final regulations relating to agents authorized under section3504 of the Code to perform acts under the Federal Unemployment Tax Act (FUTA) required of employers who are homecare service recipients.EXCISE TAXREG–143172–13, page 383.This document proposes amendments to regulations regarding excepted benefits under the Code. Excepted benefits areexempt from the health reform requirements that were addedto the Code by the Health Insurance Portability and Accountability Act and the Affordable Care Act. Comments requestedby February 24, 2014.Notice 2014 – 4, page 274.Under interim guidance, a Type III supporting organization will betreated as functionally integrated if it (i) supports a supportedorganization that is a governmental entity to which the supportingorganization is responsive; and (ii) engages in activities for or onbehalf of that governmental supported organization that performthe functions of, or carry out the purposes of, that governmentalsupported organization and that, but for the involvement of thesupporting organization, would normally be engaged in by thegovernmental supported organization itself. Pending further guidance, private foundations and sponsoring organizations that maintain donor-advised funds generally may continue to rely on thegrantor reliance standards of Notice 2006–109, as modified by thisnotice, in determining whether a potential grantee is a Type I, Type II,or functionally integrated Type III SO for purposes of the excise taxesimposed under sections 4942, 4945, and 4966. Comments arerequested by March 7, 2014. Notice 2006 –109 modified.ADMINISTRATIVERev. Proc. 2014 –14, page 295.This revenue procedure provides issuers of qualified mortgagebonds, as defined in § 143(a) of the Code, and issuers ofmortgage credit certificates, as defined in § 25(c), with a list ofqualified census tracts for each state and the District of Columbia. See §§ 25(c)(2)(A)(iii)(V) and 143(j)(1)(A). Rev. Proc.2003– 49 is modified and superseded.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of generalinterest. It is published weekly.It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of internal practices and procedures that affect the rights and dutiesof taxpayers are published.Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.The Bulletin is divided into four parts as follows:Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions 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 thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued bythe 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 forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.January 6, 2014Bulletin No. 2014 –2

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing CreditThe adjusted applicable federal short-term, midterm, and long-term rates are set forth for the monthof January 2014. See Rev. Rul. 2014 –1, page 263.Section 121.—Exclusion ofgain from sale of principalresidence26 CFR 1.121–1: Exclusion of gain from sale orexchange of a principal residence. (Also: §§ 61, 165,691, 1001; 1.61– 6, 1.165–1, 1.691(a)–1, 1.1001–1.)Rev. Rul. 2014 –2ISSUES1. If a taxpayer receives a paymentpursuant to the National Mortgage Settlement due to the foreclosure of the taxpayer’s principal residence (“NMS Payment”), what is the proper taxcharacterization of the payment?2. If the NMS Payment is characterizedas part of the amount realized on the foreclosure and if that characterization createsor increases a gain on the foreclosure ofthe principal residence, are there groundsfor the taxpayer to exclude from grossincome some or all of that gain?3. If the property for which a taxpayerreceives an NMS Payment contained one ormore additional dwelling units that were notused as the taxpayer’s principal residence,how should the NMS Payment be allocatedbetween the portion of the property that thetaxpayer used as a principal residence andthe rest of the property?4. If a borrower who was eligible for anNMS Payment died before receiving it,what is the tax treatment of the personwho receives that payment?BACKGROUNDIn 2012, the United States governmentand the attorneys general of 49 states andthe District of Columbia entered into settle-ment agreements with five bank mortgageservicers to address mortgage loan servicingand foreclosure abuses (“National MortgageSettlement”).1 One component of the National Mortgage Settlement is the BorrowerPayment Fund (Fund), which the parties intend to be structured as a qualified settlement fund under § 1.468B–1 of the IncomeTax Regulations. The terms of the settlement agreements provide that:(1) The five mortgage servicers collectively will pay approximately 1.5 billion into the Fund.(2) The Fund will make NMS Paymentsto certain borrowers who lost theirprincipal residences in foreclosure onor after January 1, 2008, and on orbefore December 31, 2011.(3) Each borrower’s transaction mustmeet the following requirementsfor the borrower to receive anNMS Payment:2(i) The borrower’s first-lienmortgage loan was securedby a one-to-four-unit residential property that the borrower had indicated at thetime of loan origination wasto be used as the borrower’sprincipal residence;(ii) The borrower’s mortgage loanwas serviced by one of the fivebank mortgage servicers;(iii) The borrower made at leastthree payments on the firstlien mortgage loan;(iv) The loan went to foreclosuresale on or after January 1,2008, and on or before December 31, 2011; and(v) The unpaid principal balanceof the first-lien mortgageloan did not exceed the government sponsored enterprise (GSE) loan limit for theproperty securing the loan(for example, 729,750 for aone-unit residence).(4) For each NMS Payment, theremust be certification by (or for)the borrower under penalties ofperjury that—(i) The borrower owned and occupied (or intended to ownand occupy) the property (ora unit thereof) as his or herprincipal residence at thetime the borrower obtainedthe mortgage loan;(ii) The borrower lost the principal residence in foreclosureon or after January 1, 2008,and on or before December31, 2011; and(iii) The borrower lost the principal residence in foreclosurebecause—(a) The borrower was unable to make paymentson the first-lien mortgage loan due to a financial hardship; and/or(b) The mortgage servicermishandled the borrower’s application for aloan modification orother foreclosure alternative or pursued foreclosure while the application was pending orafter it was approved;and/or(c) The mortgage servicer,foreclosure trustee, ortheir attorneys made errors in, or leading up to,the foreclosure process.The NMS Payment for each loan is thesame amount (approximately 1,400). (Ifmore than one of the co-borrowers on aloan filed claims, they share a single NMSPayment from the Fund.) A borrowercould receive the NMS Payment withouthaving to prove financial harm and without having to release any claims. However, under the terms of the NationalMortgage Settlement, the NMS Payment1Oklahoma did not join in the National Mortgage Settlement, and borrowers in Oklahoma are not eligible for its direct relief measures to borrowers. Borrowers with property in Puerto Ricoand other American territories also are not eligible.2The servicers provided lists of loans that met these five criteria.Bulletin No. 2014 –2255January 6, 2014

offsets and reduces any other obligationthat a servicer has to the borrower to provide compensation or other payments.The National Mortgage Settlementagreements provide that an NMS Paymentis remedial and relates to the reduced proceeds a borrower is deemed to have realized in a foreclosure because of the servicers’ allegedly unlawful conduct. Theagreements do not consider the NMS Payment to be forgiven debt.The Fund began making the NMS Payments to eligible borrowers in the summerof 2013.3 In the case of a deceased eligibleborrower, the Fund generally issues payment for the claim in the name of theborrower.4FACTSSituation 1—Loss on a single-unithome. In 2006, Borrower A purchased aproperty for its fair market value of 230,000. A financed 200,000 of the purchase price with a recourse first-lien mortgage loan that was secured by the property, and A used the property as A’sprincipal residence. During 2011, A’sprincipal residence was foreclosed onwhen its fair market value was 125,000.The lender subsequently sold the principalresidence and applied the proceeds in finalsatisfaction of the principal balance of thefirst-lien mortgage loan, which was 185,000. A’s adjusted basis in the principal residence at the time of the foreclosure was 230,000. In 2013, A received anNMS Payment of 1,400 from the Fund.Situation 2—Loss on a multiple-unit home.The facts are the same as in Situation 1,except that the borrower was B, and theproperty has two identical dwelling units. Bused one unit as a principal residence andleased the other to a third party at fair rentalvalue. B’s entire property was foreclosed onand subsequently sold by the lender. B’sadjusted basis in the entire property at thetime of the foreclosure was 200,000, ofwhich 115,000 was allocable to the portionof the property B used as a principal residence. Half of the property’s fair marketvalue at the time of the foreclosure( 62,500) was allocable to the portion of theproperty that B used as a principal residence.In 2013, B received an NMS Payment of 1,400 from the Fund.Situation 3—Gain on a multiple-unithome. The facts are the same as in Situation 2, except that the purchase price was 155,000; and, at the time of the foreclosure— The property’s fair market value was 160,000;Half of the property’s fair marketvalue ( 80,000) was allocable to theportion of the property that B used asa principal residence;B’s adjusted basis in the entire property was 125,000; and 77,500 of the total adjusted basis wasallocable to the portion of the propertythat B used as a principal residence.Situation 4 —Gain on a single-unithome. In 1980, Borrower C purchased aproperty for 155,000. C financed 130,000 of the purchase price with arecourse first-lien mortgage loan secured by the property. C continuouslyused the property as C’s principal residence. C refinanced the mortgage loanfor an amount in excess of its outstanding principal balance with a new recourse first-lien mortgage loan securedby the principal residence, and used theproceeds to pay for educational expenses of C’s children and to purchase aboat for personal use.In 2009, C’s principal residence wasforeclosed on when its fair market value was 160,000. The lender subsequently sold theprincipal residence and applied the proceedsin final satisfaction of the principal balanceof the new loan, whi

2014 covered compensation tables; permitted disparity. The covered compensation tables under section 401 of the Code for the year 2014 are provided for use in determining contri-butions to defined benefit plans and permitted disparity. (Continued on the next page) Finding Lists begin on page ii. Bulletin No. 2014–2 January 6, 2014

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